Macroeconomics: The Day Ahead for 26 July

A relatively modest schedule of data awaits, which will probably struggle to distract from the very differentiated trends in infection rates (UK easing but still high, parts of US surging, adverse trends in some parts of Asia and Australia), and China’s continued interventions and regulatory clampdowns and tensions with the western world, as its Politburo holds a regular meeting this week. There are a weak set of Japan PMIs to digest ahead of Germany’s Ifo Business Climate, Hong Kong Trade and US New Home Sales & Dallas Fed Manufacturing survey – previews in week ahead below. In event terms BoE’s Vlieghe speaks, there is an informal meeting of EU economic and financial affairs ministers to discuss implementation of the Recovery and Resilience Facility, the EU MARS monthly Crop Bulletin, and rate decision in Ghana (no change) and Kazakhstan, with the NBK effectively being forced into following Russia’s Bank Rossi’ aggressive rate hike on Friday. Headline makers on today’s Corporate Earnings run are likely to include: Tata Motors, LVMH, Michelin, Lockheed Martin and above all Tesla.

RECAP: The Week Ahead – Preview: 

The new week brings end of month, an FOMC meeting and a much busier run of statistics, and it will also be peak weak for US S&P 500 corporate earnings, with 177 companies reporting, and also a busy week elsewhere for earnings, above all Europe and Japan, and in sector terms: energy, mining and autos, European banks and US big tech (see also attached chart on the quite disparate big tech equity performance year to date). Advance Q2 GDP readings for the US, Eurozone, France, Germany, Italy, Spain and South Korea top the run, with the US also looking to Durable Goods, Consumer Confidence, House Prices, New & Pending Home Sales, Personal Income & PCE. In the Eurozone, there are the usual end of month array of CPI readings, Germany’s Ifo & GfK surveys and Unemployment, French Consumer Spending. Japan has flash PMIs, Industrial Production, Retail Sales and Unemployment, while China has its NBS PMIs, and Canada looks to CPI and monthly GDP. The IMF updates its global economic outlook (upgrades for Europe and North America, downward tweaks in parts of Asia?). Also in view will be whether the US Congress can pass either an extension of the Debt Ceiling suspension or an outright increase (deadline August 2nd), and Congress will also hold its first public hearing on the January 6 insurgency in Washington. China’s interventions in pretty much every sector of the economy – commodity prices, steel output, tech sector and education regulation, SOE and Property sector debt – and continued tensions with US, EU, Canada, Japan and UK remain a persistent source of leftfield risks. A relatively busy week for govt bond supply has a total of $211 Bln US Coupons (2, 5, 7 & 2-yr FRN), along with sales of Japan 2 & 40-yr, UK 5 -yr, German 15-yr, Italy 5 & 10-yr and Belgian 10, 13 & 19-yr. Reduced summer trading volumes and very fluid and fickle market views on the impact of rising infection rates on the global economic outlook will likely continue to foster spikes in volatility.

In light of growing doubts about the pace of the global recovery in H2 2021, the run of advance Q2 GDP estimates may be dismissed as historical, with greater focus on survey data for July – e.g. US Consumer Confidence, Germany’s Ifo Business Climate and EC Confidence surveys – along with US weekly jobless claims. Be that as it may a cursory look at the table of median forecasts for this week’s Q2 GDP and for comparison Q1 readings, highlight a strong Q2 recovery in both Europe and the US, after a far more differentiated Q1.

              Q2 (q/q)    Q1 (q/q)

                          (actual)

U.S.A.         2.1%*        1.6%*  (*SAAR 8.5% vs. 6.4%)

Eurozone       1.5%        -0.3%

Germany        2.1%        -1.8%

France         0.8%        -0.1%

Italy          1.3%         0.1%

Spain          2.1%        -0.4%

South Korea    0.9%         1.7%

Eurozone July CPI will be a case of wildly disparate trends at national level due to all sorts of base effects (VAT, air fare & holiday weightings, delayed annual seasonal sales), ending up cancelling each other out, with headline seen falling 0.3% m/m (as is seasonally typical) to edge the y/y up to 2.0% from 1.9%, while core is expected to drop to 0.7% y/y from 0.9%. But again take a look at the median forecasts at a national level:

             July y/y   June y/y

                        (actual)

Germany        2.8%       2.1%

France         1.1%       1.9%

Italy          0.4%       1.3%

Spain          3.1%       2.5%

The bigger upward pressures on headline and core will be seen from August.

In terms of the run of US data, Durable Goods Orders should get a sizeable headline boost from transportation (mainly aircraft, but also vehicles), with core measures seen posting a very solid 0.8% m/m rise. Consumer Confidence is expected to dip modestly from a pandemic high of 127.3 to 124.0, buoyed above all by strength in the labour market (Labour Differential hit a 21-yr high at 43.5 in June), and also in stark contrast to the unexpected sharp fall in Michigan Sentiment (80.8, final reading also due) which continues to lag the Conference board heavily. Further sharp rises in House Prices are expected (FHFA 1.5% m/m, CS CoreLogic 1.6% m/m 16.2% y/y), while New Home Sales are seen rebounding 4.0% m/m echoing May’s 8.0% jump in Pending Home Sales (seen moderating to 0.5% m/m in June). PCE Deflators are anticipated to see headline rise to 4.0% y/y from 3.9%, with core at 3.7% from 3.4%, and the Advance Goods Trade Balance little changed at $-88.0 Bln. Germany’s Ifo Business Climate is forecast to rise to 102.5 (best since Oct 2018) from 101.8, led by current conditions, with expectations expected to edge down, while the EC Confidence surveys are projected to post a new all-time high at 118.5 (vs 117.9), paced by Services rising to a 20-yr high of 19.3. China’s NBS PMIs will be published on Saturday, and are seen little changed after an unexpected drop in Services in June. Canada’s CPI is likely to moderate slightly on headline and core, while May monthly GDP will highlight a sharp regional lockdown driven contrast to the US with another 0.3% m/m drop, though June and Q3 should see a sharp rebound.

On the central bank front, the Fed is expected to hold rates, keep its QE pace unchanged, and stick to its forward guidance, underlining that while the recovery remains robust, there are still downside risks (above all due to the spread of the delta variant). It will continue to argue that inflation pressures are “largely reflecting transitory factors”, and that “substantial further progress” is still needed to meet its employment goals, and by extension to justify starting a discussion on a taper timetable. The question is whether it suggests that this will be on the agenda “at coming meetings”, with markets not expecting this to be signalled until the annual Jackson Hole meeting (even if policy signals are actually rare at this event, above all in recent years). FOMC opinions on how it will taper (i.e. pace of taper for Treasuries vs. MBS) remain divided, though it will be wary of signalling anything that appears to be a ‘protest’ at the sharp rise in house prices, particularly as it stressed in the first place that its MBS purchases were not aimed at shoring up house prices. That said, it has painted itself into many corners in terms of putting constraints on policy flexibility.

Elsewhere ECB speakers will be closely watched, as the likes of Weidmann and Wunsch express their dissent against the forward guidance on rates and QE outlined last week. BoE’s Vlieghe’s speech will also be in focus in terms of the potential for a BoE taper, though last week’s dovish speech by Broadbent tends to suggest that those concerned about inflation pressures are in a clear minority.

In the commodity space, this week is all about earnings from the behemoths of the energy and mining sectors, as well as the ongoing weather related disruptions to agriculture, electricity production and transport.  Chevron, Enel, Equinor, Exxon Mobil and Royal Dutch Shell head up the energy sector corporate earnings, while Anglo American, Rio Tinto and Vale are on tap in the resource sector, which also sees quarterly production reports from ArcelorMittal and Glencore. Profits have rebounded sharply, and there will be particular focus not only on outlooks, but also share buybacks, dividends and debt paydown and how these balance out against upstream and downstream investment plans, above all given increasing ESG pressures from stakeholders. The disruption to auto output from semiconductor shortages has been well documented, but the additional question for the likes of Ford, Nissan, Tesla, Toyota and Volkswagen, who all report this week, is how they are managing in terms of passing on the sharp rise in input prices. In the Agricultural sector, two of the ABCD behemoths (ADM & Bunge) report this week with the focus on how the drought in the US, and the numerous weather disruptions in South America are impacting outlooks, as well as prospects for Chinese demand in H2. Agricultural price pressures on margins and profits will also be focus as the likes of Anheuser-Busch InBev, Budweiser, Danone, Nestle, Starbucks and Yum! Brands report, with the USDA’s Agricultural prices paid and received report also on hand. In conference terms, China’s Coal Fair and MySteel Derivatives Forum will attract some attention, while the US EIA publishes its Petroleum Supply Monthly and 914 monthly Oil and Gas production reports.

In this bumper week for earnings, Bloomberg News highlight the following as likely to be among the headline makers: 3M, AbbVie, ADM, AMD, Aflac, Air Liquide, Airbus, Alphabet, Altria, Amazon, Ambev, Ameriprise, Anheuser-Busch InBev, Aon, Apple, ArcelorMittal, AstraZeneca, Banco Santander, Barclays, BNP Paribas, Boeing, Boston Scientific, Bristol-Myers Squibb, British American Tobacco, Budweiser, Bunge, Canadian Pacific Railway, Canon, Caterpillar, Central Japan Railway, Charter Communications, Chevron, Chubb, CME Group, Colgate-Palmolive, Comcast, Corning, Credit Suisse, Danone, Deutsche Bank, Enel, Exxon Mobil, Facebook, Ford, Fujitsu, Garmin, General Dynamics, GE, Gilead, GlaxoSmithKline, Hermes, Hilton, Hitachi, Humana, L’Oreal, Lam Research, Linde, Lloyds Banking Group, Lockheed Martin, LVMH Moet Hennessy Louis Vuitton, Mastercard, McDonald’s, Merck, Microsoft, NatWest Group, Nestle, Nissan Motor, Nokia, Nomura, Northrop Grumman, Novatek, Panasonic, PayPal, Pfizer, Pinterest, Procter & Gamble, Qualcomm, Raytheon, Rio Tinto, Royal Dutch Shell, Samsung Electronics, Sanofi, Sberbank of Russia, Shopify, Starbucks, Swiss Re, Tata Motors, Telefonica, Tesla, T-Mobile U.S., Toyota Industries, Twilio, UPS, Vale, Visa, Vivendi, Volkswagen, Waste Management and Yum! Brands.