Macroeconomics: The Day Ahead for 9 July

The day’s statistical schedule is both quite light and heavily front loaded, with Chinese and Norwegian inflation readings, along with UK monthly GDP, Industrial Production, Services Output and Trade to digest ahead of Turkey’s Current Account and Canadian Labour data. The events schedule is also sparse with the start of a two day G20 Finance Ministers and Central Banks meeting, which will doubtless see a lot of discussion about the actual implementation of the minimum corporate tax rate, as well as efforts to overcome the pandemic. The events schedule has Rehn talking about the ECB’s “nothing burger” Strategy Review, which at the end of the day does not change the fact that low inflation in the Eurozone is structural and requires structural reforms, above all to labour markets, and it most certainly will not make any contribution to the ECB ameliorating its very poor track record on hitting its inflation target, above all in the past 10 years. Otherwise Lagarde and Bailey will be on panel taking about digitalization and intangibles, which outside of any discussion of CBDC and cryptocurrencies will attract little if any market attention. Next week has a busy run of statistics from China: Trade, Production, FAI and Retail Sales; UK and US inflation; US Retail Sales, Production, NY, Philly Fed, NFIB & Michigan Sentiment surveys, UK and Australian labour data, and Japan’s Machinery Orders. On the central bank side of the equation there are the Fed’s Beige Book, a BoJ policy meeting and update on its economic forecasts, with perhaps more interest in the extent of the hawkish (or rather ‘less accommodative’) tilt from the BoC and RBNZ at their policy meetings. All eyes will also be on China’s PBOC with markets awash with speculation about a cut in reserve requirement ratios (RRR) this weekend.

** China – June CPI & PPI **

– Given all the chatter about RRR cuts, the weaker than expected CPI data (-0.4% m/m 1.1% y/y) came as no surprise, though the colossal drag from the fall in Pork Prices (-36.5% y/y), which drove the slide in Food Prices (1.7% y/y vs. May +0.3%) accounted for all of the drop. That said non-Food Prices only edged up slightly to 1.7% from 1.6%, and the PBoC and local authorities will be concerned about the persistent weakness in core CPI (0.9% y/y). Upward pressures seem unlikely to emerge given that the Commerce Ministry overnight projected 2021-2025 averaging 5.0% y/y, well below the pre-pandemic pace of 8.0-8.5%, and begging the question of how China will transition to a consumption led economy. PPI dipped marginally less than expected at 8.8% (vs. a decade high of 9.0% in May), with energy and food price base effects accounting for the slip, with only a marginal dip in Mining Prices to 35.1% y/y, while Food dropped to 1.4% y/y from 2.1%, and Consumer Goods to 0.3% from 0.5%. While PPI will likely remain elevated through much of H2 2021, the lack of pass through from PPI to Consumer Goods will have the PBOC more worried about disinflation than inflation.

** U.K. – May GDP and monthly activity indicators **

– As with much Eurozone data, the run of UK monthly GDP and monthly activity indicators missed forecasts substantially, and failed again to mirror survey strength, which again serves as a warning about diffusion indices, though in the case of the Manufacturing (-0.1% m/m vs. Apr rev. Flat) and Construction (-0.7% m/m vs. Apr -0.8%) drops doubtless also attests to supply chain disruptions. The greater concern was the slower than expected recovery in Services (0.9% m/m vs. f’cast 1.6%, with Apr revised to 2.8% m/m from 3.4%), which tends to suggest that the talk of a wall of pent-up demand on re-opening has been exaggerated. That said the effective block on much tourist related activity, and the continued ‘work from home’ directive will have acted as a considerable restraint. Overall the data tend to lean towards the majority view about inflation and growth on the MPC rather Haldane’s narrative. One relatively encouraging piece of news overnight was that 8 out of 10 companies do not expect to make any redundancies in the coming quarter, despite the looming end of the furlough scheme in September, though the fact that 20% are considering redundancies should not be considered good.