Macroeconomics: The Day Ahead – 20 January 2021

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

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

  • Inflation data (UK, Canada, Eurozone, S. Africa) and US NAHB Housing Index dominate data run; busier US corporate earnings run; BoC, BNM and BCB all seen holding rates; Biden inauguration, China Standing Committee meeting and EC Euro ‘promotion plan’; German 30yr, US 20yr
  • UK: inflation edges higher, but post Brexit bottleneck impacts key to Q1 outturn
  • Canada: core CPI to remain just below BoC target; BoC to hold policy,  re-emphasize forward guidance as s-t growth risks crystallize
  • Yellen offers few surprises on fiscal proposals; but overcoming long term Congressional polarization still the critical challenge

EVENTS PREVIEW

A much busier day for data and events has a raft of inflation data (UK, South Africa, Canada & final Eurozone) and the US NAHB Housing Market Index, accompanied by rate decisions in China, Malaysia, Canada and Brazil, plenty of US corporate earnings and bond auctions in Germany (30-yr) and USA (20-yr). On the political front there are the inauguration of Biden as US president, the meeting of Standing Committee of China’s National People’s Congress (news from this tends to trickle out over following weeks), and the EU Commission paper on boosting international role of the Euro. Yellen’s nomination hearing testimony was in principle unsurprising, calling for a big fiscal stimulus package (beyond the initial $1.9 Trln Covid-19 related package, and estimated in the $2.0-3.0 Trln area), trying to assure that it would not be financed by tax hikes, though this is sleight of hand rhetoric as she also basically called for a partial reversal of Trump administration tax cuts. It emphasized environment and climate change related issues, but in the first instance the Covid-19 package will be key: a) it will be a litmus test to see if a deeply divided Congress can pull back from partisan divisions that have bedevilled the US legislature for many a decade; b) will it ultimately help to bring the pandemic under control so that economic and social activity gets back to a more normal level? There is a limit to what money can achieve on this front, social responsibility has a big role to play (this applies across the world). If it does, then markets will eventually have to confront the point that central banks will then need to wind back some of their back stopping measure, and current levels of leverage will need to be wound back, and in the real world of business, there will need to be balance sheet reconciliation, and a roll back of measures that currently put insolvencies and foreclosures on hold. How this plays out in labour market terms will be critical, particularly given difficult choices on how to restore profitability in what will inevitably be a changed and evolving operating environment.

In terms of today’s run of inflation data, the UK data did pick up, but remains in headline and core terms a long way from the BoE’s target, with PPI offering no signs of meaningful pipeline pressures. That said the real test will come with the Q1 readings, and the extent to which the numerous reported bottlenecks related to the post Brexit situation see some pressures emerge, food being the most obvious, even if these prove to be transient in the longer run. Elsewhere Eurozone CPI will be confirmed as being way below target, South African CPI remains comfortably enough below the 4.0% target to justify the SARB’s very accommodative stance (above given a very weak economy. While some core measures of Canadian CPI are slightly adrift of the BoC’s 2.0% target, the profile over the past 3 years had been remarkably steady and generally close to target, allowing the BoC plenty of continued room for manoeuvre to focus on growth and labour market dynamics. In that respect today’s BoC meeting is likely to see rates held at 0.25%, current QE volume and forward guidance maintained. Canada’s economy is expected to contract around 2.0% in Q1, and along with December’s larger than forecast 63K drop in Employment, it confirms that the downside risks governor Macklem identified in December are crystallizing, above all due to high infection rates and accompanying movement restrictions. But in the short-term the key question on inflation in developed countries will remain unanswered, namely whether the reflation that accompanies economies’ recoveries from the pandemic proves to be largely transient and mostly bottleneck related, or whether the profound changes to the mechanics and dynamics of the global economy due to the pandemic engender price pressures due to sharp shifts in medium and long-term demand patterns, and related supply chains. Last but not least, the US NAHB Housing Market Index is seen unchanged at 86, close to record highs, and continuing to underline that this is the bright spot in the US economy.

 

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