Macroeconomics: The Day Ahead for 3 August

A busy day of statistics accompanies a much anticipated BoE policy meeting and Monetary Policy Report, on another busy day for corporate earnings. Statistically Services PMIs dominate, with Australia’s Trade Balance and quarterly Real Retail Sales and worse than expected German Trade to digest, while ahead there are US Challenger Job Cuts, weekly jobless claims, Q2 Non-farm Productivity and generally overlooked Factory Orders. There are also expected no change rate decisions in Czechia and Egypt, a speech by ECB’s Panetta, the BoE’s Decision Make Panel survey on inflation and Output expectations. Amazon tops the run of US corporate earnings, with Cigna, Expedia, Hasbro, Kellogg, Southwestern Energy and Warner Bros Discovery also among the likely highlights. Government bond supply takes the form of multi-maturity sales in France and Spain, and 10-yr in Canada.

** U.K. – BoE rate decision **

The consensus looks for the BoE to revert to a 25 bps rate hike to 5.25%, premised on signs that inflation pressures are starting to ease, as signalled both by the CPI data and this week’s BRC Shop Price Index, and Citi/YouGov inflation expectations (4.3% y/y vs. prior 5.0%). That said inflation remains much higher than most G7 counterparts, and a very long way from looking as it will be back down at 2.0% on a continuous basis, i.e. understanding that the likely sharp fall in H2 will above all be base effect related, rather than disinflation. Complicating the rate outlook picture is the question of what happens with QT. While a decision does not have to be made at this meeting, being due in September, if the BOE follows last year’s schematic, it will announce a decision at this meeting, with Ramsden’s recent comments on upping the pace of active sales (given the lack of any obvious market or economic disruption) suggesting it may raise active sales to £15.0 Bln / qtr from the current £10, and with passive reduction having to rise due to next year’s rise in the volume of Gilt redemptions, total QT could therefore rise to £100-£110 Bln from this year’s £80 Bln. As the attached chart attests, market rate expectations, which feed into the BoE’s long-term inflation forecasts have been inordinately volatile going into the meeting (ranging from the current 5.75% to a peak in mid-July of 6.50%), which should bear down on its inflation forecasts, but it is unlikely to revert to forecasting a recession, above all due to being previously wrong footed. As for forward guidance (or the lack thereof), it will likely stick to “The MPC will continue to monitor closely indications of persistent inflationary pressures in the economy as a whole, including the tightness of labour market conditions and the behaviour of wage growth and services price inflation. If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required.” The BoE’s biggest challenge remains the fact that while the economy has thus far borne the weight of rate hikes relatively well, there is an underlying fragility, which suggests that the cumulative impact of its rate hikes needs to be a far greater consideration from here on, that judgement will be a very difficult one.

** World – July Services PMIs **

While Tuesday’s Manufacturing PMIs continued to paint a very down at heel profile for the manufacturing sector, Services PMIs and US ISM are generally expected to remain in expansion territory, though continuing to lose momentum in much of Asia and Europe, while continuing to show some resilience in the US. The encouraging China Services PMI (54.1 vs. expected 52.4) will likely prove to be the most important readings, even though it stands in contrast to the drop in the official NBS reading to 51.5 from 53.2, though the surge in India to a 13-yr high was also a very welcome signal that India’s economy continues to perform strongly.