Written Commentary
Persian Gulf and Red Sea developments cast a long shadow, as busy run of US and Eurozone Q2 GDP, German and Spanish CPI, US Personal Income, PCE and weekly jobless claims tops data run; BoE rate decision, deluge of earnings headlined by Samsung, Amazon and Apple.
- Eurozone GDP: few surprises thus far, Spain and erratic Ireland strong; France tepid, with Germany and Italy also expected weak; energy prices to offset seasonal discounts in German and Spanish CPI.
- U.K.: BoE set to hold rates, potential for one more dissent, likely to suggest CPI to peak at lower level than assumed in May; not expected to make substantive changes to QT programme.
- U.S.A.: Q2 GDP seen maintaining Q1 pace, but solid rebound in personal consumption expected, strong equipment spending seen offset by large drag from net exports.
- U.S.A.: Fed statement and press conference unimpressive, uninformative and rather patronising; Warsh likely to have to face market message of ‘actions speaking louder than words’.
- Japan: BoJ expected to hold, CPI forecasts likely tweaked higher, but no commitment to faster rate hike path, expect some dissent.
EVENTS PREVIEW
Persian Gulf and Red Sea developments will remain the key overarching factor, as a very unimpressive and uninformative Fed statement and press conference are digested, but the day’s regular macro schedule is something of a blockbuster: BoE rate decision, Eurozone and US advance Q2 GDP, German and Spanish CPI, EC Confidence surveys, US Personal Income & PCE top the data and events run.
An even busier corporate earnings run has Samsung Electronics and Tata Steel in Asia; Anglo American, Anheuser Busch Inbev, BMZ, ING, Lloyds and Shell in Europe; Amazon and Apple will take pride of place in the US. The Fed statement was again very terse, with literally nothing to take home from: “Economic activity is expanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East. Productivity growth and capital investment are strong. Job gains have kept pace with the workforce, and the unemployment rate has changed little.
Inflation remains elevated relative to the Committee’s 2 percent goal, in part reflecting supply shocks that have driven price increases in certain sectors, including energy. The Committee will deliver price stability.” This reads more like some Communist Party or oligarch statement than communication from the world’s leading central bank, and borders on being very patronising. As noted in yesterday’s preview, there is likely to be a very short shelf life for Warsh burnishing his inflation fighting credentials, if policy action does not accompany the rhetoric.
** Eurozone – Q2 advance GDP **
Thus far, there has been a strong element of predictability to national readings, Spain leading the way with a slightly stronger than expected 0.7% q/q, France recovering to 0.2% q/q, Austria and Belgium flatlining q/q, while Ireland’s highly erratic GDP bounced back 3.9% q/q after a -7.0% q/q contraction in Q1. Germany and Italy are seen at 0.1% and Flat q/q, and Eurozone at 0.2% q/q. The fact remains that growth is very weak, and Unemployment continues to edge higher in many countries, and that is what distinguishes this from 2022 when post Covid pent up demand and solid employment growth saw rapid pass through of energy costs to businesses consumers. Per se, there is likely to be one more ECB hike in September, and then a period of maintaining a tightening bias without further rate hikes.
Thus far, there has been a strong element of predictability to national readings, Spain leading the way with a slightly stronger than expected 0.7% q/q, France recovering to 0.2% q/q, Austria and Belgium flatlining q/q, while Ireland’s highly erratic GDP bounced back 3.9% q/q after a -7.0% q/q contraction in Q1. Germany and Italy are seen at 0.1% and Flat q/q, and Eurozone at 0.2% q/q. The fact remains that growth is very weak, and Unemployment continues to edge higher in many countries, and that is what distinguishes this from 2022 when post Covid pent up demand and solid employment growth saw rapid pass through of energy costs to businesses consumers. Per se, there is likely to be one more ECB hike in September, and then a period of maintaining a tightening bias without further rate hikes.
** U.K. – BoE rate decision **
The BoE’s MPC also has the lower than expected CPI (2.6% y/y), as well as its Agents report indicating that supermarkets have lowered their food inflation expectations to a peak of 4-5% for this year, against a prior estimate of 6-7%, noting fragile demand has made passing on increased costs more challenging, which was also evident in the latest Decision Maker Panel survey showing 12-month inflation expectations dropping to 3.0% vs. June’s 3.3%. But CPI is set to rebound above 3.0% in Q3 due to the jump in fuel and household energy prices (perhaps even as high as 3.5%), and the perhaps deceptively strong June Retail Sales may prompt one or other MPC members (Mann?) to join Greene and Pill in voting for a rate hike, despite a sluggish labour market.
The BoE’s MPC also has the lower than expected CPI (2.6% y/y), as well as its Agents report indicating that supermarkets have lowered their food inflation expectations to a peak of 4-5% for this year, against a prior estimate of 6-7%, noting fragile demand has made passing on increased costs more challenging, which was also evident in the latest Decision Maker Panel survey showing 12-month inflation expectations dropping to 3.0% vs. June’s 3.3%. But CPI is set to rebound above 3.0% in Q3 due to the jump in fuel and household energy prices (perhaps even as high as 3.5%), and the perhaps deceptively strong June Retail Sales may prompt one or other MPC members (Mann?) to join Greene and Pill in voting for a rate hike, despite a sluggish labour market.
The Monetary Policy Report will have updated forecasts, but with the energy price surge, the new Burnham government likely to make further announcements on the economy, and the US again wielding tariff threats, it is likely that Bailey & Co will not put too much emphasis on them. The other focal point will be the review of its Quantitative Tightening programme, which even the BoE admits has put upward pressure on long-dated gilt yields, but thus far the MPC has shown no willingness to relent on balance sheet reduction, and governor Bailey has steadfastly resisted changing course, even if last year did see a reduction in the volume to £100 Bln to £70 Bln, and curbed sales of long-dated Gilts. But the BoE should be aware that with a new ‘broom’ at No. 10 Downing Street, the added debt servicing pressure from the BoE’s QT programme may well become a focal point and could be added to Burnham’s list of intended institutional reforms, even if he would need to tread carefully given the potential for accusations of political interference (even if some would be a case of political opportunism).
** U.S.A. – Q2 advance GDP, June Personal Income/PCE **
Q2 advance GDP SAAR seen unchanged vs. Q1 at 2.1%. However, the details will look very different to Q1 with Personal Consumption rebounding to 2.3% from a tepid 0.5% in Q1, continued strength in Equipment Spending close to, but slightly lower than Q1’s 15.8%, while Net Exports are likely to be a bigger drag, perhaps as much as 1.5 ppt, in part due to front loading ahead of the expiry of the Section 122 tariffs. June PCE deflators are expected to echo CPI in headline with a drop of -0.1% m/m bringing the y/y rate down to 3.7% from 4.1%, but core posting a very average 0.2% m/m that would see y/y ease 0.1 ppt to a still very lofty 3.3%, and thus above target every month since March 2021.
Q2 advance GDP SAAR seen unchanged vs. Q1 at 2.1%. However, the details will look very different to Q1 with Personal Consumption rebounding to 2.3% from a tepid 0.5% in Q1, continued strength in Equipment Spending close to, but slightly lower than Q1’s 15.8%, while Net Exports are likely to be a bigger drag, perhaps as much as 1.5 ppt, in part due to front loading ahead of the expiry of the Section 122 tariffs. June PCE deflators are expected to echo CPI in headline with a drop of -0.1% m/m bringing the y/y rate down to 3.7% from 4.1%, but core posting a very average 0.2% m/m that would see y/y ease 0.1 ppt to a still very lofty 3.3%, and thus above target every month since March 2021.
** Japan – BoJ rate decision **
The BoJ is under increasing pressure to increase rates at a faster pace, above all but not only due to import price pressures from a very weak JPY and rising energy prices. While national CPI was below the BoJ’s 2.0% target on all measures, this week’s Tokyo CPI ex-Food & Energy is set to hit 2.0% and rise further in coming months, and the underlying rate is in the 2.5%-3.0% area. A number of BoJ officials have recently also voiced concerns about evidence of a faster pass through to business and consumer prices. In its April forecast, core CPI was seen above target for the next two years, only reaching 2.0% in 3 years, while core CPI ex-Energy was seen at 2.6% in the next 2 years before dropping back to 2.2%.
The BoJ is under increasing pressure to increase rates at a faster pace, above all but not only due to import price pressures from a very weak JPY and rising energy prices. While national CPI was below the BoJ’s 2.0% target on all measures, this week’s Tokyo CPI ex-Food & Energy is set to hit 2.0% and rise further in coming months, and the underlying rate is in the 2.5%-3.0% area. A number of BoJ officials have recently also voiced concerns about evidence of a faster pass through to business and consumer prices. In its April forecast, core CPI was seen above target for the next two years, only reaching 2.0% in 3 years, while core CPI ex-Energy was seen at 2.6% in the next 2 years before dropping back to 2.2%.
It seems likely that these should be tweaked higher in this week’s forecast update, as will its GDP forecasts. It will doubtless stress the need for vigilance due to the JPY, Import and energy prices, and the need for further rate hikes. But given very intense govt pressure not to tighten monetary policy, Governor Ueda will likely eschew offering a clear signal that the pace of rate hikes needs to pick up from the current 6-month cadence, which will likely prompt a more concerted test of the USD/JPY 165 level.
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