Macroeconomics: The Day Ahead for 19 January

Inflation data once again dominate the data schedule, with readings from the UK, South Africa and Canada, though outside of these there is only US Housing Starts. The day’s US Q4 earnings run will again be dominated by financials, with the focus on Bank of America and Morgan Stanley, but there are a number of non-financials that will attraction attention, most notably Alcoa, Citrix, Procter & Gamble, United Airlines and UnitedHealth. On the events schedule, the IEA follows OPEC with its monthly Oil Market Report, while the World Bank provides the first major world economic forecast update of the year, while BoE governor Bailey and his fellow FPC members testify to the Treasury Select Committee on the latest Financial Stability Report, with little in the way of central bank speakers. A busy looking govt debt auction schedule likely to be less overwhelming than it appears with only the German 15-yr and US 20-yr sales likely garner any attention. The seemingly relentless rise in US and other G7 govt bond yields is testimony to how much markets have underestimated both the potential for oil prices (and energy more broadly) to buttress inflation pressures beyond supply chain disruptions. It leaves central banks in the awkward position of trying to use rates to curb inflation pressures that are a function of lost productive capacity, both as a result of the pandemic (e.g. US refining capacity is down ca. 8.0% since the start of the pandemic), and the slide in up and downstream investment since the 2014 oil price slide). Rate lock hedging for corporate bond supply is contributing to the rise, the question is how much this will pressure credit spreads wider, which will create some pain points for fund managers, above all those with high leverage.

** U.K. – December CPI, RPI and PPI **

– To be frank, it was never going to be this month’s inflation data which was going to stop the BoE delivering another rate hike in February, but rather last week’s GDP/activity data and yesterday’s labour market report, both of which effectively sent a clear ‘just do it’ message to the BoE. Be that as it may the upside surprise was paced above all by Food (4.2% y/y vs. prior 2.5%) and Household, i.e. energy (7.3% y/y vs. 6.1%), with Clothing & Recreation also contributing (see tables attached). The seemingly relentless pressure on non-discretionary prices remains the striking feature, and while this will only reinforce expectations of a BoE hike in February, higher rates will do little or nothing to curb these pressures, and there are still more to come over the course of the next 3 to 4 months, even though the PPI data showed some of easing, but this was mostly energy prices, and will as such be reversed, given the surge in oil prices.

** U.S.A. – Dec Housing Starts **

– Following on from another robust NAHB survey, the focus turns to Housing Starts. After a rip roaring 11.8% m/m jump in November, a modest -1.7% m/m mean reversion is expected, which would remain strong on any historical comparison. The risk is skewed very firmly to the downside, given that a number of highly destructive tornadoes hit the biggest home building region (the South) during the month. As such, any large downside surprise on Starts should be dismissed (though algos will tend to be oblivious to the reason for such a fall), above all if Permits hold up as they should, given low levels of housing inventories.

** Canada – December CPI **

– In a similar vein to the BoE, today’s CPI data are perhaps less ‘make or break’ for an early BoC rate hike at next week’s (Jan 26 meeting) than Monday’s BoC Business Outlook survey, which saw its Business outlook at a record high, with hiring and investment intentions also posting records. Piling the pressure on the BoC to hike is the fact that inflation is seen above 3% (top of BoC target range) over the next 2 years by more than 2/3 of respondents, (highest ratio since 2001). Per se the fact that the consensus looks for little change in headline CPI (4.8% y/y) and the various core measures averaging 2.8% y/y does underpin rate hike expectations but is not a game changer on its own.