Macro Weekly

Macro week 32 by #1 Chief Economist Harald Magnus Andreassen, and Macro Analyst Tina Norden

Last week

Few news from the East front no end of the war in sight. However, grains are finally being shipped out of Odessa
Most commodity prices fell last week. European gas and thus electricity prices are still the main (only?) challenge, as the supply from Russia remains at very low level
China has responded aggressively vs. speaker Pelosi’s Taiwan visit, both by bruising it feathers around Taiwan, and by closed down several lines of dialogue with the US (like vs Pentagon, climate policy). But no hot war

PMI/ISM: The global composite PMI fell significantly in July, mostly due to steep declines in the USA and EMU, but also with minor contributions from China and other Emerging Markets – but these two still reported decent growth. Delivery problems are easing, and price increases are slowing – as order growth has turned sharply negative (in rich countries). The US ISM surveys were better than expected though, especially for the service sector (but price increases slowed here too)
Auto sales: Both the US, EMU and so far in an average of Emerging markets that have reported, auto sales rose in July. Sales in China probably fell back to earth, following the rocket strong sales in post-lockdown June
China: Chinese exports remained at a very high level in July, way above the pre-pandemic growth path, even in volume terms – which does not fit well with the ‘supply chain’-explanation’ for the troublesome high inflation rates in many countries. Imports are also at ATH in value terms, but slightly below the p-pandemic trend in volume terms
USA

Stronger growth in employment than expected, a surprising 0.1 pp decline in the unemployment rate (it has not been lower since 1969) and 0.3 pp higher wage inflation than expected. No recessionary signal in the July job report! The vacancy rate fell more than expected but remained high in June. In July, SMBs reported they are still not able to fill job openings, and that they plan to lift compensation at the same pace as until now
Businesses in the US are increasing their prices by 8% and unit labour costs are growing even faster (thus, profits are under pressure already), and something MUST give the coming months & quarters. Raw material prices/energy will very likely help bringing headline inflation down, but that would probably increase the need for a monetary policy tightening, as spending power will recover. Suddenly, the market Friday afternoon recognised that the Fed probably would have to do more in order to slow the economy sufficiently to bring domestic generated inflation down. The expected peak in Fed funds rate was lifted by almost 50 bps last week, and the first cut was postponed – as a 3^rd ‘triple’ hike in September once again became the most likely outcome

EMU: Retail sales fell by 1.2% in June, broadly based. Industrial production probably rose, equally broad based. Surveys signal a downturn ahead
UK: Bank of England hiked the Bank Rate rate by 50 bps, as expected. A spectacular lift in inflation is assumed (to 13%), however mostly due to the energy shock – but not only. Domestic price and costs are contributing too – and the signal rate at 1.75% is still low. The Bank does not publish its own interest rate path but did not argue against market expectations for further hikes, up to 3.25% (down 25 bps vs the assumed peak in June)
Norway

House prices fell 0.2% in July, as NoBa expected – while most economists expected a similar increase. Prices rose in Oslo but fell in most other cites, and by more than 2.5% in both Kristiansand and Stavanger. Sales have normalised at a pre-pandemic level. The inventory is slightly up but remains very low. However, higher mortgage rates will very likely lower prices the coming quarters
Domestic credit (C2) growth was higher than expected, as the corporate sector borrowed far more than we assumed. Household credit growth is slowly slowing

The Calendar: China in July, US CPI, productivity. Swedish house prices. Norwegian food prices

Global auto sales: Auto sales rose marginally in both US and the EMU in July. Sales in Emerging Market countries that have reported so far, is also in plus too. However, we expect Chinese sales to come down to a more normal level, following very strong sales in June, after the lockdowns. Global auto production is gradually on the way up
China: Early next Monday, July data for the real economy will be released. Industrial production was back on track in June but services sector activity was not, even if it grew at a fast pace in June. Retail sales are still really sluggish. During this weekend, the strength in exports was confirmed, another ATH, and 4 pp higher growth y/y than expected in July
USA

Headline CPI will most likely come down in July, to below 9% from 9.1% in June as energy prices retreated, and we expect to hear more talk about ‘peak inflation’ – which formally is correct. However, core CPI is expected up 0.5% m/m, and the annual rate to climb above 6% again. Prices increases are unusually wide spread. In the July SME survey, businesses have reported very aggressive price plans – and so far they have delivered. July data out this week
The real scale of the inflation problem will be revealed in the Q2 productivity and unit labour cost report. Productivity fell sharply, as in Q1. A continued very rapid growth in ULC is expected in Q2, following the extreme lift in Q1. For the total economy, the first GDP data revealed a more than 8% growth in labour cost per unit produced. That’s the real inflation problem, and has (almost) nothing to do with energy or food prices!

UK: GDP is expected down 0.2% in Q2, due to a 1.2% assumed contraction in June. BoE expects as further contraction in Q3, due to an massive decline in real income – and higher interest rates
Sweden: Watch out for July house prices. Preliminary reports suggest a further, and rapid decline
Norway: How much did food prices climb in July, as a result of the semi-annual negotiation between wholesalers and retailers? Media reports suggested some 16 – 17%, which we deem to be totally unlikely. But what about the half? We have pencilled 8% (5% seasonally adj), other economists far less. Thus, our July CPI forecast is well above consensus, the core up 1.4% m/m and 4.4% y/y, up from 3.6% in June. NoBa’s forecast is 3.2%. Electricity prices rose slightly m/m, but gasoline prices fell more, in sum close to neutral.