Macroeconomics: The Day Ahead – Feb 10

Ahead of the Lunar New Year holidays that begin tomorrow, today marks the high watermark for data and events for this week, with China and US inflation data and a deluge of central bank speakers, including Bailey, Lagarde and Powell topping the bill. Statistically there are also the unexpected surge in South Korea’s Unemployment Rate, higher than expected Norwegian CPI and very weak French Production to digest, with US Treasury Budget and Brazil’s Retail Sales also on tap. Corporate earnings are plentiful, featuring amongst others: Toyota, Equinor, Heineken, Bunge, CME, Coca Cola, GM, Uber, Under Armor and Zillow, while on the govt bond auction schedule, Germany sells 5-yr and the US sells 10-yr. While there is good reason to be very sceptical about linking market performance to views on the economic outlook, and attributing it rather to central bank ‘largesse to excess’, yesterday’s somewhat lower than expected US NFIB Small Business Optimism was notable for and almost wholly paced by another sharp drop in the ‘Expect Better Economy’ (see chart), which has plummeted from an historically very robust 32 in September to -23 in January. It may be in part due to small businesses fearing tax and spend under the Biden regime, but it may well be the case that the seemingly incessant stop/start in the economy due to the pandemic leaves many small businesses despairing that a recovery will come soon enough to save their businesses from insolvency (the latter obviously not being limited to the US).

China – January CPI / PPI

PPI rose 0.3% y/y as expected from December’s -0.4%, the highest reading since May 2019, and paced by broad based commodity price pressures, and PPI will rise much more sharply in coming months due to adverse base effects (and not just in China, but through much of the world, as well as the rise in commodity prices). By contrast CPI dropped back more than expected to -0.3% y/y from December’s +0.2%, with expected food price pressures (4.1% m/m 1.6% y/y) more than offset by a sharp deceleration in Services prices (-0.7% y/y vs. Dec +0.3%), the latter doubtless impacted quite sharply by activity restrictions due to localized spikes in infection rates, as well as a still rather patchy recovery in consumer spending. Base effects will have a sizeable impact throughout H1, but it will be the degree to which PPI rises that markets focus on, wary of China exporting inflation after years of exporting deflation.

U.S.A. – January CPI

 A 6.3% m/m rise in gasoline prices suggests some upside risks to an expected 0.3% m/m for headline CPI that would see the y/y rate edge up to 1.5% from 1.4%, while core CPI is seen up 0.2% m/m to push the y/y down to 1.5% from 1.6%; both are obviously well below the Fed’s (average) inflation target, for a tenth consecutive month in core terms. However underlying trends in goods and services are heavily divergent, as can be seen on the attached chart, with housing & shelter costs now heavily constraining services, while goods prices emerge from almost a decade of effectively flat lining. Central banks may be keen to look through all the noise in inflation data in coming months, but will find their forward rate and liquidity guidance severely challenged, if these trends persist into H2 2021, above all if core CPI measures were to be elevated.