Macroeconomics: The Day Ahead for 29 July

Data and earnings dominate the day’s schedule, with little in the way of market moving scheduled events. US Q2 advance GDP and preliminary HICP readings in Germany and Spain get top billing, with German labour data, UK Credit and Mortgage Lending, EC Confidence surveys, US weekly jobless claims and Pending Home Sales also on tap. Govt bond supply takes the form of EUR 8.75 Bln of 5 & 10-yr and FRN 7-yr from Italy, while the US rounds off this week’s funding exercise with $62.0 Bln of 7-yr. Another bumper day for corporate earnings has Samsung Electronics in Asia, while Accor, Airbus, Anheuser-Busch InBev, Enel, Lloyds Banking, L’Oreal, Mediobanca, Nestle, Rentokil Initial, Repsol, Royal Dutch Shell, Telefonica, TotalEnergies and Volkswagen headline in Europe. Across the pond Amazon takes centre stage, with Altria, Mastercard, Merck & CO, Molson Coors and Yum! Brands will be among other headline makers, along with Cemex. Yesterday’s FOMC meeting was short on surprise in terms of the policy messaging, though the addition of “will continue to assess progress in coming meetings” suggests a taper decision may not materialize before Q4, though markets will be focussed on what emerges from Powell’s speech at the August Jackson Hole meeting. Powell’ comments on markets, above all with respect to the fall in Treasury yields suggests that the Fed is mystified by the recent fall, and while the establishing of the two standing repo facilities is welcome, the impression that the Fed is still not on top of what is going on in US money and rates markets should be a point of major concern. As the G30 report issued yesterday underlines, at the very minimum the Fed must address the issue of the SLR (Supplementary Leverage Ratio), otherwise it will continue to be the case that “banks are highly unlikely to allocate more capital to market-making in the Treasury and Treasury repo markets” as the report notes. In a similar vein, China;s hastily convened meeting with its major investment banks to shore up support for its equity markets, which appears to have imparted some semblance of calm, also attest to a total failure of the politburo to comprehend the age old tenet that ‘actions have consequences’ as it bludgeons its way through a series of of increasingly damaging regulatory inteventions.

Germany / Spain – July CPI & EC Confidence surveys 

– One might call this month’s run of CPI readings in the Euro area a game of two halves, with sharp jumps in y/y seen for today’s German and Spanish HICP, and sharp falls for tomorrow’s French and Italian readings, as per these median forecasts:

             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 end result, if forecasts are correct, for tomorrow’s Eurozone CPI would be that these wildly disparate trends at national level due to all sorts of base effects (VAT changes, airfare & 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%. The initial CPI reading from Germany’s largest state NRW at 0.8% m/m 4.1% y/y (vs. prior 2.5%) implies considerable upside risks relative to the 0.6% m/m consensus. The bigger upward pressures on headline and core CPI will be seen from August. Also on hand will be the EC Confidence surveys, which 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, though setbacks in Germany’s Ifo & GfK and French Consumer Confidence suggests some downside risks, notwithstanding the better than expected Italian confidence surveys.

 U.S.A./Europe – Q2 advance GDP 

– The US and Belgium kick off a busy 24 hour run of advance Q2 GDP readings, though as noted previously in light of growing doubts about the pace of the global recovery in H2 2021, the run of reports may be largely dismissed as historical. A cursory look at the table of median forecasts for Q2 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%

U.S.A. – Initial Claims / Pending Home Sales

– Weekly jobless claims have been volatile of late, with erratic retooling schedules in the manufacturing (above all autos), the Independence holiday, regional spikes in infection rates and termination of enhanced benefit timetables all contributing. Another outlier is quite possible, though the consensus looks for a drop back to 385K after last week’s spike higher to 419K (paced mainly by Michigan and Kentucky, both of which have auto production plants). A clearer downtrend may have to wait for August. Despite the unexpectedly sharp fall in New Home Sales, Pending Home Sales are seen posting another rise of 1.0% m/m after a surprising 8.0% m/m surge in May, with re-opening and the ending of forbearance increasing the low volume of inventories, with demand remaining robust due to low rates, even if affordability is clearly now a substantial headwind.