Macroeconomics: The Day Ahead for 24 July

A busy week for major data and central bank policy meetings gets off to a very slow start, with the only items of note being the array of G7 and Australia flash PMIs. A modest run of corporate earnings has Posco, Tata Steel, NXP Semiconductors and Cleveland-Cliffs as the likely highlights. G7 flash PMIs get the week underway, with Manufacturing readings continuing to see broad weakness (as exemplified by the overnight readings from Japan and Australia), and Services continuing to expand, albeit at a slower pace, with the exception of France’s forecast 48.5 from June’s 48.0. As previously noted, PMIs have latterly proven to be rather poor guides of late to economic trends, conveying a picture of greater economic weakness than official statistics, and probably reflecting the uncertainty about and unpredictability of business flows in a transitioning world post-Covid. Some head-scratching comments from various govt officials (FX tsar Kanda and Deputy Chief Cabinet Secretary Yoshihiko Isozaki) introduce an element of uncertainty into this week’s BoJ meeting, which most had expected to be a formality, as speculation on a policy tweak have faded, thanks to Ueda’s recent comments. There is also the inconclusive general election result in Spain, which does again highlight the increasingly polarized world of European politics, and per se makes reaching agreements on the numerous challenges that the EU faces that little bit more difficult.

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The focal points for the week will be the array of central bank meetings – Fed, ECB (both +25 bps), BoJ, Czech National Bank, Bank Indonesia (all no change), though Chile’s BCC is expected to launch a rate cut cycle with a 75 bps cut to 10.5%, and there is also a busy run of top tier data. Highlights include Q2 advance GDP for US, France, Spain, Austria, Belgium, Sweden, South Korea and Taiwan; US Consumer Confidence, House Prices, Durable Goods, Advance Goods Trade Balance, New and Pending Home Sales and Personal Income/PCE. The Eurozone also looks to national CPI readings from Germany, France and Spain, which are accompanied by the German Ifo, and G7 flash PMIs, along with the CBI Industrial Trends and Retailing surveys. Japan has Tokyo CPI and Services PPI, Australia June & Q2 CPI, while China awaits Industrial Profits, and Mexico and Brazil look to inflation data. The Q2 earnings season cranks into full fear, with 173 US S&P 500 companies reporting, and a barrage of major earnings also due in Asia and Europe. In the commodity space, China’s growth outlook will likely continue to be the key factor, with considerable market disappointment at the measures announced last week to boost consumer spending. Beyond that there is the monthly EU MARS Crop Conditions report, with the impact of the searing heatwave in much of Europe in view, while there will be continued focus on the prospects for Ukraine grain exports as tensions escalate. There are also a number of conferences: S&P’s Beijing Commodity Market Insights Forum, Connecting Green Hydrogen APAC, Australian Grains Industry Conference, and China’s International Conference on Power and Energy Technology in Tianjin. Spanish politics will be on the radar as the nation votes in its General Election on Sunday, which polls suggest will see the PP emerge as the strongest party, but probably requiring the support of the far right Vox party, who have suggested that coalition participation will be contingent on tax cuts, which Spain can ill afford given ballooning public debt levels.

The Fed is expected to hike rates a further 25 bps to 5.25-5.50%, and leave the door open to a further hike in Q4, with the emphasis again on taking time to ‘asses the economy’s progress’ and the cumulative and lagging impact of its 500 bps of rate hikes. Tweaks to the statement on both inflation (June ‘remains elevated’) and the labour market (some chance of shifting from jobs gains having been ‘robust’ to ‘have moderated’, though they may express caution on wage growth after the stronger June rise). Comments from Fed officials show divisions with some still seeing the need for a further hike after this meeting, and others becoming less convinced), and it will be interesting to see if Powell suggests that the scope for a ‘soft landing’ has widened, and if there are any efforts to lean against markets discounting 125 bps of rate cuts in 2024, e.g. by emphasizing that even if this does prove to be the final hike, rates will likely remain high for longer (than markets are anticipating).

The ECB meeting comes after Tuesday’s quarterly bank lending survey, the latter notable given comments from chief economist Lane recently placing considerable weight on this, having been quite dismissive of the tightening in credit conditions evident in the prior report, with the Private Sector Credit readings within M3 (June data due Wednesday) already signalling that the credit impulse in the Eurozone is at weaker levels than during the ‘Euro crisis’. Be that as it may, a 25 bps rate hike is seen as a ‘done deal’, but with the hawks toning down their rhetoric, there will be even greater emphasis on being ‘data dependent’ in terms of the September decision. There is some risk that the press conference sends some confusing signals on the rate outlook, and statement comments on underlying inflation will be closely watched (June: ‘Indicators of underlying price pressures remain strong, although some show tentative signs of softening), along with any tweaks to ‘Borrowing costs have increased steeply and growth in loans is slowing. Tighter financing conditions are a key reason why inflation is projected to decline further towards target, as they are expected to increasingly dampen demand.’ As with the Fed, Lagarde will likely want to ensure that any hints that she may offer that a peak in rates is closer at hand are offset by a ‘high for longer’ message.

As for the Bank of Japan, Ueda’s most recent comments have put paid to the idea that some small upward revisions to its inflation forecasts at this meeting’s forecast update might prompt a policy tweak, stressing that the economy still needs the stimulus of its ultra-easy policy. Given that Ueda prides himself on being a very clear communicator, tweaking policy at the current juncture would send completely the wrong sort of hawkish signal and undermine his still rather nascent credibility. Thus the call rate target will be kept a -0.1%, and 10-yr JGB yield at 0.0% +/- 50 bps

Statistically, advance Q2 GDP and inflation data dominate the week. In the US, Q2 GDP is forecast to slip to 1.8% SAAR from Q1’s 2.0%, with a weak contribution from Personal Consumption (1.2% vs. Q1 4.2%) and a drag from Net Exports, offset by a small increase in Business Investment (structures rather than equipment) and Inventories, with Housing Investment seen flat after a persistent drag since Q1 2022. Friday’s Personal Income and PCE will have been pre-empted by the GDP data, but the PCE deflators are both to rise just 0.2% m/m, to bring headline y/y down to 3.0% from 3.8%, and core to 4.2% from 4.6%. Friday also brings the Q2 Employment Cost Index, with a slightly lower 1.1% q/q from Q1’s 1.2%, which would see y/y ease modestly from 4.8%. Consumer Confidence is seen posting a more modest gain to 112.0 after June’s jump to 109.7, House price measures are seen up 0.6%/0.7%, but will drop deeper into negative territory thanks to base effects. Durable Goods Orders are forecast to rise 1.0%, thanks again to transportation (mostly defence aircraft), but Non-defence Capital Goods ex-Aircraft are seen dipping 0.2% m/m. A mean reversion is seen for New Home Sales is expected (-5.0% m/m after May’s +12.2%), with a modest 0.5% drop seen in Pending Home Sales.

For the Eurozone, French Q2 GDP is forecast to eke out growth of just 0.1% q/q vs. Q1 0.2%, despite a smaller drag from social unrest and strikes, the latter helping to boost industrial production, even though utilities output likely moderated from Q1, but with the Services PMI down in the dumps, Services output will probably no better than flat. In Spain, Q2 GDP is forecast to post a respectable 0.5% q/q as tourism continued to provide major boost, helping to offset continued weakness in Personal Consumption, that has been undermined by inflation and only modest wage increases. June provisional CPI data for Germany, France and Spain are also due, and will see considerable divergence, as package holiday prices are expected to see German HICP rise 0.5% m/m, and keep the y/y rate elevated at 6.6% vs. prior 6.8%. French HICP is seen unchanged m/m to push the y/y rate down to 5.0% from 5.3%, with Food and Goods price pressures easing. By contrast Spanish HICP is forecast to fall 0.4% m/m, but with adverse fuel price base effects this would edge the y/y back up to 1.8% from 1.6%, despite ongoing downward pressure from utility prices, with core CPI likely to be slightly higher than June’s 5.1% y/y.

G7 flash PMIs and Germany’s Ifo survey get the week under way, with Manufacturing readings continuing to see broad weakness, and Services continuing to expand, albeit at a slower pace, with the exception of France’s forecast 48.5 from June’s 48.0. Germany’s Ifo Business Climate is set to slow a third month to 88.0 from 88.5, the weakest reading since November, on the back of weaker Current Conditions, with Expectations little changed at a very weak 83.5. Elsewhere Tokyo CPI is forecast to show headline and ex-Fresh Food CPI dropping to an 11-month low of 2.9% y/y from 3.2%, though ex-Food & Energy only dipping to 3.7% from 3.8%. Australia’s June CPI is expected to edge down to 5.5% from 5.6% y/y, with Q2 core CPI measures seeing a still very elevated 1.1% q/q increase, though y/y rates will drop thanks to base effects to 6.0% (trimmed mean) and 5.4% (weighted median). Canada’s May GDP seen picking up to 0.3% m/m to edge the y/y rate up to 1.9%, while Brazil’s IPCA-15 Inflation is anticipated to edge down to 3.26% from 3.4% y/y, paving the way for the BCB to cut rates, while Mexico’s Mid-month CPI should ease further to 4.77% y/y, with core also seen lower, but at a still very elevated 6.73% y/y.

As noted above there will be a tsunami of corporate earnings, with Tech behemoths such as Alphabet & Microsoft, energy giants such as Chevron, Exxon Mobil, Shell and TotalEnergies, and many other bellwethers reporting. Highlights for the week according to Bloomberg News: 3M, AbbVie, ADM, ADP, Advantest, Agnico Eagle Mines, Air Liquide, Airbus, Align Technology, Amadeus IT Group, American Electric Power, American Tower, American Water Works, Ameriprise Financial, Amphenol, Anglo American, Aon, Arch Capital Group, Arthur J. Gallagher, Asian Paints, AstraZeneca, AT&T, ADP, Axis Bank, Bajaj Finance, Bajaj Finserv, BBVA, Banco Santander, Barclays, BASF, BAT, Biogen, BNP Paribas, Boeing, Boston Scientific, Bristol-Myers Squibb, Cadence Design Systems, CaixaBank, Canadian National Railway, Canadian Pacific Kansas City, Canon, Capgemini, Carrier Global, CBRE, Cellnex Telecom, Cenovus Energy, Centene, Central Japan Railway, CGI, Charter Communications, Chevron, Chipotle Mexican Grill, Chocoladefabriken Lindt & Spruengli, Chubb, Chugai Pharmaceutical, CME Group, Coca-Cola, Colgate-Palmolive, Comcast, CATL, Corning, CoStar Group, Danaher, Danone, Dassault Systemes, Denso, Deutsche Boerse, Dexcom, Digital Realty Trust, Dow, DSV, Edison International, Edwards Lifesciences, Emirates NBD Bank, Enel, Engie, Eni, Equinor, Equity Residential, EssilorLuxottica, Fanuc, Fiserv, Ford Motor, Fortive, GE HealthCare Technologies, General Dynamics, General Electric, General Motors, GSK, HCA Healthcare, Hermes International, Hershey, Hess, Hexagon, Hilton Worldwide, Hitachi, Holcim, Honeywell International, Iberdrola, ICICI Bank, Imperial Oil, Intel, Intesa Sanpaolo, KDDI, Kering, Keurig Dr Pepper, Keyence, Kimberly-Clark, KLA, Komatsu, Kotak Mahindra Bank, Kuehne + Nagel International, L’Oreal, L3Harris Technologies, Lam Research, Larsen & Toubro, LG Chem, LG Energy Solution, Linde, Lloyds Banking Group, Loblaw, LVMH Moet Hennessy Louis Vuitton, Martin Marietta Materials, Mastercard, McDonald’s, MediaTek, Mercedes-Benz Group, Meta Platforms, Mettler-Toledo International, Microsoft, Mobileye Global, Mondelez International, Moody’s, MSCI, Naturgy Energy, NatWest, Neste, Nestle, Nestle India, NextEra Energy, Norfolk Southern, Northrop Grumman, Nucor, NXP Semiconductors, O’Reilly Automotive, Old Dominion Freight Line, Orange, Oriental Land, Otis Worldwide, Paccar, PG&E, Porsche, Posco Holdings, Procter & Gamble, Raytheon Technologies, Reckitt Benckiser Group, Relx, Renesas Electronics, Rio Tinto, Roche Holding, Royal Caribbean Cruises, S&P Global, Safran, Saint-Gobain, Samsung Biologics, Samsung Electronics, Samsung SDI, Sanofi, Schneider Electric, ServiceNow, Shell, Sherwin-Williams, Shin-Etsu Chemical, SK Hynix, Spotify Technology, Standard Chartered, Stellantis, STMicroelectronics, T-Mobile US, T Rowe Price, Takeda Pharmaceutical, Tata Motors, TC Energy, TE Connectivity, Texas Instruments, Thermo Fisher Scientific, TotalEnergies, UniCredit, Unilever, Union Pacific, United Overseas Bank, United Rentals, Universal Music, Vale, Valero Energy, Verbund, Verizon Communications, Vici Properties, Vinci, Visa, Volkswagen, Wal-Mart de Mexico, Wanhua Chemical, Waste Management, West Pharmaceutical Services, WW Grainger, Xcel Energy.