Macro insights

G20 US/China talks – a potential juncture for the global economy

The US remains the centre of attention

Last week President Donald Trump made an unprecedented intervention, following the European Central Bank’s monetary policy meeting, where he accused it of currency manipulation, as the value of the dollar fell against the euro. Tensions were also elevated in the Gulf over the downing of a US drone, although the President stepped back from ‘airstrike’ reprisals. At its own policy meeting the Federal Reserve suggested it was open to easing monetary policy if the environment of economic uncertainty persists.

The coming week promises more. Internationally, the meeting between Trump and China’s President Xi Jinping, at the G20, will likely overshadow the broader meeting. We think this will mark a juncture for the global economy. With large costs to the contrary, we expect the leaders to resume negotiations, providing a modest boost to the global outlook but with uncertainty looking set to remain elevated over coming quarters, we retain some pessimism. However, if our outlook proves too benign, a more serious deceleration in global trade and output could be underway. US manufacturing surveys already reflect these concerns with last week’s Empire and Philly Fed surveys dropping sharply.

We will watch the Chicago PMI on Friday for evidence of further weakness. Friday sees May’s PCE inflation release, which could provide further justification for Fed easing. Less watched, last week was the House of Representatives approve legislation for several government departments for 2020. This week it will try to approve funding for remaining departments. This would then move to the Senate. Amidst all the other developments, the US can ill afford another budget clash over the coming months and needs to address the debt ceiling. Finally, despite it being 497 days until the next US Presidential Election, Democrat Primary TV debates begin this week. Joe Biden is currently the clear Democrat frontrunner - as Jeb Bush was in June 2015 for the Republicans.

No progress was made last week at the European Union’s summit regarding the allocation of top EU jobs, in particular the Commission Presidency.

EU leaders are set to meet again on 30 June to try to resolve the grid-lock but uncertainty remains high, with a still wide dispersion of possible outcomes. This week, attention will continue to focus on Italian/EU negotiations, to avoid the launch of an Excessive Deficit Procedure. However, there are signs that the European Commission might be backing down and give more time to the Italian government. Even if the procedure is delayed, we expect the situation to remain fluid.

The 2020 budget discussions will soon officially start, and with Deputy Prime Minister Matteo Salvini showing no signs of backtracking on his flagship tax proposal, which could be worth €10bn to €15bn - and European Commission 2020 deficit forecast (under no-change policy assumption) at 3.5% of GDP, confrontation between Rome and Brussels is unlikely to abate. On the data front June’s flash inflation numbers will be in the spotlight. We expect a small rise in core, to 1% year-on-year, up from 0.8%, and think core inflation is unlikely to accelerate significantly from this level in the second half of the year.

June’s German IFO was released on Monday morning and failed to show a significant improvement, with expectations still depressed. This echoes the Germany’s June flash PMIs released last week. At the euro area level, Flash PMIs edged up in June to 52.1, the highest reading in seven months. The improvement was mainly driven by France, while manufacturing sentiment dropped significantly in the periphery, most likely in Italy.

Last week saw Tory leadership contenders Boris Johnson and Jeremy Hunt go into the final head-to-head contest.

At this stage, we are in little doubt that Johnson will emerge victorious. However, while the final result, is expected around 22 July, much can happen - or emerge - over that period. On Tuesday, following the Bank of England’s decision to leave monetary policy unchanged last week, Governor Mark Carney and several Monetary Policy Committee members will appear before the Treasury Select Committee. The minutes from last week’s meeting suggest that the BoE’s short-term hawkishness has softened in the face of rising global risks and downside risks to UK GDP growth. The Governor is likely to continue to make the case for a medium-term tightening, in the face of a tight labour market, elevated unit wage costs and an expectation of excess demand. However, with global risks rising and many other central banks making the case for easier policy, we do not expect the Governor to suggest that the Bank will hike in the short-term. We continue to see the BoE on hold this year, but to tighten policy next year – if global tensions fade.


Upcoming events

US: FHFA and Case-Shiller house price index, Conference board consumer confidence, New home sales (Tuesday), Trade balance, durable goods orders and Wholesale inventories (Wednesday), Q1 GDP, Q1 Core PCE price index, Weekly jobless claims and Pending home sales (Thursday), May PCE price index, Personal income, Chicago PMI and Michigan consumer sentiment (Friday)

Euro Area: French Manufacturing Confidence (Tuesday), French Insee consumer confidence (Wednesday), EU19 Business Confidence, German HICP and CPI, Italian ISTAT confidence, Spanish HICP (Thursday), EU19 CPI, French Consumer Spending and HICP, Italian HICP and Spanish Q1 GDP (Friday)

UK: CBI Distributive Trades Survey (Tuesday), Mortgage Approvals (Wednesday), GfK consumer confidence, Q1 GDP, Current Account and Business Investment (Friday)

China: Industrial Profits (Thursday)

Japan: G20 Leaders’ Summit in Osaka, Unemployment Industrial Production and Housing Starts (Friday)

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