Macroeconomics: The Day Ahead for 30 June

Month end as ever brings a very large “data dump”, but with quarter end dominating trading flows, much of the barrage may prove to be little more than statistical roadkill. There are China’s NBS PMIs, Japan and South Korea Industrial Production, UK BRC Shop Prices, Lloyds Business Barometer, final Q1 GDP and Current Account and French HICP to digest. Ahead lie Eurozone CPI, German Unemployment, US ADP Employment, Chicago PMI and Pending Home Sales, Canada’s monthly GDP and activity and labour data from Russia. While there are a number of central bank speakers, the events schedule is dominated by commodity reports, above all the USDA’s annual acreage report for grains, oilseeds and cotton, with the EIA’s 914 Production and Petroleum Supply reports also due. Govt bond supply comes via of 5 & 10-yr supply in Italy and 10-yr in Canada.

The run of data out of Asia overnight can only be described as disappointing, with the sharp drop in Japan’s Industrial Production and an unexpected dip in South Korea, as well as the dip in China’s Manufacturing PMI and a sharper drop in the Services measure underlining: a) the headwinds to Manufacturing from supply chains disruptions, b) the impact of lockdown measures on both manufacturing and consumer activity. Again it serves as a reminder that even with successful vaccination roll-outs in the US and Europe, the path to recovery will continue to be very uneven, and that supply chain disruptions will be a good deal more protracted than perhaps many assume (see my article in the upcoming edition of The Ghost In the Machine). Last but not least, a rare speech by Fed’s Waller yesterday underlined the Fed’s pivot towards removing accommodation, in effect saying that he still sees inflation as transitory and some time before full employment is a realistic prospect, but admitting the risks are now skewed to a shorter time frame before the Fed has to start rolling back accommodation.

** Germany – June Unemployment **

– Unemployment is seen falling modestly (-20K), but the focus will be on how much of a drop there will be in the number of “short-time” workers, which has fallen sharply in recent months, above all in terms of new applicants (last 96K), but was still high in overall terms (last 2.60 Mln). Yesterday’s broad based strength in the latest EC Confidence surveys, with headline Economic Confidence hitting a 21-yr high at 117.9 does point to a more rapid fall in short-time work, though it should be borne in mind that the Eurozone’s Underemployment Rate was much higher than the US at around 15%, per se labour market slack is structurally higher, and the need for rapid deployment of EU Recovery Pact funds remains absolutely essential, if what is now a fairly robust recovery is to sustain traction.

** Eurozone – June HICP **

With French, German and Spanish HICP readings all essentially in line with expectations, today’s headline and core Eurozone CPI should dip to 1.9% and 0.9% y/y as expected, however as previously noted, July and August base effects will be much less favourable. The public debate between ECB hawks and doves over the summer months will be the more decisive element in regards to what initial decision is reached on tapering at the September meeting, but it will be Lagarde and Lane who will be instrumental, if a shift is to take place. The challenge for them is to ensure that the debate between hawks and doves does not get out of control, thus sending confusing signals to markets, which would be all the more risky if the Fed does signal that tapering will be initiated.

** U.S.A. – June ADP Employment **

The month to month divergence between ADP and Private Payrolls in the past two month have been so enormous, and sizeable in most of the months since the start of the pandemic as to render any read across redundant (see chart). Be that as it may, the consensus looks for a 550K rise for the ADP measure as against 605K for Friday’s Private Payrolls. The May ADP report was notable for its broad based strength across sectors, though leisure/hospitality saw particular, but unsurprising strength as the economy re-opened, it was also notable for strong growth in employment at SMEs. The latter needs to and should hold up, if progress is to be made towards the Fed’s goal of full employment, given that pre-pandemic it accounted for about 2/3 of job creation.