Another Very High CPI Print / UK Politics and Russian Gas

US Key Points

• The CPI is likely to print another very high number.
• Fed speakers to confirm 75bp hike at 27 July meeting.

Europe Key Points

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• Russian gas to Germany stops for annual scheduled maintenance.
• More information on the process to select the next UK Conservative Party leader, and hence UK PM.
• BoE Governor Bailey’s testimonies will be watched for hints of a more hawkish outlook.
• Final Eurozone CPI numbers will be important to see for the drivers in strong Spanish numbers, and the dip in core rate.
• UK May monthly GDP expected to be flat on April.

US

Fed

This past week, Fed speakers made clear that they intended to deliver on the 3.4% end-2022 FFR forecast in the June SEP, even if it entailed downside risks to growth.

This coming week, the Fed will release the Beige Book. Our Beige Book sentiment indicator, that quantifies Beige Book comments into a score, noted a pick-up in June.  Based on recent positive economic surprises, there is a risk our indicator could improve further.

As of this writing, the speakers are Williams, Barkin, Waller and Bostic and I expect the latter 3 to argue for 75bp at the 27 July meeting.

Data

This week’s better than expected PMIs and NFPs confirm that the risks of imminent recession are low, please see US Growth: Air Pocket Not Crash and my NFP review to be published on Monday.

The key data this week is the CPI, and I agree with the consensus forecast of 0.6% MoM for core.  In addition, I will be looking for a further increase in the Cleveland Fed trimmed mean CPI, from 9.6% in May, as well as a continuation of the slowdown in core goods price inflation and of the acceleration in services inflation.  My forecast is for core inflation to end 2022 above 4.5%, see End 2022 PCE to exceed Fed forecast.

Other key data includes:

• Retail sales: the consensus expects 0.9% MoM, less than the CPI.  This is possible but needs to be put in context: even after last month’s contraction, retail sales are 30% above pre-pandemic levels.  In addition, with the switch away from goods and towards services, weak retail sales need not imply weak consumption. 
• Activity indicators: small businesses optimism, the NY Fed ‘Empire’ manufacturing survey, and industrial production.  I expect a stronger small business survey than Empire survey and IP since the latter 2 are in the tradable sector that is being hit by dollar strength.  Small businesses by contrast tend to be domestic focused.
• Prices: PPI and import prices.  In the PPI, I will be paying special attention to the price of semiconductors that stabilized in May. 
• University of Michigan consumer confidence: I will be paying particular attention to LT inflation expectations.
• Business inventories: I will be looking for a stabilization of inventories to sales ratios as well as for the update of the Atlanta Fed GDP nowcast, currently predicting Q2 growth at -1.2% based on inventories changes subtracting 2.5 ppt.
• Other data include: real estate market data, jobless claims, and June budget balance.

Events/Political Developments

President Biden’s job approval ratings continue to fall.  The latest polls suggest the Senate could be a toss up in November while the House is likely to turn Republican.

Links to New York Fed POMOs/TOMOs:  Repos, Treasury, MBS, CMBS

Europe

Russian Gas Flow Stops

Every year the Nord Stream pipeline from Russia to Germany undergoes a period of maintenance when gas flows are ceased. Usually, the halt in gas there is made up for by flows elsewhere (via Ukraine or Belarus). This year is different. Russia has cut its gas flows via all routes significantly, leaving Nord Stream increasingly important (Chart 1). The fear now, is that after gas flow stops for the annual shutdown (scheduled 11-21 July), it may never start again. If that was the case, it would be catastrophic for Europe (Germany in particular). Expect, therefore, for a lot of attention on this, with the risk of any hawkish Russian comments to drive market volatility.

Who Will Replace Boris?

With Boris’ resignation last week, the process begins for finding the next Conservative Party (Tory) leader, and with it, the next PM. See here for our overview of the process, the main candidates, and the potential market reaction.

The Tory backbencher committee (1922 Committee) is in charge of the details of the process ahead. They are expected to elect a new executive on Monday, which will then confirm the process for selecting a new party leader. Reports so far suggest they will aim to have a new leader selected by early September, although depending on the process and the candidate pool it could be much sooner.

Will Bailey Confirm BoE Hawkishness?

We will be hearing from BoE Governor Bailey several times this week, including in testimony to parliament on financial stability. Following last week’s relatively hawkish tone from Chief Economist Pill, and MPC Member Cunliffe, we will be watching for any similar shift from Bailey. Our base case is that 50bp come August is a risk. Thereafter, with the coming of active gilt sales, and the loss of arch-hawk Saunders, we expect the BoE to underdeliver on hikes further out.

Eurozone Inflation – Getting the Details

June preliminary CPI outturns were a mixed bag across the Eurozone. While Spain saw a strong surprise to the upside, Germany’s headline reading was suppressed by government-imposed train fares caps, and the Eurozone YoY core fell to 3.7%.

This week will not see the final Eurozone reading released, so the information on the fall there will need to be prized from the national releases. Wednesday will see the bulk of these (Germany, France, Spain), while Italy comes on Friday. We will be watching closely for signs of leisure and holidays playing an outsized role in the Spanish numbers, and for any signs that core has begun to fade across the countries. Looking further ahead, the recent spike in gas prices will probably cause some resurgence in the headline, but it will be trend in the non-energy readings that will be more important.

UK GDP – Lifted by Bank Holiday Changes?

The UK publishes its monthly GDP outturn for May on Wednesday. The economic performance since Russia’s invasion of Ukraine has been sluggish. Reading too much into the numbers of a single month can be misleading, especially given that a tail-wind may come from the shifting of the late May bank holiday to June. Market consensus is looking continued declines in manufacturing and services, but a bounce in construction.

Other G20 Countries

This week the BOC is holding its policy meeting and is expected to hike 50bp.  BoJ Governor Kuroda is speaking.

Key data releases this week include China’s credit, retail sales, trade balance and IP. 

Links to BOJ Rinban , BOE OMO

COVID-19 Monitoring

Dominique Dwor-Frecaut is a macro strategist based in Southern California. She has worked on EM and DMs at hedge funds, on the sell side, the NY Fed , the IMF and the World Bank. She publishes the blog Macro Sis that discusses the drivers of macro returns.

Henry Occleston is a Strategist, who focuses on European markets. Formerly, he worked in European credit and rates strategy at Mizuho Bank, and market strategy at Lloyds Bank. He holds a BA in Economics from Durham University, and an MSc in Economics & Social History from the University of Oxford.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)