Insider Stories) - The following is an excerpt from a report by London-based research provider Capital Economics.

 

-    We expect the downtrend in the price of WTI crude to continue

-    Japan’s manufacturing PMI may show small decline in July (00.15 BST)

-    PBC acts to relieve worries about a repeat of June’s cash crunch in China

 

Key Market Themes

The price of US benchmark crude oil fell to a three-week low on Tuesday. We expect this slide to continue. Indeed, we forecast West Texas Intermediate (and Brent crude) to end the year below $100 a barrel and then extend losses in 2014.

 

Energy prices have been supported in recent weeks by renewed optimism about global demand and a revival of concerns about the geopolitical situation in the Middle East. However, we do not expect this to last.

 

On the demand side, although US crude stocks have fallen by more than expected recently, we would be wary of placing too much weight on this development. After all, the numbers may have been distorted by temporary disruptions to imports from Canada and by the easing of logistical problems at Cushing. As it is, US crude inventories remain unusually high. (See our Energy Watch, “Ample supply to weigh again on oil prices”, published on 10th July and our Commodities Analyst, “Headwinds set to persist”, published on 26th July.)

 

Meanwhile, on the supply side, events in the Middle East are very unpredictable and are clearly worrying. However, if oil supply from the region were threatened, we would expect any fallout for global oil markets to be more than offset by releases from the vast strategic reserves held by the US and its allies. (Jessica Hinds)

 

What to watch for today: North America

GDP growth in the US may have slowed to only 1.0% annualised in the second quarter (13.30 BST), although we expect it to accelerate in the second half of the year. The monthly data suggest that second-quarter consumption growth slowed to around 1.7% annualised, from 2.6% in the first quarter. Worse still, it appears that business investment contracted slightly, largely due to a drop back in expenditure on equipment and software. Residential investment probably posted another big gain, reflecting the rebound in homebuilding. The monthly trade data suggest that imports increased by a sizeable 11% annualised, whereas exports probably only increased at half that pace. Nevertheless, the spike in imports is a little hard to square with the slowdown in final domestic sales growth, particularly as inventories appear to have been a drag on GDP growth as well. This release will also include revisions to the historical data, which for the first time will incorporate investment in research and development. That will boost the level of GDP by around 3%, although historical growth rates may be largely unchanged.

 

There is only a remote chance that the Fed will make any major changes at the end of its two-day FOMC meeting (19.00 BST). Instead, it will probably wait until September to begin tapering its monthly asset purchases. At most, the accompanying policy statement might include some modest changes, such as highlighting the further improvement made in the labour market. (Paul Ashworth)

 

Continental Europe

The euro-zone unemployment rate (10.00 BST) is likely to have remained at a record high of 12.2% in June, but at least there should be more signs that the labour market downturn is slowing. Surveys such as the composite PMI suggest that the rate of job cuts has continued to ease over recent months.

 

Tuesday’s EC survey for July added to evidence that the downturn in the region is easing. The rise in the headline Economic Sentiment Indicator (ESI), from 91.3 to 92.5, was in line with the consensus forecast (and our own) and marked the third consecutive increase. The index looks consistent with the annual rate of contraction of euro-zone GDP slowing from Q1’s -1.1% to about -0.5%. So, for now at least, the economy remains very weak and with money and credit growth still failing to pick up, the ECB should provide more monetary policy support before long. (Jennifer McKeown)

 

Japan

Perhaps we have jumped the gun a little with our forecast that labour cash earnings (02.30 BST) rose by 3.1% y/y in June, but the risks to the consensus forecast of growth of just 0.1% clearly lie on the upside. The difference is presumably because our estimates factor in a substantial increase in the bonus component. According to a survey at the end of May by Keidanren, Japan’s business federation, companies had planned to increase summer bonuses by 7.4% y/y.

 

Regarding the manufacturing PMI (00.15 BST) for July, the evidence from the flash PMIs already released for other major countries is inconclusive. The July numbers from the US and euro-zone improved, but China’s PMI continued to weaken. On balance, we have gone with the signal from the Economy Watchers Survey, which has fallen for three consecutive months, and pencilled in a small decline in Japan’s PMI to 51.9 from a two-year high of 52.3 in June. 

 

Industrial production fell by 3.3% m/m in June (published on Tuesday), but we are not too worried as manufacturers forecast a strong rebound of +6.5% m/m in July. Small business confidence also remained at relatively high levels, falling just slightly from 49.6 to 49.4 in July. (Marcel Thieliant)

 

China

China’s Politburo, the top policymaking body, held its usual mid-year meeting on Tuesday to discuss the economic situation in the year so far and determine the tone of policy for the second half. The closing statement suggests that policymakers think economic condition – including GDP growth, employment and inflation – are still relatively stable and within what it deems to be an appropriate range. The statement also hints that some fine-tuning of policy is set to come. This is likely to include measures to support household spending, certain service sectors and firms producing environmental goods.

 

There was nothing here that was unexpected. The announcement of a number of small measures to support the economy last week already signalled that policymakers hope to stabilise the rate of economic growth, while stopping short of wanting to drive a rebound. The desire to rebalance China’s economy away from traditional heavy industry and investment spending remains a key focus. We think this is sensible. Indeed, given that the slowdown to date appears primarily structural, we don’t believe that stimulus would be able to drive a sustainable pick-up in growth. (See our China Watch, “Is China suffering from deflation?” published on Tuesday for more.)

 

Also on Tuesday, the People’s Bank (PBC) resumed repo operations for the first time in several months. The goal was to ease tight market conditions – interbank rates had increased on the back of the usual end-month competition among banks for liquidity. By stepping in though, the PBC also calmed fears that a re-run of June’s cash crunch was on the cards. (Qinwei Wang)

 

Other Asia-Pacific

Taiwan’s economy slowed sharply in the first quarter of the year. Our GDP tracker, which is constructed using monthly data for output and spending and provides a fairly close fit with actual GDP, suggests growth remained subdued in the second quarter. We have pencilled in growth of +1.9% y/y (01.30 BST). (Gareth Leather)

 

The Reserve Bank of India (RBI) kept its policy rates unchanged at its meeting on Tuesday, as was widely expected. Recently-implemented tightening measures could be removed within the next few months if the rupee remains stable, but policy rates are likely to be kept on hold for the rest of the year. (Daniel Martin)

 

Key Data and Events

Wed 31st    00.01  UK   GfK Consumer Confidence Survey (Jul)

            00.15  Jpn  Manufacturing PMI (Jul)

            01.30  Twn  GDP (Q2 Prov.)

            02:30  Jpn  Labour Cash Earnings (Jun)

            03.00  Spr  Unemployment Rate (Q2 Prov.)

            06.00  Jpn  Housing Starts (Jun)

            07.00  Ger  Retail Sales (Jun)

            07.45  Fra  Consumer Spending (Jun)

            08.00  Spa  Retail Sales (Jun)

            08.55  Ger  National Unemployment Rate (Jul)

            09.00  Ita  Unemployment Rate (Jun Prov.)

            10.00  EZ   Flash CPI (Jul)

            10.00  EZ   Flash Core CPI (Jul)

            10.00  EZ   Unemployment Rate (Jun)

            10.00  Ita  CPI (Jul Prov.)

            13.15  US   Change in ADP Employment (Jul)

            13.30  US   GDP (Q2, 1st Est.) (ann.)

            13.30  US   Employment Cost Index (Q2)

            13.30  CA   GDP by Industry (May)

            14.45  US   Chicago PMI (Jul)

            19.00  US   Fed Policy Announcement

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