Macroeconomics: The Day Ahead for 9 June

With many countries on holiday for either Whit Monday or Eid Al-adha, trading volumes will be thinner than usual, but there is plenty to consider from the weekend and overnight run of data from China and Japan, though only the US NY Fed Inflation Expectations survey ahead. But the US China trade talks in London will be the focal point for the day. There is a case for arguing that both sides need something positive to take home from the talks, which will inevitably be more of a staging post in what is going to be a protracted process. In all likelihood, the talks will be less about tariffs, even though the US fentanyl related tariffs will be a key bargaining chip, as the talks likely focus on export restrictions (which both sides have added to since the first round of talks) and other non-tariff barriers. The other focal points are the social unrest in California relating to official ‘immigration raids’, the Trump-Musk stand off, the continued efforts to pass the US tax and spending bill in the Senate, and further official ‘leaks’ about the UK Budget ‘Spending Review’ on Wednesday, as an expected uptick in US CPI, PPI and Michigan Sentiment, UK labour market data, monthly GDP and other activity data top the weeks statistical run.

China’s inflation data were broadly in line with forecasts, reinforcing the impression that weak domestic demand, excess production capacity trade tensions with the US sustain the overall deflationary impulse in its economy, which stimulus measures have at most prevented from deepening, rather than reversing. China’s trade data need to be divided up in terms of analysis. Exports were weaker than expected at 4.8% y/y, but still expanded, as the unsurprisingly sharp fall in exports to the US (-34.4% y/y, unlikely to be its nadir as many estimate that with the current net 40% us tariff rate, exports look likely to fall around 60-70%)), was offset by an 11% y/y increase to the rest of the world, within which exports to Vietnam rose 21%, EU 12% and ASEAN 14.8% – trends which have been in place for some time, and underline a decreasing, though still large dependency on US demand. Imports were worse than expected at -3.4% y/y, but not all of that weakness can be attributed to sluggish domestic demand or trade wars, with the fall in crude imports (-3.0% m/m) mostly down to seasonal maintenance shutdowns, the fall in Coal imports due to both cheaper domestic prices and increasing competition from renewables. The drop in Copper concentrate imports was primarily a reactive correction to April’s surge, and conversely record imports of Soybeans contrasted with the 10-yr low in imports recorded in April. As ever, the data does require much deeper analysis that the all too frequent headline grabbing surface assessments acknowledge. Japan’s GDP revisions were largely in line with expectations, and primarily due to an upward revision to the contribution from Inventories (which will see some payback as tariff pre-emptive activity ebbs), a small upward revision to Private Consumption to 0.1% q/q that does not alter a weak profile for Household Consumption, and a downward revision to Business CapEx, though at 1.1% q/q this was still very robust. The rebound in the monthly Economy Watchers (services) survey suggests the dip in the sector PMI should prove to be transitory, even if this does little to alter a weak manufacturing sector profile. This does not change the BoJ’s dilemma on rates, with inflation pressures all too evident, but weak domestic demand and tariff related uncertainty about future external demand continuing to restrain the BoJ from a more aggressive move to reduce its still accommodative policy stance.