Macroeconomics: The Day Ahead – 12 October 2020

Good Morning: The Long & the Short of it and The Bigger Picture

Written by Marc Ostwald, ADMISI’s Global Strategist & Chief Economist

• Very quiet start to busy week with US bonds closed for Columbus Day;  digesting Japan Orders, awaiting India CPI and Industrial Production; busy run of central bank speakers
• Week Ahead: US and China dominate data run, but politics (US elections, Brexit) and pandemic likely to rule the roost, US earnings season kicks off

EVENTS PREVIEW

With the US bond market closed for Columbus Day (though equities will be open), a quiet start to the week looks be in prospect, with a modest schedule of data and events on the agenda, amounting to digesting Japan’s Orders data and awaiting Indian CPI and Industrial Production. There are a raft of central bank speakers on hand – ECB, BoE, BoJ and BoJ – but with monetary policy now so obviously impotent, and many of the speakers having been on the wires recently, it is unlikely that much will be offered in the way of fresh insights into the policy outlook. While Japan’s Orders were better than expected at +0.2% m/m vs. forecast -1.0%, this was at best marginal given the inherent volatility of this data series. Perhaps of greater interest was the very fleeting setback for the CNY vs USD in response to the reduction in bank reserve bank reserve requirements for FX forwards to 0% from 20%, underlining the point that the recent strength of the CNY has primarily been driven by the attractiveness of the CNY yield carry, along with the relative strength of incoming economic data.

RECAP -The Week Ahead Preview

While there is a busy run of US and China data this week, along with the start of the US Q3 earnings season and the usual raft of central bank officials speaking at the annual IMF/World Bank meetings, these are likely to be subordinate to politics and pandemic developments. Trump returns to the presidential election campaign trail as another ‘stimulus’ package fails to bridge the ideological divides between Democrats and Republicans, and the nomination hearings for Amy Barrett to the US Supreme Court take place. The UK’s self-imposed October 15 Brexit talks ‘deadline’ dovetails with the EU Summit on Thursday and Friday, while tensions in the Eastern Mediterranean, Caucasus and former CIS regions continue to simmer. But for all the unsettling political news, the tightening of movement restrictions, above all in Europe, due to a second wave surge of infections, (though mortality rates continue to thankfully lag, but the next two weeks could prove pivotal), which in turn threatens to stymie the recovery in many countries, markets continue to indulge in ‘blue sky’ thinking. Even if this is unsettled occasionally by bouts of vertigo like anxiety, but seemingly eternally bolstered by ongoing central bank largesse and its bedfellow ‘financial repression’, and above all led by disproportionately high levels of derivative trade volumes, which remains a major Achilles heel.

In terms of the US Q3 earnings season, the bald facts are as laid out by Factset’s latest Earnings Insights: ‘For Q3 2020, the estimated earnings decline for the S&P 500 is -20.5%’, which the Panglossian fraternity will stress is much better than Q2’s -30.6%, and unusually better (i.e. upgraded) than the end June estimate for Q3 of -25.3% , but still the second worst on record (after Q2) since Q2 2009. As ever the big ‘money centre’ banks dominate the start of the season, and while low interest rates and soft loan demand are expected to be a key drag, the focus will be on loan loss provisioning, and as with other sectors on forward guidance, which in proportionate terms remains well below long-term averages – wholly unsurprising given the array of uncertainties, both economic and political. It will also be interesting to note whether the sharp rise in digital payments (which banks are limited in offering due to licensing related constraints) due to the pandemic is impinging on consumer division earnings of banks.

As for the week’s data schedule, Auto Sales are again likely to lead an expected 0.8% m/m headline rise in US Retail Sales, though ex-Autos measures seen at a more subdued 0.4% m/m pace, with the absence of a new fiscal aid package continuing to restrain spending, though favourable seasonal adjustment could help to flatter the outturn (unadjusted sales tend to fall sharply in September after the August ‘back to school’ boost, which was muted this year). CPI is seen up 0.2% m/m on both headline and core, to edge headline y/y up 0.1 ppt to 1.4%, while leaving core at 1.7% (notably higher than rates in Europe and much of Asia), but still below target; risks appear to be skewed to the downside, as weak OER (rents), and an unwind of transient post-lockdown jumps in Food and Auto prices are unwound, with Service prices still heavily muted by the pandemic. Industrial Production and Manufacturing Output are both seen up 0.6% m/m, (prior 0.4% & 1.0%) and continue to see a patchy picture, with continued strength seen in Autos, while storm disruptions muted energy sector output, with utilities output set to drop as temperatures reverted to typical seasonal levels. The NY and Philly Fed Manufacturing are both forecast at a relatively solid 14.0, modestly lower than September, and the NFIB Small Business Optimism is seen edging up to 101.0 from 100.4, with the already published Employment sub-indices at their best levels since Q4 2018. While this all points to a sharp bounce back in Q3 GDP (though regional Fed Nowcasts are hugely divergent: NY 14.1%, Atlanta 35.2%), the key question (above all absenting a new round of fiscal stimulus) is how much recovery momentum is lost in Q4.

China is indubitably leading the global recovery, with this week’s Trade data expected to confirm a further solid rise in Exports (10.0% y/y vs. Aug 9.5%), as it benefits from the post lockdown recovery in demand in Europe and North America, which if the Manufacturing PMI Orders rebound is anything to by should be sustained into Q4. Imports are seen up just 0.1% y/y, after dipping 2.1% in August; normalization of oil imports (i.e. lower vs. mid-year)  should keep this subdued, and the usual erratic patterns in iron ore/metals and agriculture due to output and shipping issues and disruptions will as ever impart a high probability of an outlier, which make trend extrapolations about the relative strength of domestic demand rather tenuous. Continued dissipation of food price pressures is likely to be key to an expected setback in CPI to just 1.9% y/y from 2.4%, while PPI is seen little changed at -1.9% y/y, with a stronger CNY likely to offset rises in some commodity prices. Credit aggregates are expected to show New Yuan Loans rebounding to CNY 1,700 Bln, offsetting a drop in municipal borrowing that will likely weigh on Aggregate Social Financing at CNY 3,000 Bln vs. August 3,582 Bln. The focus near term is rather more on tensions with the US, the upcoming (14th) 5-year plan that will be detailed at the 26-29 October Plenum of Chinese Communist Party Central Committee, and in the very short-term, whether the reduction in bank reserve requirements for CNY forward trades to zero at the weekend, helps to curb CNY strength, above all by encouraging more corporate hedging.

Elsewhere, the UK looks to BRC Retail Sales (Like for Like seen slower than August’s 4.7% y/y at a still solid 3.5%), and the latest labour data, with Employment projected to drop by a still very modest -24K, with the Unemployment Rate forecast to rise to 4.3% from 4.1%, but clearly still being subdued by the furlough scheme (ends 31 October). Pipeline layoffs remain elevated, and with the new localized / targeted furlough scheme expected to prompt a further rise in layoffs, the anecdotal evidence of a pick-up in labour demand may not be enough to stop a further reasonably sharp rise in Unemployment though the autumn and winter, which may already be visible in the Claimant Count (last +73.7K). Japan has Private Machinery Orders, which have been ever more erratic than ever (prior 3 months +6.3% m/m, -7.6% and +1.7%), and are projected to edge down by 1.0% in August. Germany’s ZEW survey, Singapore’s advance Q3 GDP estimate, Indian CPI & Industrial Production and Canada’s Manufacturing Sales offer further statistical points of focus, along with the IMF’s World Economic Outlook update (likely to see some upgrades of the ‘not quite as bad as we had feared’ variety) that is published at the start of this week’s annual IMF/World Bank Meetings.

On the political front in the US, Congress is likely to be so pre-occupied with the four days of hearings for the nomination of Barrett to the Supreme Court for there to be any meaningful efforts to reach an agreement on a fiscal package, which now looks highly unlikely ahead of the elections. Of more immediate interest is how the final round of Brexit talks evolve ahead of the EU Summit on Thursday and Friday, whether the UK walks away from these as PM Johnson has previously stated (but then again he is a master of u-turns and volte face), and if not, the EU summit will likely endorse a further extension of talks. Monday will also see the announcement of a further tightening of lockdown measures in the UK (and through the week elsewhere) as the second wave of the pandemic starts to threaten to reach a tipping point that will or already is pressuring capacity constraints in national health care systems.

On the govt bond auction front, a relatively light week in the US has only T-Bill and Cash Management Bill auctions, but a much busier week in Europe sees £6.75 of UK Gilts, France selling EUR 7.5 Bln of conventionals and EUR 1.0 Bln of I-L, Italy selling EUR 7.5 Bln of mediums and ultra-longs, Spain selling a new 2026, with smaller offerings from Germany, Netherlands and Portugal.

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