Macroeconomics: The Day Ahead for 31 July

The BoJ and FOMC meetings bookend and are the focal points for a very busy day for central banks, data and earnings, with rate decisions also due in Brazil, Chile and Colombia. Statistically there are Japan & South Korea Industrial Production, Japan Retail Sales, Australian CPI and Retail Sales, and French CPI to digest. Ahead lie Eurozone & Italian CPI, German Unemployment, US Q2 ECI, ADP Employment, Pending Home Sales and Chicago PMI and Canadian monthly GDP. In earnings terms, Asia features Samsung Electronics, Mahindra & Mahindra, Sumitomo Corp, Takeda Pharmaceuticals, Xinyi Energy and Xinyi Solar. In Europe, the focus will be on ARM, HSBC, Taylor Wimpey, Telecom Italia and Telefonica, while the US looks to Meta Platforms, Albemarle, Boeing, Du Pont de Nemours, Kraft Heinz, Mastercard, Qualcomm and Western Digital amongst others. Germany is the sole major govt bond issuer with EUR 3.0 Bn of 6-yr Bunds. It is also month end, and price action thus far this week suggests this has been a constraint, above all given all of the event risk this week, not to mention long-standing national and geo-political issues, but may also point to a flurry of end of month rebalancing activity at the close after the FOMC meeting.

** Japan – BoJ meeting **

– By hiking rates 15 bps but outlining a JGB purchase tapering plan that is so painfully slow, the BoJ (and MoF) are signalling that the JPY is their number one consideration. It also acknowledges the weakness of domestic demand (and a lack of confidence that higher wage settlements will meaningfully boost household consumption), and perhaps not as much confidence that a virtuous inflation cycle has been achieved (implicit in its updated forecasts), which Ueda’s press conference also confirmed (‘still some distance to reaching 2% inflation as a trend.). It also should serve to temper steepening in the JGB yield curve. The BoJ will be hoping that the Fed ‘does its job’ and signals that a rate cut is on the table. While there was a brief bout of USD/JPY volatility around the announcement, this has proved short-lived, perhaps reflecting an unwillingness to second guess the Fed, perhaps also a function of month end.

** Eurozone – July prov. CPI **

– Yesterday’s German (2.6% y/y vs. expected/prior 2.5%) and Spanish HICP (2.9% y/y vs. expected 3.2%, prior 3.6%) marched in opposite directions, even if differing base effects do account for much of the divergence, while France’s \HICP just missed forecasts. German state CPI nevertheless implied a further slowdown in core CPI, and the risks are skewed to the downside of the anticipated -0.1% m/m for an unchanged 2.5% y/y headline, and a 0.1 ppt drop to 2.8% y/y on core CPI, with Services CPI also seen edging down to a still uncomfortably high 4.0%. As previously noted, base effects in energy and services prices should ensure a more meaningful drop in August. The ECB’s bigger headache looks to be how to deal with the sharp divergence in growth trends at a national level, even if Germany’s growth headwinds are largely structural, and per se in need of fiscal adjustments and incentives, rather than lower interest rates.

** U.S.A. – Q1 Employment Cost Index, July ADP Employment **

– Following on from the higher than expected JOLTS Job Openings (8.184 Mln, vs. rev. 8.230 Mln) ADP Employment is forecast to be almost unchanged at 150K, by contrast Friday’s Payrolls are seen lower in headline terms at 178K (vs. June 206K), though Private Payrolls slightly higher at 148K (vs. June 136K), and the Unemployment Rate (for which the ADP survey is a better guide) unchanged at 4.1%. The Q2 Employment Cost Index is seen at 1.0% q/q vs. prior 1.2%, though little changed in y/y terms at 4.2%, with Unit Labour Costs seen at 1.9% vs. prior 4.0%, the q/q slowdown would largely echo the slowdown in 3-mth annualized Average Hourly Earnings, but still remain uncomfortably high for many members of the FOMC. In passing, yesterday’s Consumer Confidence (once again seeing hefty revisions down for May, which continue to undermine its credibility) was above all notable for a further decline in the Labour Differential (see chart) to its lowest level since March 2021, and notably diverging in m/m terms from the headline index.

Source: Bloomberg Finance L.P.

** U.S.A. – FOMC meeting **

– The FOMC is expected to hold rates at 5.25%-5.50%, with the initial focus on whether there is any dissent (presumably for a rate cut), or whether the unified voting since the first rate cut in 2022 continues to persist. The statement will likely note the improvement in inflation, and the downside risks to employment, though it may not offer a clear signal that a rate cut is imminent, though probably opening the door via tweaks to ‘The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent’, or perhaps more subtly by emphasizing that risks to the inflation and employment outlooks are now balanced.  Powell will likely send a more emphatically dovish signal at the press conference, hinting at the possibility of a September rate cut, with a clearer signal likely at the end August Jackson Hole conference.

** Brazil, Chile & Colombia – Central Bank policy meetings **

– Ahead of the Brazilian BCB meeting, the national Unemployment Rate is forecast to fall to 6.9% from 7.1%, and per se continuing to suggest labour demand remains very strong, and well below the ca. 9.0% level that is generally seen as non-inflationary, which is also evident in wage growth at 5.6% y/y. The fact that yesterday’s broadest measure of inflation (FGV IGP-M) saw another sharp 0.61% m/m rise (vs. expected 0.47%), jumping the y/y rate up to 3.82% from 2.45% only serves to underline the relatively hawkish tone from the BCB, with no change from 10.5% expected today, or indeed until the end of the year, despite markets discounting up to 100 bps of rate hikes by year end, a view not currently endorsed by the BCB. Ahead of Chile’s BCC meeting, Retail Sales are expected to rebound quite sharply, but Industrial Production to slow quite sharply, while tomorrow’s monthly GDP is seen edging back up 0.2% m/m 1.5% y/y, confirming the economy continues to slow. But with BCC concerned about spillover effects from utility price hikes (above all electricity), and the CLP under renewed pressure, it is likely to hold rates at 5.75% after cutting 550 bps since June 2023, and probably hint at a more protracted pause. Colombia’s BCR was late to the South American rate cut ‘party‘, and is expected to cut rates a further 50 bps to 10.75%, following 200 bps of cuts since last December. BCR expects inflation to fall further (last headline 7.18% y/y, core 7.6% y/y), but some policy committee members have recently highlighted risks from a weak COP, rising food prices, rather stubborn Services inflation, and elevated inflation expectations, though others have pushed for a more aggressive rate path lower, noting weakness in investment. While BCR will remain wary of a narrowing rate differential with the US, even with a 50 bps cut this would remain some 100 bps above the average spread for the past 20 years.