Macroeconomics: The Day Ahead for 22 July

A much busier day awaits, though the ECB council meeting will be front and centre. Statistically, there are Australia’s preliminary Trade data and French Business Confidence to digest, while ahead lie the UK CBI Industrial Trends survey, Mexico mid-month CPI, Eurozone Consumer Confidence and US weekly Jobless Claims, Existing Home Sales and KC Fed Manufacturing survey. Aside from the ECB meeting, there will be particular attention paid to BoE’s Broadbent’s speech, as the balance of MPC members leaning towards a less accommodative stance is under markets’ microscope, and there are also expected no change policy meetings in South Africa, Paraguay and Ukraine. The US sells 10-yr TIPS, while the corporate earnings schedule is likely to see the following among the headline makers: ABB, Publicis, Roche, Unilever and UPM Kymmene in Europe, and in the US: Biogen, Blackstone, Freeport McMoRan, Newmont, Snap, Twitter and Union Pacific. The roller coaster on markets really does underline the very fickle fluidity of sentiment, as well as the degree to which US long-term yields are locked onto oil prices currently, as per the attached chart. One issue that is looming in the headlights is the July 31 deadline for either extending the suspension of the US debt ceiling or raising it; to be sure, debt ceiling dramas are pretty much ten a penny in recent years, and no one expects a real default event. However, locked into this is the Treasury’s commitment to reduce its Cash Balance at the Fed to $450 Bln by the end of the month, which looks a very tall order given that this balance currently stands at $650 Bln (see chart), and in theory implies the redemption (rather than rollover) of a large volume of T-Bills, which would have profoundly disruptive consequences for money market funds, as well as crunching short-term yields.

** UK / Eurozone – July Business / Consumer surveys **

Ahead of what will be quite sensitive flash G7 PMI readings tomorrow (given growth outlook concerns), the run of France Business Confidence, UK CBI Industrial Trends and Eurozone Consumer Confidence will bear some scrutiny. France’s Business Confidence remained robust at 113, with a notable pick-up in Manufacturing Confidence to 110 from 108, and above all in the Overall Business Demand Outlook to 19 from 9. The UK’s CBI Industrial Trends survey is expected to see the Orders index dip to a still robust 16 from 19, while the quarterly Business Optimism index is seen little changed at 8 vs. April’s 9; the acute ‘pingdemic’ staff shortages could dampen sentiment, but may not have been captured in the survey period. Meanwhile the preliminary reading on Eurozone Consumer Confidence is expected to rise again to -2.6 from -3.3, thus matching its 10-yr high from December 2017 (see chart).

** Eurozone – ECB Council Meeting **

The ECB will be updating its guidance on the policy outlook in the wake of its strategy review, but as Lagarde has admitted there is going to be an almighty scrap between hawks and doves, so what emerges may well be as confused and sometimes contradictory as has been the case at the last three meetings. It should be noted that Lagarde has invested a great deal in consensus building, in other words that there is not a repeat of the seemingly incessant sniper fire from the Bundesbank (above all Weidmann) that was the hallmark of the Draghi era. Nevertheless there are still tensions, and no changes to the pace of QE purchases are expected to be made today, with the September meeting and its fresh set of staff forecasts earmarked for signals on both fate of the PEPP and the pace and size of APP paces going into Q1 2022 and beyond. A market consensus view is emerging that while today may be short on specifics, it will effectively signal more monetary ‘largesse’ for longer in order to meet its inflation target. That said, the “new” strategy will make little or no difference to the ECB’s inability to achieve its inflation target without structural reforms in the various member states.

** U.S.A. – Weekly Jobless Claims / June Existing Home Sales **

Initial Claims are expected to post another modest fall from last week’s pandemic low 360K to 350K, as re-opening and the early termination of extended / enhanced benefits drive the recovery in the labour market. The risks look to be skewed to the downside as the seasonal adjustment assumes seasonal closures for re-tooling, above all in the auto sector, which in some cases may not be happening as automakers continue to attempt to help boost low levels of inventories, while also contending with supply chain disruptions. After a run of four successive declines, though still remaining very robust, Existing Home Sales are expected to rebound 1.7% m/m to a 5.90 Mln SAAR pace. Low inventories remain a major headwind to sales, even if the months’ worth of supply metric has recovered to 2.5 from a low of 2.1 in March, but remains below year ago level and indeed the range between 1995 and 2019. However sky high prices are increasingly the bigger headwind, with the Existing Home Average Price up 17.0% y/y, and the median price up 23.6%. The sharp drop in Tuesday’s Building Permits to below current Housing Starts if sustained, also points to a slowdown in the sector, notwithstanding low mortgage rates.