Macroeconomics: The Day Ahead for 14 June

A quiet start to the week with greater China and Australia closed, has precious little in the way of market moving data, with Indian WPI and CPI, Eurozone Industrial Production and Canadian Manufacturing Sales providing the only highlights. There are a smattering of central bank speakers, though these are likely to offer no fresh perspectives, just as the Lagarde Politico interview trundled out all too familiar optimistic lines on the economic outlook, while strongly resisting any discussion about tapering ECB support. The NATO will move the focus from China (G7) to Russia, with meeting on the sidelines between Biden and Turkish president Erdogan providing a particular point of interest, as NATO attempts to wrest influence over Turkey back from Russia and China (the announcement of a near trebling of TCMB’s FX swap line with the PBOC to $6.0 bln from $2.4 Bln offers a counter). The only other item of interest for energy markets will be the EIA’s monthly Drilling Productivity Report. A close eye will kept on weather forecast updates for the US for the next 8 to 14 days see less intense heat, and better precipitation levels, which appears to have taken a heavy toll in early trade on grains and beans futures (see charts); the sharpness of these moves (Palm Oil down 10%) again attests to risks from excessive speculative positioning in the commodity space (and elsewhere) and the scope for volatility to spike higher, even if only temporarily. In passing, it is worth noting that the port disruptions in Shenzhen due to a spike in Covid19 cases and associated restrictions on activity is being further exacerbated by limits on power generation due to very hot weather and drought, the Greater Bay Area’s power generation capacity has long been considered to be inadequate to service this very densely populated region.

RECAP: The Week Ahead – Preview: 

The new week sees a busy run of data from the US, China and the UK, with US Retail Sales, Industrial Production, NY & Philly Fed surveys, NAHB Housing Market Index and Housing Starts; China Retail Sales, Industrial Production, FAI and Unemployment; UK CPI, RPI, PPI, labour data and Retail Sales. Elsewhere there are also Japan Trade and Machinery Orders, Canadian CPI, Australian labour data and India’s CPI, WPI and Trade. In central bank terms the FOMC and BoJ meetings are not expected to see any departure from their current ultra-accommodative narratives, and thus continuing to appease ‘animal spirits’ in financial markets, who clearly have no desire to ‘front run’ any potential central bank policy shifts; the SNB and Norges Bank also hold policy meetings. Following on from a less confrontational, though still quite tense G7 meeting, this week has a NATO summit, the US/EU summit and what will be a very tense initial meeting between Biden and Putin, with US/Russia relations at a multi-decade low.

It will be a very light for earnings, and a relatively busy week for bond auctions that has sales in USA, UK, Germany, Finland France, Spain, Australia and Canada. There are another raft of commodity conferences, including Australia’s APPEA Gas and Oil, FT Commodities Global Summit, CRU World Aluminium Conference, China’s CNGOIC Oilseed conference and the Asia Pacific Precious Metals Conference. In commodity report terms the focus will be on EIA monthly Drilling Productivity Report, Unica’s Cane Crush & Sugar Production and USDA World Coffee Market report, while the crypto space awaits the SEC’s Bitcoin ETF decision.

With regards to this week’s data, the initial observation is that where the reports are for May, base effects will start to turn negative in coming months for y/y readings on activity data, putting greater focus on m/m readings. But more importantly the fact is that for all of the ‘recovery gaining traction’ narrative above all in Europe and North America, deeply negative long-term bond real yields basically are actually saying the developed world is facing a prolonged depression. To be sure, to assume that real yields actually say anything about market economic expectations is at best misguided and myopic, given the epic and unprecedented levels of monetary accommodation that G10 central banks continue to lavish and, with that the most brutal and prolonged period of financial repression which has been seen during peacetime. Per se, the run of data will have to spring some big, though not wholly fanciful surprises to have anything more than a passing impact.

US Retail Sales are likely to be the highlight of the week, but with the lack of new stimulus cheques, and going forward the withdrawal of enhanced / extended unemployment benefits are expected to post a headline -0.5% decline paced by auto sales, and just flat m/m ex-Autos & Gas. Upside surprises are possible, but as this is a value (nominal) rather than a volume (real) measures, this may be wholly due to inflation, rather than a signal on pent-up demand. US Industrial Production and Manufacturing Output are seen up 0.6% and 0.7% m/m respectively, despite supply chain bottlenecks and mirroring readings in April, and echoing sector surveys, but the bottlenecks do impart some downside risk. Headline and core PPI are expected to rise 0.5% m/m, but with oil price base effects reversing, this would leave headline unchanged at a lofty, though not particularly threatening 6.2% y/y, but core PPI is seen climbing to 4.8% y/y from 4.1%, while Housing data are expected to remain robust, though clearly past their peak. China’s run of activity data will see base effect driven deceleration in y/y rates, though still running at very robust levels on any historical comparison, with the focus on any signs that consumer spending may be getting a little more traction, even if Unemployment is expected to remain relatively high at an unchanged 5.1%. UK labour data should show Employment growth accelerating, a modest slip in the Unemployment Rate and largely base effect driven pick-up in wage growth, while CPI is seen up a reasonably well contained 0.4% m/m to push the y/y rate up to 1.8% from 1.5%, while core CPI edges up to 1.5% from 1.3%, while PPI Input pressure are expected to remain elevated at 1.0% m/m 10.6% y/y, though the pass through to PPI Output is forecast to remain modest at 0.4% m/m to jump the y/y rate to a 4.5% from 3.9%. Meanwhile UK Retail Sales should get a more modest re-opening but still strong boost at 1.6% m/m, with base effects pushing the y/y rate back down to a still sizzling 29.0% from April’s 42.4%.

However the focus will be on the FOMC and a broad array of central bank meetings. The focus for markets initially will be on any changes in the dot plot, with one or two more members likely to be looking at a slightly earlier initial rate hike, with the 2023 median perhaps moving to 0.375 from 0.125. It will then move to the updated forecasts, which in March saw the PCE deflator at 2.4 in 2021 and core at 2.2, these will have to move higher, but without a shift in estimates for 2022 (last both 2.0%) and 2023 (last both 2.1%), this will merely be an acknowledgement of near term pressures, while affirming the narrative that these will be transitory. Unemployment was forecast at 4.5% in 2021, 3.9% in 2022 and 3.5% in 2023 in March, and the trajectory would have to be shifted to a sharper improvement in 2021/2022 to signal potential for a less accommodative policy path. As for the statement, the question will be less about what it acknowledges in terms of an overall better than expected economic performance and outlook, and more about whether it and/or Powell hint that talking about when they will talk about tapering is ‘on the table’. The BoJ is not expected to make any policy changes, while underlining risks to the near term economic outlook due to the extended lockdown, while this would behove the BoJ to extend some of its funding measures for the corporate sector beyond the current end date of September, it will likely defer any decision on this until its July policy meeting. Norges Bank is seen holding its policy rate at 0.0%, but will likely stick to its projection that there will be a rate hike later in the year, despite much weaker than expected outturns for headline and underling CPI, which might see its rate hike trajectory edged down. Last but not least in terms of DM central banks, the SNB will keep its policy rate unchanged, underline that it will continue to use FX intervention to curb CHF strength, and point to soft CPI data and rather mixed incoming data as underlining continued downside risks to the outlook. In the EM space, Bank Indonesia could in theory cut rates given weak activity data and soft inflation data, but such a cut would put the IDR under additional pressure, which it will certainly not want to countenance. Meanwhile Turkey’s TCMB is once again under political pressure to cut rates from the current punitive 19.0%, but with the TRY recovery being little more than a marginal correction, and inflation remaining sky high and facing the threat of additional pressure from higher oil price, it will for the time being want to see much clearer signs of TRY stability and a material drop in CPI.

As noted, it will be a very light week for corporate earnings, with Bloomberg News highlighting the following as like to make some headlines: Adobe, online retailer AO World, Ashtead Group, Halfords, Kroger, U.S. homebuilder Lennar, Oracle, H&R Block, La-Z-Boy, Jessica Alba’s Honest Co., footwear firm Dr. Martens, fashion label Ted Baker, and gun manufacturer Smith & Wesson.