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Monthly Macro Outlook : There is no summer break

Macro
CD
Christopher Dembik

Head of Macro Analysis

Summary:  The received wisdom is that August is a quiet month for trading. But this is wrong. In August 2011, the markets went into turmoil over raising the U.S. debt ceiling - referring to the legislative limit on the amount of national debt that can be incurred by the U.S. Treasury. In August 2015, China stunned markets with unexpected currency devaluation. This year, we see a bunch of risks which could create sudden volatility in the market: the deadline to raise the U.S. debt ceiling on 2 August, many central bank meetings (Reserve Bank of Australia, Bank of England, Hungarian National Bank), the U.S. July CPI print and the unavoidable annual Symposium of Jackson Hole.


China : The peak in growth is behind us

The Chinese credit impulse peaked a while ago and, now, the economy is in slowdown mode – see chart 1. But the macroeconomic picture is a little weaker than authorities are comfortable with. This explains why we are seeing an increasing trend of an upward revision in historical numbers. The slowdown is mostly driven by the weak recovery of consumer spending and the contraction in equipment investments. The most important factor affecting consumption is wage growth, in our view. Unless we see a centralized policy promoting higher wage growth, we don’t think consumption will be back to its pre-Covid level this year. The two most important factors behind the contraction in equipment investments are the semiconductor shortage, which is expect to last until at least year-end, and lower investment due to concerns about the economic prospects. We think that China will first and foremost look to further support the manufacturing sector and especially equipment investments. This should materialize in actual policies and at least another reserve requirement ratio cut by the end of this year.

Rest of the world : All eyes on the U.S. economy

Following the deliberately vague and fuzzy FOMC meeting of 27-28 July, investors will likely remain U.S. centric this summer to glean insights about the future of the Federal Reserve monetary policy. We have mostly two concerns about the U.S. economy. First, we are seeing growing evidence that we are moving into a cycle marked by higher inflation than the previous one. « Transitory » inflation is here to stay, in our view. There are four inflation pillars right now : 1) bottleneck and supply chain bullwhip (cyclical) ; 2) firms rising prices (cyclical) ; 3) left policies inducing higher wage growth ; and 4) green inflation linked to carbon tariffs for instance. The pillars 3) and 4) are structural and sticky by nature. All put together, they are strong factors which could lead to a lasting inflation regime change.

Second, it seems that surging U.S. home prices are broadly ignored by policymakers, as was the case between 2005 and 2007. Then, 2008 happened. The S&P/Case Shiller composite index, which tracks the evolution of single-family home prices in twenty key urban markets, gained 17.0% through the twelve months ended in May according to Tuesday’s release – see chart 2. This is the highest rate of increase ever. The U.S. housing market is close to the stratosphere and, apart from a few exceptions, it is not coming back to pre-Covid levels yet. With housing being the most interest rate sensitive part of the U.S. economy, investors should pay close look to how the evolution of monetary policy will affect the U.S. housing market, potentially resulting in a burst of the current bubble.

Chart1
Chart2

Calendar of August 2021

2 August – U.S. debt ceiling deadline

Unless the U.S. Congress acts by 2 August, the Treasury Department will have to resort to extreme measures to avoid hitting the debt ceiling. Back in 2019, the Congress quietly suspended the debt ceiling until August 2021. A bipartisan agreement will require the Biden administration to make political concessions to Republican lawmakers. If a bipartisan agreement is not reached on time, the real damage will be on the U.S. bond market.

3 August – Reserve Bank of Australia monetary policy meeting

With Australia’s latest spate of lockdowns and high-frequency data pointing out the hit to activity in Q3 will be real, we expect the Reserve Bank of Australia (RBA) will reverse its recent decision to taper. Under current circumstances, there is a strong case to maintain the weekly rate of QE purchases to $5bn, at least in the short term. When the restrictions will be lifted and activity will bounce back, it will be time to start taper talk again. As for the cash rate, we continue to see the RBA on hold until early 2024.

5 August – Bank of England monetary policy meeting

Bank of England’s (BoE) external voter Gertjan Vlieghe and his colleague Michael Saunders delivered hawkish comments over the past few weeks. But we don’t see any firmer clues on an early end to QE purchases or on future rate hikes at the next monetary policy meeting of 5 August given increased risks to the outlook associated with the third wave of the pandemic. For the time being, the BoE is likely to follow the same playbook which paid off recently by signaling « significant » progress is required before Covid-19 monetary policy stimulus is removed.

11 August – July U.S. CPI

June U.S. CPI was out above expectations at 5.4% YoY. This was the largest gain since August 2008. More than 55% of the increase in the June CPI was due to six items directly impacted by the re-opening of the economy (hotel stays, airfares and used car prices especially). But with more and more firms inclined to increase prices to cope with higher wages and soaring transportation costs, the market is seriously questioning the concept of « transitory » inflation used by the Fed. The consensus expects that U.S. July CPI will come out at 4.9%. If the headline figure is higher, which is likely, be ready for a roller coaster market.

24 August – Hungarian National Bank monetary policy meeting 

On 27 July, the Hungarian National Bank raised its base rate by a larger-than-expected 30 basis points at 1.20%. This sent to the market a strong message about its intention to deliver a pro-active and front-loaded tightening cycle. With inflation likely to remain above its upper tolerance level of 4% until end-year, there is room for further rate hikes. We expect the next rate hike will happen at the meeting of 21 September when the economic projections will be updated.

30 August – France’s finance minister Bruno Le Maire will meet with business representatives of sectors most hit by the roll-out of the health passport since 21 July. Further sector-targeted financial support measures will be likely unveiled soon afterwards.

26-28 August- Annual Jackson Hole Symposium This year, the Jackson Hole Symposium hosted by the Federal Reserve Bank of Kansas City will be in-person in contrast to last year’s event. We don’t have the full list of speakers yet. But the focus will be on « Macroeconomic Policy in an Uneven Economy ». In our view, Jerome Powell’s speech should bring little clarity on the tapering. We now expect the Federal Reserve to wait until later this year, perhaps until its December meeting, to announce forward guidance on the matter.

Global Markets’ performance :

Chart3

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