Macroeconomics: The Week Ahead: 8 – 12 July

The Week Ahead – Preview: 

The French election outcome will kick off a relatively busy week next week, which has US and China CPI and PPI, China Trade and Credit Aggregates, UK monthly GDP and associated activity indicators, Japan Labor Cash Earnings and PPI, Indian CPI and Industrial Production, and Mexican and Brazilian inflation (both seen accelerating in headline y/y terms). On the central bank front, Powell gives his semi-annual testimony to Congress, the RBNZ and Bank of Korea are expected to hold rates at 5.50% and 3.50% respectively (though political pressure for a cut is building in South Korea), and BoE’s Haskel and Pill give the first BoE speeches since the general election was called. The end of the week sees the start of the Q2 earnings season with Pepsico and the usual posse of major US Banks (JPM, Citi, BoNY Mellon, Wells Fargo) getting things slowly under way. A busy week for major monthly reports in the commodities space sees the US EIA STEO, and IEA and OPEC monthly Oil market reports (expected to show a slight improvement in demand forecasts), while the agricultural sector looks to USDA’s WASDE, China Agriculture Ministry CASDE, and Brazil’s CONAB S&D report for Corn & Soybeans.

– U.S.A. – Ahead of the key CPI data on Thursday, there is the NY Fed’s Inflation Expectations, which eased marginally to 3.17% y/y in May, after jumping to 3.26% from 3.0% in April. Tuesday has the NFIB Small Business Optimism, which is expected to be little changed at a very soft 90.2 vs. prior 90.5 (though the latter was the best since December), echoing the already published Employment components. Of particular note will be the ‘Expect Better Economy’, which jumped in May to -30 from -36, registering its best level since August 2021.  But it will be the signals that Powell offers in his semi-annual testimony on Tuesday and Wednesday that garner most attention. He will likely strike an overall relatively dovish tone, noting that the balance of risks between its two monetary policy pillars – inflation and employment – is becoming two sided, with good, but as yet insufficient progress made on bringing inflation down towards target, while labour market conditions continue to loosen, as the economy slows somewhat. He will also face a lot of questions about the fiscal deficit, but likely stick to saying that the current trajectory is not sustainable, but that it is not in the Fed’s remit to opine on taxes and spending, and doubtless reiterating at the same time the importance of the Fed’s independence. Thursday’s CPI is forecast to show a modest rise of just 0.1% m/m headline, taking the y/y rate down 0.2 pts to 3.1%, still just above the June 2023 low of 3.0%, with the drop in Gasoline prices bearing down, perhaps a little exaggerated by seasonal adjustment. Core CPI is however seen up 0.2% m/m to be unchanged at 3.4% y/y, with housing pressures still visible if moderating, but also offset by used car prices and some disinflation from recreation. Friday’s PPI is forecast to post similar m/m gains on headline and core, but base effects will edge up y/y rates to 2.3% and 2.5% respectively. Friday also sees preliminary Michigan Sentiment, expected to be unchanged at a lowly 68.2, as softer labour demand, and high for longer rates (reflected in rising credit card delinquencies) and housing affordability weigh. (See below for some comments on the US Q2 earnings season)

– China: CPI and PPI are both expected to move higher to 0.4% and -0.8% y/y respectively, vs. prior 0.3% and -1.4%, though the ‘improvement’ will be largely down to base effects, which in the case of PPI turn in an adverse direction in Q3. Race to the bottom discounting in the retailing sector continues to underline weak personal consumption, though this is reaching a threshold where margins are so badly impaired that competition for market share is becoming a hopeless war of attrition, while PPI continues to highlight sluggish demand for raw materials amid an increasingly alarming rise in inventories. Credit aggregates will likely get a boost from a seasonal (quarter/half year end) rise in lending, but the anticipated CNY 2.4 Trln rise in Aggregate Financing and CNY 1.7 Trln rise in New Yuan Loans will look very weak when compared to June 2023. Friday’s Trade data are likely to flatter to deceive, with Exports seen accelerating modestly to 8.0% y/y from 7.6%, and Imports to 2.5% y/y from 1.8%, boosted by favourable base effects, and masking a slowdown in foreign demand. Concerns about the outlook for China’s economy will remain, as the focus turns to what significant measures the key Third Plenum policy forum will come up with next week.

– U.K.: – The new Labour government has certainly gone all out to signal its intention to ‘hit the ground running‘, while also emphasizing the scale of the challenges that it faces in numerous areas from fiscal through health, education, migration and prisons, above all as an exercise in expectations management. PM Starmer will get his first outing on the international stage as he attends this week’s NATO annual summit in Washington.  Be that as it may, and ahead of Thursday’s monthly GDP, BRC Retail Sales are seen accelerating modestly to 0.8% y/y from 0.4% despite slightly adverse base effects, but doubtless getting a boost from Euro 2024, while the RICS House Price Balance is expected to pick up slightly to -14 from -17. After a flat outturn in April, May monthly GDP is forecast to rise 0.2% m/m, leaving the 3m/3m rise unchanged at 0.7%, with a steady rise of 0.2% m/m in the Index of Services, and rebounds of 0.3% and 0.5% m/m in Manufacturing and Construction Output underpinning, as wet weather effects eased. This would suggest that Q2 GDP is likely to ease to 0.3%/0.4% q/q, rather more in tune with the underlying trend than Q1’s 0.7% q/q. Thursday will also see the delayed BoE Q2 Bank Liabilities and Credit Conditions surveys published.

– Eurozone: Whatever the outcome of the French election, any relief at RN not achieving a majority may prove to be rather short-lived, as the realization that political gridlock will only make resolving France’s challenging fiscal position more difficult. The statistical schedule is light with final national CPI readings accompanying German Trade data that are expected to echo the dire message from last week’s Orders and Production, with Exports expected to drop -3.0% m/m and Imports -1.5% m/m.

– Japan: as the key end of month BoJ policy meeting looms, and following on from a desultory -1.8% y/y drop in Household Spending, the focus this week will be on Labour Cash Earnings, which are expected to accelerate to 2.1% y/y from 1.6%, reflecting the ‘shunto’ (large corporates) wage settlements, and in principle offering the BoJ the sort of reassurance that it has been looking for wage growth trends that would allow it to hike rates again by 15 bps to 0.25% at the end of the month. There should also be better news from an anticipated modest rise in the Economy Watchers (services) survey, and something of a dead cat bounce (0.9% m/m vs. prior in -2.9%) in Private Machinery Orders.

– India: the median forecast for Indian CPI of little change at 4.8% y/y (vs. prior 4.76%) disguises a very wide range of forecasts (4.3% to 5.2%), much will as ever depend on Food prices that have been decelerating, as have key logistics costs. A lower than expected outturn would raise market expectations of a rate cut later in the year, even as early as August, and likely to be reinforced if core CPI remains at or perhaps even below its historic low. Industrial Production is seen little changed at a very solid 4.9% y/y, reflecting a broadly steady PMI, though the very sharp acceleration in May Exports, above all in seasonal terms, to 10.5% m/m imparts some upside risks to the consensus.

– The US Q2 corporate earnings season is going to be one of the pivotal keys for equity sentiment for the remainder of the year. Q1 saw the ‘Magnificent 7’ post earnings growth of 51.8% y/y, as compared with a negligible 1.3% y/y increase for the rest of the index, and it should be noted that year to date only 24 companies have outperformed the S&P 500 index, making for a rather fragile and lopsided performance profile. For Q2 the consensus looks for an increase of 10.1% y/y, the highest since Q1 2022, with some narrowing in the performance for the magnificent 7 and the rest, while revenue growth is seen at just 4.1% y/y. Profit margins will thus be one of the main focal points. Worldwide corporate earnings highlights for the week as compiled by Bloomberg News are likely to include: Bank of New York Mellon, Citigroup, Delta Air Lines, DNB Bank, Fast Retailing, Fastenal, HCL Technologies, JPMorgan Chase, PepsiCo, Seven & i, Tata Consultancy Services, Wells Fargo.