Take Five: Stimulus, storms and soft landings

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Here is a look at the week ahead from Laura Matthews in New York, Tom Sims in Frankfurt, Kevin Buckland in Tokyo, and Amanda Cooper and Karin Strohecker in London.

1/ARE WE THERE YET?

U.S. economic data has been positive and the June inflation reading of 3% was the smallest annual increase in over two years. Cue soft landing?

Not so fast. The Federal Reserve continues to emphasise data dependency – as chair Jerome Powell said at the last meeting, “the totality” of the incoming data matters, and “reducing inflation is likely to require a period of below-trend growth”.

That makes Thursday’s consumer price index report for July critical for showing whether the economy is seeing sustained disinflation and whether markets are correct in believing rates are close to peaking.  

Lower numbers could increase the likelihood of a Fed pause. Yet the U.S. economy has been resilient despite the highest rates in about two decades, fuelling concern that inflation could resume its upward trend – and rates with it.

2/CHINA STIMULUS FATIGUE

China’s stumbling post-pandemic economy needs help, everyone agrees. But the scope of what Beijing has offered so far has underwhelmed the market. Measures and pledges are too minor or too vague, say analysts, and the result is apparent in property shares that surged by as much as 29% in Hong Kong after China’s Politburo began its meeting in July, only to retrace about half of it shortly afterwards.

Morgan Stanley concluded the hope-filled rally offered a perfect opportunity to sell, downgrading Chinese stocks to equal weight.

Macro data, however, helped to spare market blushes with some rare good news, as a private survey showed a pick-up in services activity in July. The question is whether trade numbers on Tuesday and inflation data the following day can provide any additional cheer.

3/THE TURNING OF THE CYCLE

A number of emerging market interest-rate decisions are due, providing further evidence on how fast and furious the monetary policy cycle in developing economies will turn after Brazil and Chile became the first major central banks to deliver rate cuts in recent days.

Having front-run the Fed tightening cycle, Latin America is at the heart of the easing push across emerging economies.

Mexico’s policymakers might not be there yet when they meet on Thursday – though they are expected to keep rates where they are, notwithstanding more hikes from their northern neighbour. Peru – meeting the same day – is expected to deliver cuts this year, but not in August.

India’s policymakers are expected to keep interest rates on hold at a meeting on Aug 10 and to do so until end-March.

3/NO RECESSIONS, PLEASE, WE’RE BRITISH

The UK economy has defied last year’s forecasts that it would experience one of the deepest recessions in recent memory – just about. In May, it shrank less than expected, having all but stagnated for the prior two months.

Part of that is down to resilient consumers with a savings cushion built during pandemic lockdowns, the other part is the time it takes for interest rate rises to filter through to borrowing costs, especially mortgages.

The Bank of England raised UK rates to a 15-year-high of 5.25% this month.

Consumer inflation is 7.9%, and although the direction of travel is downwards, it is nearly four times the BoE’s target. That means wage growth, although at its highest on record, is in negative territory in real terms. GDP figures for the three months to June due on Aug. 11 could provide clarity.

5/STORM CLOUDS AHEAD

The Atlantic hurricane season is underway, and so is the reporting season for some of the world’s biggest insurance companies that face paying out for storm damage. Munich Re, the world’s largest reinsurer, is expected to post a 60% increase in net profit on Thursday, despite storms in Texas, as it recovers from big writedowns last year caused by war and inflation.

Swiss Re (SIX:SRENH) gave a taste of that trend, reporting a rise in net profit in the first half of the year. Allianz (ETR:ALVG), Zurich Insurance (SIX:ZURN), and Hannover Re (OTC:HVRRY) are all set to report in the week ahead.

The outlook depends on hurricanes and any other future disasters, which are increasing in intensity as the planet warms. Munich Re (ETR:MUVGn) said the 2023 hurricane season was difficult to predict – higher ocean temperatures add to the likelihood of more storms, but phases of the El Nino climate phenomenon tend to suppress hurricane activity.