Macroeconomics: The Day Ahead – 16 September 2020

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

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

• Digesting Japan Trade and UK inflation readings, awaiting Eurozone Trade,  US Retail Sales, NAHB Housing Market Index and Canada CPI; FOMC meeting  in focus, UK and Germany to auction debt
• UK CPI: above forecast, but more importantly hitting a 5-yr low
• US Retail Sales: another solid headline gain expected, but end of PPP  benefits, and weak ‘back to school’ spending skew risks to downside,  above all ‘control group’
• US NAHB Housing Index seen holding at all-time high, changing demand  and low rates underpin
• FOMC: dot plot flat as far as the eye can see, forecasts for GDP and  jobs to see upgrade, but overall tone likely to emphasize downside  risks; ‘guidance’ on AIT framework expected

EVENTS PREVIEW

A busy day for statistics accompanies the FOMC meeting and press conference, with Brazil’s central bank expected to hold rates at 2.0%, while the govt bond auction calendar has UK 10-yr and off the run German 30-yr (2048). In data terms, there are the run of Japan’s Trade and the full gamut of UK inflation data to digest, while ahead lies Eurozone Trade, Canadian CPI, and in the USA: Retail Sales, NAHB Housing Market Index and Business Inventories. Political developments (Brexit, US elections and tensions with China) continue to pepper market narratives along with pandemic related news, even if the latter appears to see a skew in reaction terms, with hopes for a vaccine proving sensitive, and the clear evidence that there is little or sign of the spread being brought under control, though thankfully mortality rates are clearly improving, as the medical fraternity refines treatment processes. In terms of the overnight data, the UK inflation data were somewhat higher than expected, but the fact is that CPI stands at a 5-yr low, and this will not have any impact on the expected no change MPC policy decision tomorrow. Japan’s Trade data saw a modestly smaller than expected fall in Exports, with a boost to tech sector exports to China offsetting continued weakness in exports to the US (above all auto parts, construction machinery) and Asia, but overall continue to suggest a substantial drag from external demand going forward.

U.S.A. – August Retail Sales / Sept NAHB Housing Market Index

– Following on from yesterday’s weaker than expected Industrial Production and Manufacturing Output, which suggested the recovery in the sector may be plateauing, today’s Retail Sales could prove to be critical in terms of recovery expectations. This will be the first set of spending data since the expiry of the $600 supplementary unemployment benefits at the end of July, and will also suffer from an adverse seasonal adjustment as this year’s ‘back to school’ spending will likely be lacklustre, doubtless accounting for the much lower forecast (0.3% m/m vs. July 1.4%) for the ‘control group’ measure, relative to an expected modest slowdown in headline (1.0% vs. 1.2%) and other core measures, ex-Autos & Gas 0.9% m/m vs 1.5%. A weak outturn would at least put some pressure back on Congress to take action on a fiscal package, though the record of Congress since the GFC outside of moments of extremely acute distress is extraordinarily poor. The NAHB Housing Market Index is expected to hold at its all-time high of 78, with ultra-low mortgage rates and pandemic driven changes to demand for single family homes (i.e. moving to suburban and out of town homes from apartments) continuing to underpin the housing market.

U.S.A. – FOMC meeting

– This is the first meeting following the shift in the Fed’s policy framework to Average Inflation Targeting (AIT), though as previously noted, the Fed (and other major central banks’) policy action has for a long protracted period been dictated by financial conditions. There will probably be some tweaks to its communications in respect of AIT, but it has already made two points abundantly clear: a) as long as markets and financial conditions remain as benign as they are currently (the recent equity turmoil being more of a storm in a teacup, from a policy perspective), it sees no immediate need to undertake any further substantive measures (why waste valuable and limited policy ammunition); b) rates and asset purchase programmes will remain in place until such time as Unemployment is back at pre-crisis levels (a very distant prospect). The dot plot and consensus forecasts may well see near term forecasts for Unemployment and growth revised substantially in light of better than expected data for Q3 to date, but inflation forecasts will signal clearly that the Fed will remain ultra-accommodative for the foreseeable future. There will also be a first set of forecasts for 2023, but with the outlook for 2021 being about as clear as mud, these will be no better than numbers plucked out of a random generator. The FOMC will again emphasize the need for further and very substantial fiscal stimulus, which remains gridlocked in Congress, and doubtless highlight downside risks to the outlook both from virus developments, as well as inaction from the legislature. Markets’ incessant tendency for wilful blindness and wishful seeing has prompted disappointment that Powell has continued to sound a downbeat note on the economic outlook at press conferences, they would be foolish not to expect more of the same at this meeting, and should in fact set their bar low in terms of expecting anything of substance from this meeting.

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