Macroeconomics: The Day Ahead for 23 June

The week ends with the focus on G7 flash PMIs, with Japan’s national CPI, UK Retail Sales and GfK Consumer Confidence, and Turkey’s Trade Balance to digest, while the ECB dominates the run of central bank speakers, as the dust starts to settle on yesterday’s 50 bps rate hike.

** U.K. – June GfK Consumer Confidence / May Retail Sales / BoE post mortem **

Both Consumer Confidence and Retail Sales were better than expected, and per se offered additional support for yesterday’s BoE 50 bps rate hike, above and beyond the adverse CPI and Average Weekly Earnings data. Consumer Confidence at -24 vs. prior -27 is not at its best level since January 2022, and well above the September -49 low, but still remains weak historically. The details were somewhat contradictory, on the one hand, the climate for major purchases edged down 1 pt to -25, on the other Personal Finance expectations jumped to -1 from -8, with Economy Expectations rising to -25 from -30, while Savings intentions jumped to 25 from 19; some of the optimism may well be reversed after yesterday’s rate move. Retail Sales posted a modest rise of 0.3% m/m, boosted by the warmer weather (evident in a 1.5% m/m rise in Household Goods) and the Coronation bank holiday, though food sales continued to weaken on the back of continued price pressure. It would be difficult to argue that the more aggressive 50 bps rate hike was a shock, even a surprise, given the run of inflation and wage data, and some may argue that more should have been done earlier, the BoE’s forecast record is extremely poor (the political fraternity are clearly lining up behind this line of argument, in a very typical case of scapegoating) and that the move was reactive, and the BoE remains behind the curve.

Markets are now priced for rates peaking above 6.0%, this may well prove to be excessive, but after this zigzag on rate hikes, this is more than reasonable from a risk management perspective. But the fact is that the primary reasons for UK inflation being a good deal higher than the Eurozone and US are structural – low labour force participation, post-Brexit red tape, high business tax rates, adverse business investment environment, weak and unstable government, and tight fiscal policy, to name but a few. Per se, hiking rates aggressively will do little to tame inflation, and raises recession risks, perhaps all the more so given the increased lag in monetary policy transmission due to the preponderance of fixed mortgages and loans. The latter also suggests that when a downturn does materialize, it may be that much sharper, and with the legislature and monetary policy makers looking inept, and seemingly having lost control, it is little wonder that markets are basically factoring in a greater risk premium into the GBP and associated assets, rather than seeing any rate carry advantage on the expected widening in UK rates over the Eurozone and US. It also signals an increasing loss of confidence in the management of the UK economy, which will act as a further headwind to domestic and foreign investment.

** G7 – June ‘flash’ PMIs **

Flash G7 PMIs were seen little changed to slightly lower across the board, confirming that manufacturing remains in recession, while services were to see a generally modest expansion, despite an array of anecdotal evidence suggests that services are losing momentum. As things have turned out, the downturn in manufacturing is clearly deepening (particularly Germany at 41.0), and Services are seeing a considerable loss of momentum (Japan, Australia, Germany), or even dropping into contraction (France 48.0 vs. 52.5). Per se the cushion that Services demand has been providing against the manufacturing downturn is clearly running out of road, and raising the risk of recession in major economies in H2 2023.