Macroeconomics: The Day Ahead for 18 July

The week ends on a lighter note in terms of data and events, as trade tariffs, the future of Powell and Fed independence and Sunday’s crucial Japan Upper House election dominate the immediate landscape. There are Japan’s national CPI, Malaysia’s advance Q2 GDP and German PPI to digest ahead of US Housing Starts and provisional Michigan Sentiment. Central banks move into their pre-policy meeting purdah periods making for a very light schedule of events, but with Fed’s Waller’s call for a 25 bps July rate cut ringing in their ears (one does wonder whether Waller’s shift is motivated as much by his economic view as a desire to take over from Powell). Meanwhile, 3M, American Express and Southern Copper will be among the highlights in terms of US corporate earnings. There will be chatter about the passage of the trio of crypto bills, including the Genius and Clarity acts, though the process of institutionalisation of the crypto and stablecoin sectors is a train that left the station a long time ago. Next week features an expected no change at the ECB meeting and China’s monthly Loan Prime Rate fixings, a lighter run of second tier data that includes G7 & India flash PMIs, German Ifo and a raft of other surveys; US Durable Goods Orders, New and Existing Home Sales; UK Retail Sales and PSNB, Japan Tokyo CPI, and Canada Q2 BoC Business Outlook and Retail Sales. The US Q2 earnings season gets into full swing (more than 100 S&P 500 companies reporting), among the highlights are likely to be Alphabet, Intel and Tesla, accompanied by American Airlines, AT&T, Baker Hughes, Cleveland-Cliffs, Coca Cola, Dow Inc, Freeport McMoRan, General Motors, Halliburton, Hasbro, Hilton Worldwide, IBM, NextEra Energy, Phillips66  and Union Pacific .

** Japan – June National CPI, Upper House Elections **

– National CPI was broadly in line with forecasts with core measures easing to 3.3% (core) and 3.4% (ex-Food & Energy) y/y respectively, but remaining way above the BoJ’s target. The key question for the fresh set of BoJ forecasts at its next meeting is not whether it revises up its inflation forecasts, which it will, but whether it revises them to show inflation at or above target on a long-term basis, which would behove it to raise rates again this year. Given that the BoJ is quite heavily politically influenced, this may depend on the outcome of Sunday’s Upper House elections, in which opinion polls suggest the Ishiba coalition government is likely to lose its current majority, leaving it needing to rely on the support of opposition parties. The latter are for the most part against further BoJ rate hikes, and all have various proposals to temporarily or permanently reduce or suspend the sales tax, above all on food, which would de facto increase Japan’s already crippling debt burden. The election will also have implications for the stalled trade negotiations with the US, with autos and agriculture among the key sticking points.

** U.S.A. – June Housing Starts, July prov. Michigan Sentiment **

– Housing Starts are forecast to bounce a modest 3.3% m/m after sliding 9.8% m/m in May, and at an SAAR pace of 1.298 Mln would be well below the long term trend range, rather unsurprisingly given home builder inventories remain very bloated, and not helped by high mortgage rates and affordability issues. Michigan Sentiment is forecast to remain very weak, but recover slightly to 61.5 from 60.7 on firmer equity markets and better economic data, though confusingly median estimates for both Current Conditions and Expectations are seen lower than in June (go figure! Ed.). Inflation Expectations are seen little changed at 5.0% (1-yr) and 3.9% (5-10 yr), high in any historical context, but well below recent peaks. Yesterday’s robust core Retail Sales add to the profile of a US economy that is anything but in need of an immediate rate cut, even if outlook risks remain heavily skewed to the downside.