Macroeconomics: The Day Ahead – 16 November 2020

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

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

• Digesting China monthly activity data, Japan & Thai GDP, awaiting NY  Fed manufacturing, deluge of G7 central bank speakers, large PBOC  MLF operation; J&J vaccine news likely to subordinate macro inputs
• China data encouraging, but recovery still patchy as Retail Sales  fail to get larger boost from Golden Week holiday; manufacturing  robust; PBOC MLF injection a reminder of underlying challenges
• Japan: better than expected Q3 GDP paced by external demand contribution,  as Private Consumption rebound weaker than expected, Q4 likely to slow  quite sharply
•  Week Ahead: very busy week for US, China, Japan & UK data, but focus  to remain on infection rate and vaccine news, along with Brexit, Biden  transition team formation and EU Summit

EVENTS PREVIEW

The new week gets under way with generally encouraging data out of Asia’s two major economies to digest along with better than expected Thai GDP, and only the US NY Fed Manufacturing survey likely to attract much attention in terms of the release ahead. The markets’ mood remains one of discounting the bad news about the continued rise in infection rates, and focussing on vaccine related news (J&J two dose trial), with some even rehashing last week’s news on the Moderna trials. Central banks would do well to realize that this primarily attests more to the excess liquidity, and as noted in the week ahead, ultimately leaves them with the challenge of trying to wind back their measures at an earlier stage than they have suggested, if the growth recovery does accelerate, and a likely adverse market reaction to such news. In terms of that overnight data, Japan’s Q3 GDP easily beat forecasts, thanks to a much stronger than expected contribution from external demand, which accounted for more than half of the 5.0% q/q increase, though it should be added that this was primarily due to a much sharper fall in Imports than Exports (as already seen in the monthly trade data). Private Consumption did rebound sharply at 4.7% q/q, but less than the expected 5.1%, and follows a downwardly revised -8.1% in Q2, while Business CapEx dropped slightly more than expected 3.4% q/q following -4.5% in Q2. As Economy Minister Nishmiura noted the output gap remains very large at Y30 Trln, and will require a further substantial fiscal package, with Q4 GDP likely to be considerbaly slower. China’s data was definitely positive, with IndUstrial Production and FAI both just beating forecasts at 6.9% y/y and 1.8% y/y respectively, and while Retail Sales picked up to 4.3% y/y, they were well below the forecast of 4.9%, and are still well below year ago levels, with the Golden Week holiday not giving the sort of boost that many had expected. The fact that the PBOC conducted the largest monthly 1-yr MLF operation since 2016, to try and calm domestic money markets after last week’s SOE defaults, serves as a reminder that there remain plenty of challenges, even if China’s economy is performing much better than most others. On the events side of the equation, there are numerous ECB, BoE and Fed speakers, though Fed vice chair Clarida will probably be the only one of any note.

RECAP: The Week Ahead – Preview:

A new week arrives with a busy run of major economic data (US, China, UK & Japan), yet another deluge of central bank speakers and a ‘moment of truth’ rate move for Turkey’s central bank, with retailers dominating the US corporate earnings calendar, an OPEC+ Joint Ministerial Monitoring Committee, another ‘crunch’ week for UK/EU Brexit talks and an EU Summit to discuss joint efforts to combat the impact of the pandemic. While the hope of reaching a ‘holy grail’ vaccine for Covid-19 remains very much alive, the timelines for mass deployment suggest that the economic benefits would likely only kick in substantively in H2 2021. In the meantime the high, and in many cases escalating infection rates, with concomitant measures to restrict movement to contain the spread and per se hobble economic activity, is the unavoidable reality that markets have to contend with. Politically the questions are: a) will the changes in UK PM Johnson’s ‘kitchen cabinet’ facilitate reaching a trade deal with the EU, or is it a rear-guard action to regain support from increasingly restive Tory MPs (given one of the Tory party’s hallmarks is ‘internecine’ warfare, though this is also true of the Labour party); b) what signals will the formation of Biden’s transition team offer on key future policies; c) what do the unexpected round of defaults in China and the abrupt halt of the Ant Financial IPO signal in policy terms; and d) will the EU ever get around to actually implementing its ‘recovery programme’, and when it does, will it be too little too late? All of those issues and the current reality of the pandemic leave incoming economic data in a heavily subordinated position, and central banks primarily acting as a palliative for the ostensible ‘impotence’ of the collective global body politic. The OPEC+ Joint Ministerial Monitoring Committee will likely see some strong hints that the end of month policy meeting will delay the plan to increase production by some 2.0 Mln bbls, given that demand recovery will be further delayed by rising infection rates and lockdown measures. As an aside, a perspective paradigm from psychology that policymakers and indeed investors would be well advised to read up on is research on emotional dysregulation and somatization due to trauma, i.e. Complex Post-Traumatic Stress Disorder (C-PTSD) – above all in terms of the reactions and behaviour of individuals and groups to the trauma of the pandemic – see also here.

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