Macroeconomics: The Day Ahead for 8 July

After another week where the battle between an inflation panic stricken Fed (and other central banks) and the reality of incoming high frequency data pointing to both demand destruction and a marked slowdown in economic activity across much of the world, the US labour report will be the end of week focal point. There are the shooting of Japan’s former prime minister Abe along with the run of Japan’s Household Spending, Economy Watchers survey (both suggesting that the recent boost to consumer spending has faded quickly) and Current Account, French Trade to digest, while ahead there is also Canada’s monthly labour data and UN FAO World Food price Index, and tomorrow sees China CPI and PPI (both see remaining relatively benign). The events schedule is relatively light with Lagarde and Villeroy both speaking at the Les Rencontres Economiques (aka French Davos), the results of the first ECB’s bank climate stress tests, and NY Fed’s Williams likely to be the highlights. As for the turmoil in UK politics, Johnson’s departure is obviously long overdue, but as previously observed, the candidates to succeed (whoever they may be) face a myriad of economic challenges, for which there are no easy solutions, and as has been evidenced on so many occasions, the Tory party’s appetite for internecine warfare remains insatiable, while the opposition Labour party continues to look just as unfit for government.

Next week brings a busy run of first division data from the USA (CPI, Retail Sales, Industrial Production, Michigan Sentiment and PPI), China (Q2 GDP, Retail Sales, Industrial Production and Property Investment) and UK (monthly GDP, Index of Services, Industrial Production, Trade). The BoC, RBNZ and Bank of Korea are expected to hike rates by 50 bps, the Fed publishes its Beige Book, and China’s PBOC is expected to leave its 1-yr MTLF rate unchanged. There is a G20 Finance Ministers meeting, and the USDA publishes its key WASDE crop S&D report.

** U.S.A. – June labour data **

The consensus looks for Payrolls growth to slow quite sharply to 268K vs. a 3-mth average of 408K, but payrolls are anything but the be all and end all for the Fed. They will be focussed above all on the Participation Rate which at 62.3%, still 1.0 ppt below pre-pandemic levels; they have been hoping that there would be more workers returning to the labour force to ease shortages, but a combination of ‘boomers’ retiring (i.e. demographics), some households needing a parent to stay at home given continued health concerns, and others simply taking a different view about working, this has not been the case, or at least not to the extent they had hoped. The models on the labour force that pre-existed are in any case premised on assumptions that are no long valid, in any case. They will also be focussed on Average Hourly Earnings, which are expected to rise 0.3% m/m for a third month and signalling some moderation in wage pressures, though ideally they would prefer 0.2% m/m as an average. Any downside surprises would likely see markets push back harder on the Fed’s rate trajectory. Anecdotal evidence does point to some easing in labour market pressures, e.g. both ISM Employment sub indices dropping to 47.3 and 47.4, as well as anecdotal of rising layoffs, as per yesterday’s jump in Challenger Job Cuts.

China’s Caixin Manufacturing PMI proved to be both much better than the official NBS measure and market expectations, as well as offering a counter to the broad array of sluggish readings from the rest of Asia, and a disappointing Japan Q2 Tankan, the latter above all downbeat on outlooks. Eurozone, UK and Americas PMI are unlikely to dispel the very clear impression that a fairly sharp loss of momentum is being witnessed in the manufacturing sector, with energy and input price pressures, easing but continued supply chain pressures and rising labour costs all starting to squeeze on profits and engendering a degree of demand destruction.