Macroeconomics: The Day Ahead for 13 July

A statistical overload awaits with China’s Trade data and UK monthly GDP and array of activity indicators, and likely unrevised final CPI readings from Germany, France and Spain to digest, while ahead lies US CPI, Treasury Budget and the Fed’s Beige Book. A busy day on the central bank front, and following on from another bone crunching 200 bps rate hike in Hungary yesterday, with the Bank of Canada expected to hike rates 75 bps to 2.25%, following on from 50 bps hikes in New Zealand and South Korea, while Chile’s BCC is also seen hiking rates 50 bps to 9.50% (cumulatively 900 bps since it started hiking rate in July 2021). The IEA rounds off this week’s run of monthly Oil Market Report, and perhaps most poignantly coming after a warning from IEA Executive Director Birol yesterday that the worst of the global energy crisis is probably still in front of us.  Last but not least, there will be testimony to parliament from the leaders of the UK’s Office for Budget Responsibility (OBR), with some of the wilder tax cut plans of the deluge of Tory party leadership candidates likely to feature among the questions, as the first round of Tory leadership voting gets under way. Govt bond supply sees Italy offer 3, 7 &16-yr, while German and the US sell 30-yr.

** U.K. – May monthly GDP, Index of Services & Industrial Production

To some extent, the stronger than expected 0.5% m/m 0.4% q/q rise in GDP will increase the pressure on the BoE to take a more aggressive stance on reining in inflation. As has been the case for some months, Health Services with a 0.18% ppt contribution (April -0.44 pt) was the key factor in the bounce, though there were also contributions of 0.1 ppt each from Manufacturing, Professional Scientific Services, Transport and Construction, while Wholesale/Retail deducted 0.1 ppt, and other personal consumption indicators were no better than flat. The BoE has also placed a lot of emphasis on basic pay growth, which at 4.2% y/y is hardly running away in a rush of second round effects, above all in real terms. While Exports grew 7.4% m/m and Imports 4.3%, the underlying picture on trade (see chart) underlines a sharp deterioration on the Goods balance since the start of the year, which has little to do with oil, while the Services surplus has been broadly steady.

** China – June Trade Balance **

While the distortions from the easing of Covid related lockdown measures render the ‘record’ $97.94 Bln Tarde surplus rather meaningless, the fact remains that Exports posted a strong recovery and Imports missed forecasts, and does underline the point that domestic demand remains weak, with the property sector woes, Covid disruptions, and very high energy and raw materials prices all playing a role. Equally the extent to which China is propping up Russian trade and contributing to hefty displacements in commodity trade, even if China has obviously been exploiting hefty discounts on Russian raw materials relative to other international prices is more than evident in the 48.2% y/y surge in H1 Imports from Russia. Otherwise, the usual caveats about not over-interpreting single month trade data apply.

** U.S.A – June CPI / Fed Beige Book **

CPI is expected to remain very high in headline terms at 1.1% m/m and rising to a new 41-yr high of 8.8% y/y (vs. May 8.6%) and also up 0.6% m/m in core terms, with the y/y rate slowing to 5.6% from May’s 6.0%. Gasoline prices are likely to account for ca. 0.5/0.6 ppt of that m/m headline rise, and not helped by adverse seasonal adjustment, by contrast core will see another hefty contribution from OER (housing rent), with core Services likely to exercise some upward pressure, but there should be some drag from used auto prices, with gains moderating in June and likely to fall m/m in July, while core Goods Prices should also offer some drag as Retailers start to discount prices to try and whittle down some of their recent involuntary inventory build. The Fed’s Beige Book will be scrutinized for anecdotal evidence on demand destruction (above all due to energy and raw materials prices), easing supply chain pressures and labour demand, and overall business outlook optimism. In that respect yesterday’s NFIB Small Business Optimism offered some very tangible signals on lost economic momentum, with those expecting higher sales sliding to -28 vs. prior -15, plans to hire dropping to 19 from 26, and yet another slide in Economy Expectations to yet another all-time low of -61 from -54 (see attached table) – all of which suggest the economy is already past a ‘soft landing’.

** Canada – BoC rate decision **

The consensus unanimously expect the BoC to hike rates 75 bps to 2.25%, mirroring the Fed and also the largest single month increase since it raised rates by 100 bps to prop up an ailing C$ back in 1998. Deputy governor Rogers said in June that inflation was “keeping us up at night”, and a 75 bps move would take the BoC’s official rate into its ‘neutral range’ of 2.0-3.0%. With headline CPI at 7.7% and average core CPI at 4.7%, while Unemployment is at record lows, there is even a case for an even more aggressive 100 bps move, though the likelihood is that it will signal the likelihood of another minimum 50 bps hike in September, and the question in terms of the MPR update is if and how far it might need to move rates into ‘restrictive’ territory.