Macroeconomics: The Day Ahead – 16 December 2020

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

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

• Busy day for data, Fed meeting in focus; Brexit, US fiscal deal and vaccine hopes continue to vie with adverse pandemic news; digesting  poor Japan Trade & soft PMI, below forecast inflation; awaiting Eurozone,  UK and US flash PMIs, US Retail Sales & NAHB; busy run of ECB speakers
• Japan: persistent PMI and Export weakness underlines lack of manufacturing momentum, and not just pandemic related
• G7 PMIs: manufacturing expected to hold up as Services continue to contract due to pandemic activity restrictions
• US Retail Sales: headline seen weak on autos, gasoline and restaurants, core measures seen posting modest gain on strong holiday season spending
• Fed: no change in rates or QE expected, FOMC dilemma on ‘operation twist’

EVENTS PREVIEW

A very busy day is in prospect with a raft of data out of the UK, USA and Canada along with G7 flash PMIs, as the Fed leads off a 24 hour run of major central bank meetings (BoJ tonight, BoE tomorrow), accompanied by plenty of ECB speakers. There are Japan’s poor Trade data and lower than forecast UK inflation data to digest as the run of European PMIs are awaited ahead of US Retail Sales and NAHB Housing Market Index, accompanied by Canada’s CPI. It remains the case that politics and pandemic news will continue to hold sway, as the noises around prospects for a Brexit deal took a distinctly upbeat turn yesterday, and Congress appears to be heading towards a fiscal package, which avoids a govt shutdown and a cliff edge on social security benefits, though without providing any meaningful stimulus. There will inevitably be some discussion about the ‘extremely extraordinary’ (quoting MoF) BoJ move to bolster its FX intervention power with a $6.0 Bln facility to purchase assets from the MoF, which comes just ahead of the US Comptroller of Currency’s annual report on countries manipulating their currencies, with Switzerland and some Asian countries expected to be singled out for criticism.

G7 – December flash PMIs

– Working from the assumption that the consensus forecasts for PMIs are little more than conservative guesstimates, which generally anticipate only small changes relative to prior months, the key questions for today’s PMIs are: will manufacturing PMIs continue to signal considerably more resilience to rising infection rates and accompanying lockdown measures? Will the US hold onto November’s unexpected strength, above all in Services? Will European Services PMIs find a base, as consensus estimates suggest, or drop further in response to the tightening of activity restrictions in most countries? The overnight PMIs from Australia and Japan highlight the differing impact of infection rates with Australia continuing to recover quite sharply as lockdown measures continue to be ease, by contrast both of Japan’s PMIs continued to signal contraction, with Services unsurprisingly declining modestly to 47.2, and rather more worryingly Manufacturing remained just in the contraction zone for a 19th consecutive month,  which when allied with a 24th month of falling exports (in y/y terms) paints a picture of an economy with little or no momentum in its industrial sector.

U.S.A. – November Retail Sales / December NAHB Housing Market Index

– Forecasts assume that a combination of a drop in auto and gasoline sales (partly due to lower prices) and lower restaurant bookings take their toll on headline with a =0.3% m/m drop, but that core measures show a little more resilience (+0.1% m/m), as evidenced by strong online holiday season spending offsetting weakness in ‘bricks and mortar’ retail. The risks on the headline look to be to the downside of the consensus, while the latter may prove to be stronger than anticipated in so far as hefty discounting may have brought forward some Christmas related spending from December. Be that as it may, anything relatively close to consensus would suggest that Personal Consumption will probably make an at best modest contribution to Q4 GDP. The NAHB Housing Market Index is expected to ease back very slightly to 88 following successive record readings, but clearly signal a very strong housing market, underpinned by record low mortgage rates, with rising infection rates expected to have tempered buyer traffic and by extension current sales.

U.S.A. – FOMC meeting

– Very unsurprisingly the Fed is expected to keep rates at 0.0-0.25% and sustain the current pace of ‘regular’ QE (i.e. Treasury and MBS purchases), above all thanks to steady and accommodative / loose financial conditions. Given the lack of any fiscal stimulus package, and obvious downside risks to growth prospects from rising infection rates and the threat of a cliff edge for personal consumption due to the prospective expiry of regular benefit entitlements, as well as very subdued inflation, the forward guidance on policy will again stress that there is no prospect of any winding back of its ultra-accommodative stance for the foreseeable future. The question is whether they opt for a ‘twist’ operation (i.e. lengthening the duration of balance sheet portfolio holdings), as a sizable number of market participants are anticipating (or rather hoping). However Fed speakers have largely suggested that they are quite happy with policy settings as they stand, and would rather retain such an option for deployment in Q1 if needed, and once fiscal policy prospects become a little clearer. In very simple terms, taking action now would generate few if any benefits, and expend limited firepower, the catch is that markets may be disappointed by a lack of fresh measure, which could result in an unwanted (though likely modest) tightening of financial conditions.

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