Macroeconomics: The Week Ahead: 24 to 28 January

The new week’s schedule is heavy on US data, and surveys including G7 flash PMIs and Germany’s Ifo, but also has the US FOMC and BoC policy meetings, and a deluge of US and other corporate earnings. US data include advance Q4 GDP, Durable Goods, Consumer Confidence, Home Sales and House Prices, while elsewhere there are Q4 prov. GDP data from South Korea, Germany France and Spain’s preliminary Q4 GDP. Political risk remains high on the agenda whether via way of Western/Russia tensions over the Ukraine, domestic risks in the UK and Italy (presidential election), or how governments across the world attempt to deal with a cost of living crisis. Commodity prices have been on a renewed tear higher to start the year (see chart), with oil front and centre, but metals (above all nickel), other raw materials and agriculture (above all grains and oilseeds) have been as much in that mix, as supply chain disruptions show little sign of easing substantially, even if there is a momentum driven speculative component, which on setbacks would likely exacerbate / exaggerate the scale of any corrections. An uncertain interest rate environment clearly plays into that, and per underpin higher levels of volatility across asset classes. Asian markets will also start to wind down at the end of the week ahead of next week’s Lunar New Year holidays.

The consensus looks for no changes in either rates or taper pace from the FOMC, and with no forecast updates at this meeting, markets will pore over the FOMC statement and Powell’s press conference. The Fed has shifted its policy stance relatively dramatically over tea past two meetings, carving itself some room for manoeuvre, and while it will offer some clearer forward guidance, it will try and avoid painting itself into any corners, primarily by emphasizing downside risks and extant uncertainties, as well as how financial conditions evolve in response to the start of the policy tightening cycle. A hefty hint of a March rate hike will be given, with a key question at the press conference likely to be whether be a 50 bps rate hike is a possibility, which Powell will lean against heavily, without completely ruling it out, whether there has been a shift in ‘dot plot’ on the rate trajectory. Just as importantly, markets want some clues on when the Fed will start reducing the size of its balance sheet, and some greater clarity on what ‘sooner and somewhat faster’ means, and how that would play out in terms of mitigating the need for a more aggressive stance on rates. A more detailed outline of its balance sheet plans will almost certainly have to wait for the March meeting. The narrative on the economy will probably emphasize that the US labour market is very tight, with any near-term loosening to be temporary along with any slowdown in growth, but that supply chain disruptions will last longer, add to inflation pressures and be a headwind for growth, but that underlying demand will remain robust. Surprisingly given the anticipated shift, there are at the time of writing, no other Fed speakers scheduled this week, though this looks likely to change.

Ahead of the Fed meeting, the Bank of Canada is expected to hold rates at 0.25%, though markets are discounting a 75% probability of a ‘surprise’ hike. This ia a Monetary Policy Report meeting, and given that supply side pressures on inflation and inflation expectations (as seen in last week’s Q4 Business Conditions survey), Macklem & Co are likely to ditch their prior focus on the ‘output gap’, and guidance of a first rate hike in the ‘middle quarters’ of 2022, and instead emphasize the need to manage inflation risks, and hint strongly at a March 2 rate hike. Accompanying MPR forecasts are likely to see near-term CPI forecasts revised higher, but growth to be revised lower, as well as anticipating that longer-term output gap pressures justify a tighter policy stance. As with the Fed, there will also be some focus on signals on when the BoC may start to reduce the size of its balance sheet, with many expecting this to start towards the end of Q2.

Elsewhere on the central bank front, the BoJ releases the ‘summary of opinions’ from last week’s meeting, with only a smattering of ECB speakers, as both the ECB and BoE enter purdah periods ahead of policy meetings at the start of February. In the CEE and EM central bank space, further rate hikes are expected in Hungary (+30 bps), South Africa (+25 bps), Chile (+125 bps) and Colombia (+75 bps).

 As for the statistical schedule, G7 flash PMIs get the week underway, with Services PMIs in the Eurozone and the US expected to drop due to the spread of the Omicron variant, with the UK holding, while Manufacturing PMIs are anticipated to show only a modest drop to still robust levels, with local business surveys, including Germany’s Ifo, expected to echo PMIs. The rash of advance Q4 GDP readings is headed by the US, which is seen rebounding to 5.0% from Q3’s 2.3%, led by a modest recovery in Personal Consumption and Inventories, with Business CapEx and Trade a drag. A very divergent picture in the Eurozone with Germany seen contracting -0.4% q/q (vs. +1.75), France growing 0.5% q/q (vs. 3.0%) and Spain growing 1.4% q/q (vs. 2.65%, while in Asia, South Korea is forecast to post growth of 1.1% q/q (vs. 0.3%), Philippines 3.5% q/q (vs. 3.8%) and Hong Kong 5.2% y/y (vs. 5.4%). But these are all very much rear view mirror readings, which may well see some outliers, but unlikely to shift the focus away from the outlook for 2022, above all in terms of inflation pressures, and central bank reactions there to. US Consumer Confidence is expected to reverse to 111.8 from 115.8, above all due to the temporary disruptions to the labour market, which along with inflation pressures suggest potential for a larger setback; final Michigan Sentiment is due at the end of the week. House Price metrics (FHFA & CoreLogic) are anticipated to show continued strength in m/m Term (1.0-1.1%), though y/y rates will slow somewhat thanks t0 base effects. Durable Goods are forecast to drop -0.5% m/m thanks to a fall in aircraft orders, but expand modestly in core terms (0.3% m/m), while the week ending m0nthly PCE deflator are expected to echo CPI gains in m/m terms to edge up y/y rates by 0.1 ppt to 5.8% headline and 4.8% core. Elsewhere Australian Q4 CPI measures are anticipated to show a headline rise of 1.0% q/q, pushing the y/y rate up to 3.2%, with core measures seen at 2.7% and 2.3% y/y, still within the RBA’s target range of 2-3%. Brazilian IPCA-15 inflation is expected to ease somewhat, but with y/y at 10.1%, this will not deter the BCB from hiking again, Mexico’s mid-month CPI is also seen plateauing, but still implying further Banxico tightening, even if weak growth is likely to be a key cause for concern.

In the commodity space, the Argus Americas oil and TD Securities Mining conferences, and the Moscow Agros (agricultural) Expo will be focal points for the week along with Production reports for Anglo American, Fortescue Metals, MMK, Newcrest Mining and Norilsk Nickel. There are also an abundance of corporate earnings from the likes of ADM, Caterpillar, Freeport-McMoRan, Grupo Mexico, Halliburton, Nucor, Southern Copper and US Steel, as well as Japanese utilities, who are major players in Asian NatGas markets.

The US leads a relatively busy week for govt bond issuance with $162 Bln of 2, 5 & 7-yr, with Europe seeing auctions from the EU, Germany, Italy, Netherlands and UK, while China has in excess of CNY 300 Bln of local govt bond issuance, underlining a pick-up in fiscal support for its ailing economy.

A busy week for US and other corporate earnings will see much focus on the tech sector (Apple, Intel, Microsoft, Samsung amongst others), industrials and banks in Europe (Deutsche and Unicredit). Bloomberg News suggest the following will be among those making headlines: 3M, American Express, Apple, AT&T, Blackstone, Boeing, CaixaBank, Canadian National Railway, Canadian Pacific Railway, Chevron, Deutsche Bank, Diageo, First Abu Dhabi Bank, Freeport-McMoRan, Fujitsu, General Electric, H&M, Halliburton, ICICI Bank, Intel, IBM, Johnson & Johnson, Philips, LVMH, McDonald’s, MediaTek, Microsoft, Samsung Electronics, SAP, STMicroelectronics, Ericsson, Tesla, Texas Instruments, UniCredit, Volvo.