Macroeconomics: The Day Ahead for 12 July

A very busy schedule of data and events awaits, even if the primary point of focus will be US CPI and the Fed’s Beige Book. There are the as expected RBNZ decision to hold rates at 5.50%, which had been heavily flagged, with the Bank of Canada seen hiking rates a further 25 bps to 5.0% later today, an expectation cemented by last Friday’s robust labour data, and despite the drop in May CPI; in all likelihood the BoC will retain a tightening bias, but as with the RBA comments overnight suggest that it is ‘open minded’ and will be data driven on whether there will be a further hike(s). Statistically, there are South Korea’s Unemployment, and Japan’s PPI and Private Machinery Orders to digest (both of which were below forecasts, and lean against a substantive BoJ policy change, though the end of July forecast update will be critical in terms of any policy tweaks), with Indian CPI and Industrial Production ahead. The Bank of England has published its Q2 Financial Stability Report and Bailey holds the accompanying press conference shortly. There are also a raft of Fed and ECB speakers. In the commodity space, the focus shifts to agriculture, with the USDA’s monthly World Agricultural Supply & Demand Estimates (WASDE), which follows on from China’s equivalent CASDE, and the UN FAO publishes its annual State of Food Security and Nutrition in the World report 2023. Govt bond supply takes the form of UK, German and UA 10-yr auctions.

** U.K. – H1 Financial Stability Report (FSR) / Bank Stress Tests **

There were no real surprises in either the Financial Stability Report or Bank Stress Tests, the former highlighting that the UK economy has coped well with the sharp rise in interest rates, and that “major UK banks are resilient to a severe stress scenario that incorporates persistently higher advanced economy inflation, increasing global interest rates, deep simultaneous recessions with materially higher unemployment in the UK and global economies, and sharp falls in asset prices.” Unsurprisingly the FSR emphasized the inflation fight, while noting that the lagged impact of rate hikes is only starting to work its way through the economy, noting concerns about the impact on households and businesses. It was at pains to note that while defaults and arrears had started to rise, and would likely continue to rise, the rise comes from a very low base historically, and was much lower than at the time of the Global Financial Crisis. It however notes considerable risks in global commercial real estate, as well as corporate borrowing in private credit and leveraged lending markets.

** U.S.A. – June CPI, Fed Beige Book **

Both headline and core CPI seen up 0.3% m/m, which thanks to energy and auto base effects would see headline slide to just 3.1% y/y from 4.0%, but core falling more modestly to a still high 5.0% from 5.3% y/y thanks mostly to housing (OER), and electricity prices. It is the stickiness of core CPI which will keep Fed rhetoric ‘hawkish’, though with some Fed speakers noting that rates are a close to a peak, any undershoot would likely see markets push back on the probability of a further hike(s). Tomorrow’s PPI will again likely confirm little in the way of pipeline pressures with headline seen at just 0.4% y/y from 1.1%, and core at 2.6% y/y from 2.8%. The Fed’s Beige Book will also require some scrutiny, having suggested the economy was stalling in May, though incoming data has been a good deal more resilient; uncertainty about the economic outlook will likely feature again (which has been evident in a good many surveys), and there will be some focus on the impact of tightening credit conditions, as well as signals on labour demand.

** India – CPI, Industrial Production **

India’s run of key monthly data are forecast to see CPI rebound to 4.6% from 4.25% y/y due to food and petrol prices, while WPI will likely remain in negative territory at -3.2% y/y, with Industrial Production expected to accelerate to 5.2% from 4.2% y/y, premised on the stronger Manufacturing PMI, ongoing govt subsidies and a pick-up in Infrastructure Industries Output. Taken in aggregate, it will keep India as the world’s fastest growing major economy, and also sustain the RBI’s tightening bias, even as it keeps rates unchanged.