Macroeconomics: The Day Ahead for 16 June

Today will be the high water mark for data and events this week, with a raft of overnight data to digest: China Retail Sales, Production & FAI, Japan’s Trade and Orders and the gamut of UK inflation indicators. Ahead lie US Housing Starts and Import & Export Prices, and Canadian CPI. The FOMC meeting tops the event schedule, while Brazil’s BCB is expected to continue with its aggressive tightening via way of another 75 bps rate hike to 4.25% and a clear signal of more to come, given that real rates remain in negative territory. On the political front the Biden tour of Europe concludes with his first meeting with Russian President Putin, in what will likely be a very tense initial meeting, with US/Russia relations at a multi-decade low, and very low expectations of anything tangible emerging from the meeting.  In the commodity space, there are more conferences (CNGOIC Oilseeds and the Asia Pacific Precious Metals Conference), accompanied by the Abares Australia Agricultural Commodities Report.

In terms of the overnight data, there will obviously be disappointment at the broad based slowing in China activity data, though this does not alter the preciously observed narrative that manufacturing and trade continuing to be the main pillars of the recovery, while personal consumption struggles to regain its previous pace, with recent localized activity restrictions clearly not helping the cause. Property Investment is starting to show signs that curbs are starting to have an impact. But it will be the decision to release metals from state reserves to curb commodity prices, along with directive to curb commodity imports which will be the focal points for markets, thus continuing the swathe of intervention measures introduced over recent months, and which present the greater risk for markets.

– While the UK CPI data were considerably above expectations at 0.6% m/m 2.1% y/y (forecast 1.8% y/y), with core CPI jumping to 2.0% y/y from 1.5%, these remain well below levels being observed in the US (though it is clearly further along the road in terms of lifting activity restrictions. The breakdown shows plenty of evidence of re-opening pressures with household and leisure goods, clothing and footwear jumping higher, though offset by drops in both food and energy prices, and in contrast to the US, the continued restrictions on foreign travel are curbing any travel related pressures. The BoE will not be losing any sleep, but knows that the real test probably comes in Q3. PPI Input prices continue to highlight ongoing pipeline pressures, though the pass through to PPI Output continues to be relatively modest.

As for Japan’s Trade and Orders data, these underlined that while domestic demand remains weak with activity restrictions continuing to constrain personal consumption, and indeed domestic machinery orders, the external sector is providing considerable offset. Exports did miss forecasts, but were still very strong at 49.6% y/y, and foreign orders which are excluded from the headline core Machinery Orders posted a sharp jump of 46.2% y/y after dropping sharply in March.

** U.S.A. – FOMC meeting **

– 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’. That in turn hinges on their evaluation of ‘substantial further progress’ on meeting its dual mandate targets, with the emphasis on meeting the employment target, but one which is of course qualitative as much quantitative, in other words where is the inflection point in terms of what is ‘substantial’? Markets are certainly in no mood to pre-empt the Fed, above all due to FOMO and TINA considerations, as has been all too obvious in recent weeks. While the consensus sees no change in the IOER rate from 0.10%, Powell will face questions about the ballooning volume of Reverse Repo Operations (>$ 500 Bln), and the potential for this to present risks to financial stability going forward, above all once it does start to taper (or even just hint at tapering). It will also be interesting to see if the press conference gets around to discussing the point made in the week ahead: 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 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 that has been seen during peacetime. The other much underdiscussed point is that the Eurozone’s purposeful ‘extend and pretend’ modus operandi during the post-GFC era is now in operation in the rest of the world, in principle moving most countries to a form of ‘command and control’, which is at best ironic, at worst ‘wilful blindness’.