Macroeconomics: The Day Ahead for 13 July

If Monday was data and event lite, today has more than enough for markets to get their teeth into, with China’s Trade data and UK BRC Retail Sales to digest ahead of US NFIB survey and CPI, the start of the US Q2 Corporate Earnings season and the IEA’s monthly Oil Market Report. There are also BoE’s Q2 Financial Stability Report, some Fed and Riksbank speakers, along with govt bond auctions in Japan, Italy, Germany, Netherlands and USA. The IEA Oil Market Report will offer an update on risks to supply and demand outlooks, but will not be able to offer any answers to the question of the moment, what would happened if OPEC breaks up, which is rather less theoretical than it has been for a long time given the Saudi/UAE stand-off. The US Q2 earnings season kicks off with the focus on JPM and Goldman Sachs for financials, and Fastenal and Pepsico in terms of the ‘real economy. Q2 will mark the peak of base effect boosts as earnings recover from last year’s pandemic hit, with S&P 500 Q2 earnings seen up 64.0-66.0% y/y, the best since Q4 2009, though revenues are seen up a more modest 18.5% y/y, (ex-energy sector 15.2%). As concerns about the economic recovery losing momentum in H2, the focus will above all be on guidance and outlooks for the Q3, as well as how companies are addressing supply chain disruptions and their success in passing on cost increases, and specifically for financials how fees on M&A and issuance and reduced loan loss provisions are offsetting drops in trading revenues, and the impact of low rates and weak loan demand.

** China – June Trade **

– Ahead of Q2 GDP and activity data, today’s trade data offered a counter to concerns about a sharper than expected slowdown, with the acceleration in exports implying sustained strength in foreign demand, above all due to re-openings in US and Europe (exports up 4.5% amd 8.0% m/m respectively, ASEAN 3.0% m/m). Eminently some of the strength in both Exports and Imports was due to the sharp rise in raw and processed commodity prices, with the H1 drop in crude imports due to a mix of adverse base effects (given the surge in imports during the crude price slump in Q2 2020), refinery maintenance closures and import quota caps. Elsewhere in metals and agriculture, the m/m changes were again largely due to delays or catch-ups in deliveries, though rising prices clearly also played a role. Perhaps a little surprising was the seemingly very marginal impact from the prolonged disruption to activity at Yantian’s major port. Overall the data impart some upside risk to the net export and manufacturing contribution to Thursday’s Q2 GDP.

** U.S.A. – June CPI / NFIB Small Business Optimism **

– Headline CPI is forecast to slow in m/m terms to 0.5% (best since Feb), while core is seen at 0.4% m/m vs. May’s 0.7%, ironically base effects would edge y/y headline down to 4.9%, but push core up to 4.0% y/y from 3.8%, primarily due to easing energy price effects, and ironically despite some unseasonal upward pressure on gasoline prices. The question above all for core is how much (i.e. more than half? as was the case in May) can be attributed to genuine re-opening pressures and supply chain disruptions, primarily this still means used car prices, car rental, hotels, restaurants and air fares. While Shelter has been elevated in m/m terms over the past 3 months (0.3/0.4/0.3), the y/y rate has remained well contained (May 2.2%), and is likely to remain so in this report and July, but large adverse effects will kick in in August, and all more so if m/m rates remain above 0.2%. The NFIB survey has been perhaps the best barometer for economic realities, above all labour skills shortages, stymying the natural optimism associated with re-opening. A cursory look at the attached table underlines the contrast between the two, with hiring intentions, capital spending plans and jobs hard to fill sky high, while ‘Expect Better Economy’ at -26 is at its worst since 2012, and not that far off the all-time lows. The headline index is seen little changed at a solid 99.5 for a third month.