Macroeconomics: The Day Ahead – 15 October 2020

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

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

• Pandemic pendulum still the focus for markets; busy day for data has  Australia labour data and China inflation to digest, awaiting US weekly  jobless claims, NY & Philly Fed Manufacturing surveys and Import Prices;  raft of Fed and other central bank speakers & EU Summit; more US earnings  and bond sales in France, Spain and Canada
• China CPI/PPI: food price base effects the primary driver of lower than  expected readings, weaker consumer goods prices also contribute
• US jobless claims: both expected to fall again, but remain very high on any historical comparison, restart of California claims a wild card for  initial claims
• US NY & Philly Fed Manufacturing surveys expected to confirm solid pace of activity persisted into start of Q4

EVENTS PREVIEW

As market sentiment swings on its pandemic pendulum between the rapid escalation in infection rates & increasing movement restrictions and the perennial holy grail hope of a vaccine, a relatively busy schedule of data, events and earnings reports will have to spring some surprises to jar that pendulum out of its arc. There are the Australian labour and China CPI and PPI data to digest, while a busy run of US data has weekly jobless claims, NY & Philly Fed Manufacturing surveys and Import Prices. In market terms, the EU summit could prove to be a non-event given that today’s UK Brexit deadline is set to come and go, and both sides are still talking, though still not making much progress  to bridge the 3 key gaps (Fisheries, ‘level playing field’ & Internal Markets Bill/N. Ireland), and as much as time is of the essence, it is not a case of ‘a minute to midnight’. Fed speakers dominate a very busy schedule of central bank speakers, though Lagarde also speaks on the CNBC debate on the global economy as part of the IMF/World Bank meetings. On the earnings front, Taiwan’s TSMC features alongside US reports from Charles Schwab, Morgan Stanley and Walgreens Boots Alliance, while the govt bond auction schedule has new 6-yr in Spain, multi-tranche conventional and I-L in France, and 30-yr in Canada.

China – September CPI / PPI

– Both CPI (1.7% y/y vs. expected 1.9%) and PPI (-2.1% vs. expected -1.8%) missed forecasts substantially, and in both cases it was primarily food prices, and to a lesser extent consumer goods (durables) which paced the setback in prices. Base effects in Pork prices were always going to smother CPI in H2 2020 after the surge in 2019/early 2020, and the impact was particularly sharp in September as pork prices dropped back to 25.5% y/y from August’s 52.6%, which in turn saw overall Food Price CPI dropping to 7.9% y/y from August’s 11.9%. PPI evidenced similar trends with Food Productions slipping to 2.1% y/y from 3.1%, and Consumer Goods slipping into negative territory at -0.1% y/y vs. August’s 0.6%, with Extraction (mining) prices still deep in negative territory, but recovering to -4.8% from August’s -5.8%, with Raw Materials also weighing heavily on the headline at -6.2% y/y vs. August’s -6.4%. Per se, the inflation trend is primarily about the mean reversion in food prices, though clearly the relatively solid recovery is not (as yet) generating any demand pull or bottleneck pressures.

U.S.A. – Jobless Claims, NY & Philly Fed surveys

– Initial Claims have dropped only marginally in the past couple of months, and are expected to dip to 825K from last week’s 840K, close to the prior all-time peak just after World War II, and still way above the post-GFC peak of 665K, with this week’s report also subject to the wildcard of California reporting backlogs after putting claims on hold for a fortnight. Continued Claims are expected to fall quite sharply again to 10.55 Mln vs. prior 10.976 Mln, but much of that fall will reflect those that have reached the 26-week limit on claims falling out of the count, i.e. not a positive labour market development. Thus a look at the broader measures that include those Pandemic Emergency Unemployment Compensation (in effect a maximum 13-week extension of ‘regular’ claims) is required, with this number likely to remain high, and likely still rising. As for the first of the regional manufacturing surveys, the NY and Philly Fed Manufacturing are both forecast to be very modestly lower than September at 14.0 and 14.3 respectively, indicating that the solid overall (though still uneven) recovery momentum in the sector has been maintained into the start of Q4, as was also suggested by the most recent ISM manufacturing outlook survey.

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