Macroeconomics: The Day Ahead for 15 July

Even if trade tensions remain front and centre, there is a lot of major data to digest today via way of China’s Q2 GDP and June activity data, UK BRC Retail Sales, Germany ZEW survey ahead of both Canadian and US CPI, with the highly erratic NY Fed Manufacturing survey also on tap. There are a number of Fed speakers, and this evening brings the UK’s annual Mansion House dinner, with keynote speeches by Chancellor Reeves and BoE’s Bailey, with Reeves expected to outline a new framework for UK insurance markets. In terms of trade negotiations, the EU can be said to be playing its cards well by showing restraint in delaying implementing counter tariff measures, per se not rising to the bait of additional US pressure. That said, this restraint certainly owes something to a lack of agreement (in some cases deep divisions) between member states about appropriate responses. Nevertheless, continued dialogue is a lot better than descending into full blown conflict on trade. Markets will inevitably take rather more comfort from Nvidia’s announcement that it will get licenses to sell some its high end chips to China, but this boost for the tech sector only serves to increase imbalanced portfolio allocations.

** China – Q2 GDP, Jun Activity & Property indicators **

– As has quite often been the case in recent years, the better than expected headline GDP reading flatters to deceive at 1.1% q/q 5.2% y/y. indeed the elements of strength only reinforce the impression of a very lopsided imbalanced economy. As was to be expected given the boost from public holiday timings, Retail Sales dropped back to 4.8% y/y, with discretionary spending dropping back, but offset by continued support for household goods from government subsidy schemes. Industrial Production was very robust at 6.8% (vs. May 5.6%), boosted by front loading of exports, but also contrasting with very weak Fixed Asset Investment at just 2.8% y/y (vs. expected 3.6%). The latter weakness was rather ominous given that while the fall in Property Investment accelerated to -11.2%, there were also setbacks in Infrastructure output to just 4.6% y/y, with Manufacturing Investment dropping to 7.5%, all of which points to substantial continued weakness in domestic demand, despite the array of stimulus measures. While the authorities announced new measures to stimulate rural property investment and also renovation of dilapidated properties, the fact is that it is the urban sector which continues to be the primary drag, and this will require something along the lines of the US RTC solution to the late 1980s/early 1990s property crisis to resolve this deep-seated malaise. While one has to acknowledge that increased energy efficiency above all in manufacturing (as well as sliding Steel output) is a restraining factor, the tepid 1.7% y/y increase in Power Generation probably offers a better proxy for the underlying growth trend.

** U.K. – June BRC Retail Sales / Barclaycard Consumer Spending **

– BRC Retail Sales at 2.7% y/y were much better than expected, but the contrast with the -0.1% y/y on the Barclaycard Consumer Spending measure, and with Food the largest contributor to the BRC rise, primarily due to inflation, there was in fact rather little to cheer in these reports.

** U.S.A. – June CPI **

– The consensus is once again expecting a significant acceleration in m/m terms on both headline and core CPI, with a median of 0.3% m/m vs. May’s 0.1%, which would bump y/y rates up to 2.6% headline (vs. 2.4%) and Core to 2.9% (vs. 2.8%). Thus far, while there has been some tariff pass through pressure evident in some goods items such as furniture and electrical appliances, these have been more than offset by autos (particularly Used), and Services (such as airfares and hospital services), and some moderation in Shelter. The risk would again appear to be for a modestly lower than expected reading. The challenge for the FOMC (leaving aside increasing political pressure) is that with so much ambiguity and vacillation on tariff rates, it may still take many months before reliable evidence on how much upward pressure on prices there will be from tariffs, leaving aside a now likely dwindling volume of pre-tariff inventories. As for the NY Fed Manufacturing survey, a rebound to -9.1 from June’s -16.0 is expected, and while the survey has been somewhat erratic and volatile in the past couple of months, large outliers have been far too common over the past 3 years to justify paying much attention to it.

** Canada – June CPI **

– It remains the case that headline inflation continues to be held down by the rollback of the carbon tax, even though an expected muted 0.1% m/m increase would translate to a 0.2 ppt rise in the y/y rate to 1.9%, thanks to adverse base effects. Core CPI measures are however forecast to be unchanged at a relatively lofty 3.0% y/y, per se reinforcing BoC concerns that disinflation in core prices has stalled, and coming on top of ongoing pass through risks from tariffs. A further BoC rate cut remains a possibility, but not near term, particularly given the surprisingly resilient June labour data.