Macroeconomics: The Day Ahead – 19 August 2020

Good Morning: The Long & the Short of it and The Bigger Picture – 19 August 2020

Written by Marc Ostwald, ADMISI’s Global Strategist & Chief Economist

  • Busier day has Japan Orders & Trade and UK inflation data, ahead Canada CPI, US FOMC minutes, OPEC+ ‘technical’ meeting, likely tense Eu Council  meeting; retailers still dominate US earnings; UK, Germany, Canada and US to auction debt
  • UK CPI/RPI: higher than expected, but still very low; price formation disrupted and distorted, seasonal trends thrown out of kilter; nothing to see here
  • Japan Orders/Trade: China exports rebound a ray of sunshine in gloomy data; H2 CapEx outlook looking quite grim
  • FOMC minutes: primarily of interest on future deployment of guidance toolkit
  •  Governments under increasing pressure to go well beyond ‘fire-fighting’ & act on recovery measures, and prepare for labour market and education and training changes and needs pre-emptively; instil confidence



A much busier run of scheduled data and events awaits, though it remains to be seen whether it materially distracts markets from a form of summer lull, and the incessant drumbeat of pandemic and political events / headlines. There are the overnight Japan Orders and Trade and gamut of UK inflation indicators to digest, ahead of final Eurozone CPI and Canadian CPI. In event terms, the EU Council meeting may prove fractious given differing views on Greece/Turkey tensions (Germany being rather isolated), which is in term hobbling any form of united front in respect of Belarus; the OPEC+ meeting is primarily about compliance, though there may be some hints on the production outlook. None of the EM central bank meetings (Indonesia, Namibia & Zambia) are expected to see any policy changes, with the FOMC minutes and a speech by Richmond Fed’s Barkin being the highlights for G7 central banks. Retailers continue to dominate the US corporate earnings run (Lowe’s, Target & TJX), and a busier day for govt bond auctions has auctions from UK 9-yr, German 30-yr, Canadian 5-yr and US 20-yr.

In terms of the unexpectedly sharp jump in UK CPI (1.0% y/y vs. exp. / prior 0.6%) and RPI (1.6% y/y vs. exp. 1.2%, preior 1.1%), firstly it remains well below the BoE’s target and low by any historical standard. Secondly, as previously observed, price formation (in all countries) has been disrupted and distorted, and seasonal trends (and adjustments) are completely out of kilter, therefore over-interpretation is misplaced. The latter above all applies to Clothing (-0.1% y/y vs. June -2.2%) and Household Goods (+0.8% y/y vs. June -0.5%), which accounted for most of the upside miss along with Heath (3.2% y/y vs.2.1%), the latter mostly due to a jump in physiotherapy prices, again a function of lockdown easing. In other words, this modest jump is neither indicative of a pickup in inflation, nor driven by underlying demand trends.

As noted yesterday and previously, the heat is increasingly on governments to start to take action not merely to preserve existing jobs, in so far as they are in viable companies. But they also need to look at infrastructure investments that will create jobs immediately and over the longer run, and to look at measures to retrain the workforce where jobs are likely to be lost permanently as economies transition as a result of the pandemic, and the already established move away from globalization. They must above all consider how to reshape the education / vocational training system to ensure that there is not a gaping chasm in the labour market as the younger generation moves into the workforce. Fundamentalist and self-righteous ideology borne of the empty populist rhetoric that is sadly the lingua franca of current politics in too many countries is wholly misplaced. What is needed is an intelligent investigation of processes along with fiscal and legislative adjustments to encourage private sector investment in the future, as well as to shore up the often very large gaps in capacity that have been exposed by the pandemic in so many economies (developed and developing). There will be mistakes and misjudgements, but with leadership that encourages and gives hope, the situation will improve; negative, antagonistic and blame game rhetoric will only embed a climate of fear in the public psyche, and per se risk a downward spiral.


Japan – July Trade Balance / June Machinery Orders

– The Japanese data overnight saw another sharp drop in exports and imports, though broadly in line with forecasts, and a much worse than expected drop in Private Machinery Orders. The  only small ray of sunshine in the Exports data was the rise in exports to China, underlining the simple point that China remains the only major economy signalling a V-shaped recovery, albeit far from broad based, but this boost was more than offset by the slump in export demand elsewhere in Asia and the rest of the world. For all that the Q2 GDP saw only a small drop in Business CapEx (after an unexpected modest rise in Q1), the Machinery Orders data are signalling a very adverse trend for H2, with Orders now down for a fourth consecutive quarter, and indeed down in 6 of the last quarters – see charts attached.


U.S.A. – FOMC minutes

– The minutes are primarily of interest in terms of what was discussed about future policy options. That is above and beyond the already very clear guidance that rates will not be going up anytime in the foreseeable future, and there will be no discussion of tightening policy until such time as unemployment gets back to pre-crisis levels (a seemingly distant prospect). The Fed has also made it crystal clear that the burden of responsibility lie with fiscal policy in the short to medium term. Recent Fed speakers have also made it abundantly clear that specific guidance (time or specific target metrics) is in the toolbox, and ready to deploy, but they see little need to deploy this at the current juncture, the same applies to Yield Curve Control, which is effectively already tacitly in place, regardless of the very modest curve steepening in recent weeks, and a more interventionist Fed approach on that front would only be triggered if this were to become an embedded steepening trend. Per se, the minutes may not offer that much for markets to react to, other than fleeting algo-driven reactions to headlines.

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