To Hell(sinki) And Back: Full Week Ahead Preview

Needless to say, all eyes and ears will be on the Trump-Putin summit in Helsinki to start the week. Here’s the schedule:

One-on-one meeting with Putin: 1:20pm local time (6:20am Washington time),
Expanded bilateral meeting and working lunch, 2:50pm,
Joint press conference, 4:50pm

As momentous an event as this already was, the stakes were raised even further on Friday when the Department of Justice indicted 12 Russian operatives for interfering in the 2016 election.

In an interview with CBS’s Jeff Glor, clips from which were released over the weekend, Trump didn’t do much to dispel the notion that he’s likely to be railroaded by everyone’s favorite KGB operative-turned-Russia-forever-President.

Asked if he would demand the extradition of the accused, Trump told Glor the idea hadn’t even occurred to him. He also suggested he isn’t expecting much from the meeting which is broadly consistent with everyone else’s expectations.

The President did take to Twitter on Sunday to suggest that even if he talked Putin into allowing the U.S. to annex Moscow, the media would insist on St. Petersburg. In the same series of tweets, he once again called the American media “the enemy of the people”:

This. Is. Insane. pic.twitter.com/jXhj8c0RbN

— Heisenberg Report (@heisenbergrpt) July 15, 2018

In the same interview with CBS, Trump took the “unusual” step of calling the European Union a “foe” of the United States, and by “unusual”, I mean “criminally insane”. Somehow, I doubt that’s going to do much in the way of allaying fears that further escalations on the trade front are imminent.

Speaking of trade, it looks like the prospect of a bilateral deal with the U.K. following Brexit is also in doubt, if you believe the Donald Trump who spoke to The Sun. If, however, you believe the Donald Trump who called that same tabloid “fake news” just a day (give or take) after he sat down for an interview with them, America’s relationship with the U.K. is even more “special” now than it’s ever been (to be precise, it’s “the highest level of special“).

On the bright side, it’s possible the Putin media circus will temporarily distract Trump from escalating the trade war with Beijing any further, although given the latest read on America’s trade deficit with China, one certainly imagines Xi isn’t far from Trump’s wandering mind. Data out late last week showed the U.S.-China deficit hitting an all-time high.

“Ongoing US-China trade tension may disturb the typical summer lull, and disappointing Chinese activity data should remind investors that the current trade dispute is occurring when the Chinese economy is already slowing”, Barclays warned over the weekend, adding that while “a so-far restrained response from China helped to stabilize sentiment towards the end of last week, we remain cautious on local market assets of countries that are exposed to escalating trade tensions or have a reliance on global funding — a collective group that comprises most EM along with AUD, NZD and GBP.”

Meanwhile, China seems to be pushing ahead with the effort to squeeze leverage out of the country’s labyrinthine shadow banking complex, a necessary but risky push in light of the potential for the squeeze to end up choking off credit to the real economy. Here’s Goldman documenting some of the nuance from the latest TSF report:

Shadow cleanup accelerated: Monthly entrusted and trust loans have recorded Rmb164bn and Rmb162bn net reductions respectively. This is the highest ever monthly net reduction for trust loans. We believe the trend could continue as a new normal given regulation tightening extending until 2020 as a target end of shadow cleanup. This should help to abate the systematic risk in the long run, however, the crowding out in short term could keep the credit spreads wide. The policy makers may rule out more targeted measures to support the real economy especially in the SME sector.

This week will bring more data from China, including, notably, GDP first thing on Monday. Consensus is 6.7%, but as Bloomberg notes, the devil will be in the details:

A look beyond the headline number will reveal more early signs of the size of the impact from the trade dispute, or where the tariffs could end up hurting. If the confrontation with the U.S. deepens to the extent that it endangers the growth target, the government may be forced to soften its campaign to curb debt and clean up the financial system.

Net exports may end up being a drag on the nation’s growth in the first six months of this year, when the services trade is taken into account. While Chinese factories ship goods abroad, its consumers are increasingly spending on foreign education, tourism and movies, and those factors have affected the current account.

Here are the numbers:

This is all completely real, ok? China promises

CHINA 2Q GDP +6.7% Y/Y; EST. 6.7%
CHINA JUNE RETAIL SALES RISE 9.0% Y/Y; EST. 8.8%
CHINA JAN-JUNE FI RISES 6.0% Y/Y; EST. 6.0%
CHINA JUNE INDUSTRIAL OUTPUT +6.0% Y/Y; EST. 6.5%
CHINA JAN-JUNE INDUSTRIAL OUTPUT +6.7% Y/Y; EST. 6.8%

— Heisenberg Report (@heisenbergrpt) July 16, 2018

Stateside, retail sales will top the data calendar with investors and traders perpetually eying every tier-one print for further evidence to support the new, U.S.-centric growth narrative which replaced “synchronous global growth” earlier this year as the go-to market meme. IP is on deck as well. Here’s BNP on retail sales:

We expect a solid retail sales print for June to close the quarter, expecting control group sales (which excludes gasoline station, motor vehicle, building materials and food services) to have increased by 0.5% m/m. Although retail sales have been solid through the quarter, the rebound in overall consumption in Q2 from its 0.9% q/q saar outturn in Q1 has been a bit more subdued, due to softer than expected services spending. We see consumption tracking at about 2.8% q/q saar for the quarter. While tax savings and nominal wage gains should sustain solid consumption in the near-term, we see rising inflation and tightening financial conditions as constraints that could pose downside risks going forward.

This comes on the heels of a marginally weaker than expected CPI print and the June payrolls report, which went some ways towards rekindling the “Goldilocks” spirit as the headline number was impressive, while average hourly earnings still suggested that inflation isn’t yet a “problem.”

It’s also Humphrey Hawkins week, and Powell’s testimony will be scrutinized heavily in light of the trade frictions and the prospect that a trade-related downturn in global growth could spill over and put the brakes on U.S. economic momentum.

Last week, in an interview with American Public Media’s “Marketplace” program, Powell was non-committal on the trade issue, but his comments in Sintra as well as the June Fed minutes reflect some consternation about the balance of risks. Here’s BofAML with a preview:

In Fed Chair Powell’s testimony to the Senate Banking Committee, we will look for his current assessment of the economy and financial markets. We suspect that he will reiterate his view that the US economy is in great shape as growth remains above trend, inflation remains subdued and labor market conditions remain tight though the unemployment rate edged higher in June. On financial markets, he will likely argue that conditions remain easy, all things considered and only see modest excess risk taking in the markets. The more interesting take may come from his assessment on the risk to the economy, especially around tariffs. At his last post-FOMC meeting press conference, he noted that while business contacts have shared concerns around trade tension, it has yet to alter his thinking on the outlook. We will see if the latest announcement of tariffs on $200bn of Chinese goods has altered his thinking. Last, we will look to see if there is a broader discussion on state of the Fed balance sheet unwind and how the latest developments in the IOER market may impact the Fed’s thinking around the ultimate size of the balance sheet and the policy framework (corridor vs floor system) it operates moving forward.

That latter bit (about IOER) is set to become more important, despite the technical nature of the discussion. For their part, Morgan Stanley thinks it will factor into a decision to halt balance sheet rundown earlier than consensus expects.

There’s also key data (CPI and the labor market report) due from the U.K. which is in the throes of a political crisis. Donald Trump did his absolute best to exacerbate that crisis over the weekend (see above).

“Our economists look for CPI to grow 2.6% y/y in June, with core edging down slightly to 2.0% y/y”, BofAML writes, adding that unemployment and average weekly earnings should remain unchanged at 4.2% y/y and 2.5% y/y, respectively.

As far as Brexit goes, BNP has the following updated take on this never-ending descent into diplomatic hell:

The second key driver will, of course, be Brexit. The government’s long-awaited Brexit white paper, published on 12 July, set out in detail the proposals for the future relationship with the EU agreed (by most of the cabinet, at least) at the meeting at Chequers. We see several likely key sticking points once UK—EU negotiations resume in the coming week.

The EU is unlikely to allow any sort of single market access without the UK accepting free of movement of labour — the EU may not accept the UK’s “mobility framework”.

The UK’s proposals are likely to be seen as cherry-picking by the EU, given that it suggests single market access for goods trade only.

The EU is unlikely to allow a third country (the UK, in this case) to collect tariff duties on its behalf, which is what the UK’s proposals suggest. And it may have concerns about how new technologies would be implemented.

The UK’s suggested “phased implementation” suggests it might take longer than the agreed transition period for new arrangements to be up and running. The EU might reject any extension to the transition, since it wants it to end at the same time as the current multiannual financial framework in December 2020.

There are questions about the role of the European Court of Justice and/or an independent court similar to the EFTA court in the case of members of the European Economic Area, such as Norway. And what happens if the UK decides to not implement rule changes?

The proposals indicate that financial services firms will lose their passporting rights and operate on an enhanced equivalence regime. The key question is whether the EU will be open to changing the existing arrangements.

Of course May could just skip all of this and “sue them“, as Trump suggested.

To let Barclays tell it, nothing that comes down the pike this week is likely to matter for the BoE. “The release of labor market, inflation and retail sales data (due Tuesday, Wednesday and Thursday, respectively) are unlikely to materially alter market expectations of an August rate hike (c.20bp priced) given the recent chorus of hawkish MPC rhetoric”, the bank wrote, in a note dated Sunday.

Long story short, this is the usual cocktail of geopolitical risk and Fed watching, with a dash of Brexit for bad measure.

EM will be a good barometer of sentiment as it’s hyper-sensitive to both the Fed and China. Also, don’t forget that Turkey was downgraded on Friday, so that might play into things at the margin for EM.

Oh, and earnings season is of course underway, so we’ll get to see how the tug-of-war between record U.S. profits and geopolitical headline risk plays out in real-time.