German trade balance in deficit for first time since 1991 as import price shock reverberates
Given the massive hit to its terms of trade from the shock to prices of energy, commodities and other inputs, Germany’s trade balance deteriorated markedly further in May. Indeed, for the first time since 1991, Germany ran a goods trade deficit on a seasonally adjusted basis. And the shortfall of €1.0bn was the largest since reunification. The value of exports dropped 0.5%M/M in May but was still up 2.7%3M/3M. However, on the same basis, imports rose 2.7%M/M to be up a whopping 9.4%3M/3M. By destination, exports to other EU countries fell 2.8%M/M, but shipments to the US (Germany’s #1 market) rose 5.7%M/M and those to China rose 0.5%M/M. Imports from the rest of the EU rose 2.5%M/M. US rose almost 10%M/M, while those from China (Germany’s #1 source of imports) fell 1.6%M/M. Imports from Russia fell almost 10%M/M. Adjusting for prices, export volumes fell 1.0%M/M while import volumes rose 1.8%M/M. So, the average level of exports in the first two months of Q2 was just 0.1% above the Q1 average, but imports were up 2.8% on the same basis, highlighting the strong likelihood that net trade subtracted from German economic growth in Q2 and adding to the likelihood that German GDP contracted last quarter.

Euro area PPI data to highlight still-significant price pressures up the supply chain; retail sales figures due later this week
Following Friday’s consumer price inflation estimates, this morning will also bring euro area PPI inflation numbers for May, which are likely to highlight still-substantive price pressures along the supply chain, some of which will in due course be passed on to consumers. Another increase in producer prices of 1.0%M/M or more will keep the annual rate close to a whopping 37%Y/Y. Euro area retail sales figures on Wednesday are likely to report moderate growth in May (0.5%M/M) insufficient to reverse the decline of 1.3%M/M in April. At the country level, the focus will be on the manufacturing sector, with May industrial production numbers to be published from France (Tuesday), Spain (Wednesday), Germany (Thursday) and Italy (Friday).

ECB account to shine further light on Governing Council policy normalisation debate
In addition, Thursday’s account from the ECB’s 9 June policy-setting meeting will be of interest, although it remains to be seen how much additional information will be provided on the Governing Council’s plans for monetary policy normalisation. At that meeting, the Council pre-committed to increasing its main interest rates by 25bps in July, and signalled the strong likelihood of a 50bps in September and further tightening thereafter. Of course, in her press conference following that meeting, President Lagarde failed to offer detail on the Governing Council’s intentions with respect to fragmentation risks. But faced with sharply rising spreads on BTPs and other Southern European bonds, the subsequent ad hoc policy meeting on 15 June saw the Governing Council agree to commission plans for a new anti-fragmentation policy tool. ECB policymakers set to speak publicly this week include Vice President de Guindos (today), Chief Economist Lane (Thursday) and President Lagarde (Friday).

Japanese wage and spending figures to be watched this week ahead of the weekend’s Upper House elections
After a quiet start to the week in Japan, tomorrow brings the latest labour earnings figures for May, which are expected to report headline growth of 1.5%Y/Y, in line with the average so far this year and still below rates likely to be required to achieve the BoJ’s inflation target on a sustained basis. Given the recent pickup in inflation, real wage growth will remain negative for the second successive month. And with consumer confidence still very weak, the BoJ’s consumption activity index on Thursday and MIC’s household spending figures on Friday are likely to suggest that the boost to household spending in May from easing of restrictions earlier in the year is likely to have been relatively subdued. The economy watchers survey for June (Friday) is also due this week. Attention then turns to the Upper House elections on Sunday 10 July. Polls suggest that PM Kishida’s LDP party is set to retain its simple majority in the chamber, and the parties who would like to revise the constitution are likely to retain a two-thirds majority. While the Kishida Cabinet’s ratings have fallen and the BoJ’s monetary policy appears increasingly unpopular against the backdrop of higher inflation, the main opposition parties continue to struggle.

US payrolls growth set to have slowed as concerns about economic outlook weigh
After today’s US holiday, the main data focus of the week will be Friday’s labour market report for June. Concerns of tighter monetary policy and recession ahead has likely led many businesses to become more cautious with their hiring intentions. Indeed, although modest, there has been an uptick in unemployment claims in recent weeks. As such, job growth is likely to be well short of the average of 590k in the second half of last year. Our colleagues in Daiwa America are forecasting an increase in non-farm payrolls of 300k, a touch firmer than the Bloomberg consensus. And they expect this to be strong enough to hold the unemployment rate steady at 3.6%. Ahead of this, the week brings the services ISM survey on Wednesday, which is expected to report the third consecutive decline in its headline index in June (-1.9pt to 54.0), leaving it well below the highs seen at the end of last year (68.4). Focus that day will also be on the Fed’s minutes from the 14-15 June meeting, when it hiked the FFR target range by 75bps (compared to the 50bps originally flagged by Powell) and signalled the likelihood of a large hike at its meeting at the end of this month too. The Fed’s Vice Chair John Williams is scheduled to speak on Wednesday, with Governors Bullard and Waller in action on Thursday.

UK final PMIs to illustrate weakening momentum at the end of Q2
In another quiet week for top-tier UK releases, tomorrow brings the final services and composite PMIs, along with new car registrations figures for June. The flash services activity index moved sideways in June at 53.4, nevertheless, still the softest reading since February 2021.

Given the downwards revision to the manufacturing output PMI, the composite PMI is likely to have fallen to its lowest reading for two years, down from the flash reading of 53.1, further supporting our forecast that GDP contracted in Q2. The construction PMIs for June will be published on Wednesday, followed by the BoE’s Decision Maker Panel data for June on Thursday. And the following day, the REC/KPMG report on jobs for June will provide an update on the labour market. Separately, the BoE will publish its Financial Stability Report tomorrow, while MPC members speaking publicly include external member Tenreyro (tomorrow), Chief Economist Pill (Wednesday) and hawkish external member Mann (Thursday)