Macro review for 9 July 2018; Escalation in the US-China trade dispute didn’t take long to materialise during the week – starting with China’s announcement of a significant increase in anti-dumping duties of US optical fiber. The US then announced a further investigation by the USTR for another 10% on $200b Chinese imports.
Two Fed speeches worth highlighting this week;
Fed Chairman Powell’s first broadcast interview – his speeches have so far emphasised the role of promoting financial stability (or the risk of instability from too easy monetary policy) alongside the price stability and full employment mandates. “If we leave rates too low for too long, then we can have too high inflation or we can have asset bubbles or housing bubbles”.
Philadelphia Fed President Harker interview on Bloomberg – highlighting the importance of watching services inflation, also, comfortable with PCE inflation higher at 2.5% – depending on the level of acceleration.
Data and sentiment in the US continue to be strong. Consumer credit growth was higher in May and we could see this filter into expenditure data (eg May retail sales were stronger). JOLTS data was little changed and remain near all-time high levels. Wholesale sales growth was also stronger, with petroleum accounting for 40% of the growth in the month. PPI growth in final goods for the month slowed somewhat, but the annual rate continued to grow, driven by goods (energy). Annual CPI also continued to accelerate, and CPI ex-food and energy grew by +2.3%.
In Europe, data and sentiment were mixed. ECB President Draghi provided an upbeat picture of growth and inflation in the Eurozone with “risks balanced”. But the Zew economic sentiment index for Germany fell further into negative territory and the Eurozone turned negative in the latest month. German headline CPI was +2.1% but ex-food and energy came in at 1.4%. A bright spot in EU data was stronger industrial production growth in May after a weak result in April. The growth was widespread among key countries.
Brexit featured heavily this week with the resignation of key government officials after PM May released the Cabinet vision for the UK-EU relationship, or “soft Brexit”. The govt is now shoring up support for its white paper on Brexit. Several parliamentary debates in the coming week will be crucial for the government, PM May and the path of Brexit plans. On the data front, the new monthly GDP report highlighted that the current ‘run rate’ for GDP growth in the 3months to May is on par with the Q1 rate of +0.2%.
The BoC continued to lift its benchmark rate for the second time this year. The BoC highlighted that “dampened” HH growth would likely be offset by stronger investment spending in response to capacity pressures and continued export growth.
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The outlook for w/c 16 July 2018;
An important week for PM May and her Cabinet Brexit plan. Several debates on the proposal will take place in the UK parliament this week amid the resignation of key ministers last week and deep divisions on Brexit.
Trade will continue to be a focus. The US-Chinese trade dispute likely to continue, as key issues remain unresolved, despite the retaliatory tariffs. On 19 July, the US Dept of Commerce will hold a one-day hearing on the Section 232 action on whether imports of autos and auto parts impair US national security. Outcomes will be important for a range of countries.
Liquidity – heavier supply of treasuries, with the US Treasury auctioning and settling approx. $226b in notes, bonds and bills and raising approx. $41b in new money this week. Key dates to watch are 17 and 19 July.
US Fed Chairman Powell provides the semi-annual monetary policy testimony to the US Senate Banking Committee (two days).
Retail sales will be released this week across the US, UK and Canada.
CPI will also be reported for the UK, Eurozone, Japan and Canada.
It’s also earnings season and the first of the FAANG’s reports this week – Netflix.
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Comments and feedback are welcome. Please email me at kim.mofardin@marscapitalpartners.net
