Macroeconomics: The Day Ahead – 23 November 2020

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

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

• Flash PMIs in focus as vaccine news continues to vie with infection rate  and lockdown headlines; BoE testimony, ECB Money Markets Conference,  US/China tensions; US to sell 2 & 5-yr
• Flash PMIs: manufacturing setback, bigger hit to services expected for Eurozone & UK; US readings seen lower, but expansionary
• Week ahead: US data dominates ahead of Thanksgiving in survey heavy week;  UK spending plans and Brexit deal negotiations in focus; ECB & Fed minutes

EVENTS PREVIEW

A relatively busy start to this week has the solid pick-up in Australia’s ‘flash’ PMIs, a robust rebound in South Korea Exports, but a weak very set of Thai trade data to digest, though the mixed news on lockdown measures from around the world, and a stream of headlines on vaccine rollout plans will be the focal point, along with further US/China tensions. Ahead lie Eurozone, UK and USA ‘flash’ PMIs, which in the Eurozone and UK are expected to see lockdown measures dragging Manufacturing lower, though mostly still expanding (except France) with the US marginally little changed, and large drops unsurprisingly seen in Services PMIs in the Eurozone and UK, with a smaller setback in the US. There is plenty of scope for some sizeable divergences with consensus forecasts, but these are moot, given that the drag on economic activity from rising infection rates and lockdown measures has long been anticipated, and the same applies to the array of UK and European national confidence surveys scheduled for the week. On the events side of the equation, there are BoE MPC testimony on the latest Monetary policy report and the ECB’s annual Money Markets conference along with numerous other central bank speakers. The US gets this week’s refunding under way with $113 Bln of 2 & 5-yr Treasuries, while Agilent Technologies tops the modest run of US corporate earnings.

RECAP:  The Week Ahead – Preview: 

Thanksgiving week is upon us, though for most it will be a case of being thankful that the 2020 nightmare is drawing to a close, and the hope that 2021 will be a good deal less challenging, rather than marking the start of the ‘holiday season’ and financial markets winding down ahead of year end, as it would normally do. Outside of the divergent pull of pandemic related news (infection rates/lockdown measures vs. vaccine progress) which will continue to be the dominant factor, the data schedule is not overwhelming, primarily featuring hard data from the US and a rash of surveys, which included G7 flash PMIs and Germany’s Ifo. Central bank speakers are once again very plentiful, with the latest ECB and Fed minutes also slated, while rates are seen on hold in Sweden and South Korea. Politically themes remain all too familiar: the transition in the US, Brexit trade deal negotiations, the incompetence of the misstep addicted UK government, and gridlock on implementing the EU recovery programme. The US dominates the govt bond auction schedule with $193 Bln of short and medium-dated coupons, while Italy tops the Eurozone run that also sees sales in Belgium & the Netherlands, with the UK offering 7 & 37 year Gilts. The corporate earnings season is largely complete in the US (and indeed elsewhere), with Deere and further retailer reports among the highlights.

– Due to the Thanksgiving holiday, much of the US data is packed into Tuesday and Wednesday, getting under way with House Price data and more poignantly US Consumer Confidence, above all in respect of the labour differential’s signal on current labour demand, with the headline index seen dropping from a stronger than expected 100.9 in October to 97.9.  Wednesday’s rush of US data may well see only a modest reaction, both due to the sheer volume of statistics, and the likelihood that many traders will be looking to lighten positions ahead of what will be for many a long weekend. Be that as it may Q3 GDP is expected to be unrevised at 33.1% SAAR, though Private Consumption is seen revised up modestly to 41.2% from 40.7%. Durable Goods Orders are forecast to post solid but slower gains of 0.9% m/m headline and 0.7% m/m Non-defence Capital Goods ex-Aircraft, mirroring the evidence from manufacturing surveys. Personal Income and PCE are forecast at Flat m/m and 0.3% m/m after robust gains in September, and mirroring earnings and Retail Sales data, while the Goods Trade Balance is anticipated to have widened very slightly to $-79.9 Bln. Weekly jobless claims may prove to be the most sensitive item after last week’s slight uptick in initial claims, with a marginal drop to 730K from 742K seen, though Continued Claims are expected to drop to 5.993 Mln from 6.372 Mln, but as has been the case for some time reflecting expiry of benefit eligibility, rather than a return to work.

Elsewhere, there are French Consumer Spending, expected to bounce back 3.5% m/m after sliding 5.1% m/m in September, Japan’s Tokyo CPI is seen dropping deeper into deflationary territory on all measures, and Germany’s Q3 GDP to be unrevised at 8.2% q/q. In Australia both Construction Output and Private CapEx are expected to have dropped again in Q3 (-1.9% q/q and -1.5% q/q respectively), with China’s Industrial Profits, South Korean Exports, Singapore and Taiwan Industrial Production providing other points of interest.

– The Fed and ECB minutes are already somewhat historical, given the seemingly incessant flow of speakers from both, which will continue apace this week, and the very strong signals about further easing from the ECB at its December meeting. Meanwhile the Fed now finds itself in a clinch with the US Treasury after Mnuchin’s to pull funding for some of the Feds’ backstop measures, in addition to its clear disappointment that the fiscal stimulus it has consistently called for has still not been delivered. The primary points of interest will be what hints there are on the next steps for the ECB in December, and what might, apart from a sharp tightening of financial conditions, be a trigger for the FOMC to consider either a change of tactics on existing measures, or other additional measures. But fundamentally, neither the Fed, the ECB, or indeed any other major central bank can change the fact that “whatever it takes” monetary policy can do nothing to change the course of the pandemic, nor the scars that it leaves, and can only offer the palliative care that they are already doing to offset stalled fiscal policy measures. Increasingly a much closer eye needs to be on macroprudential regimes, be that post Brexit regulation of the UK’s large financial sector, the Chinese authorities decision to stop the AntFinancial IPO, or the broad hints from ECB’s Schnabel last week about a tightening of non-bank financial sector regulations, and notably she will be the keynote speaker at this week’s ECB conference on Money Markets.

– On the political front, the drumbeat of ‘austerity’ appears to be stalking the corridors of power in London and Washington once again, which is quite remarkable for two regimes which have not covered themselves in glory in their management during this pandemic (neither have many others, but these two have excelled in displaying a leaden touch). Whether these measures would then be rescinded due to circumstances is less relevant, than the fact that it displays a total deficit of imagination about how to revive economies from the Covid shock, which bodes poorly. UK Chancellor Sunak will apparently be announcing public sector wage freeze, tax increases and other measures when he outlines UK government’s 1-yr spending review on Wednesday, and it will be interesting to see how markets balance this against a possible announcement this week of some form of trade deal with the EU. He is also set to announce the establishment of UK Infrastructure Bank, which is to be welcomed as long as it is not blighted as so much is in the UK by cronyism; it also about 10 years late, given that I and many others suggested this would be a good idea in the aftermath of the GFC. In the US, the question is how much more in the way of ‘scorched earth’ policy measures the outgoing Trump regime intends to announce, above all given that this is hardly the spirit of ‘Make America Great Again’, as Biden starts outlining his nominations for key govt posts this week. As for continental Europe, a ‘fudge’ has yet to be found to resolve the gridlock on implementation of the EU recovery programme, the need for which will become all the greater, if activity restriction measures are either extended or in some cases tightened going into the Christmas period. In economic terms, the question then becomes how much of a ‘march’ Asia can steal on Europe and North America.

– In the commodities and energy space, a close eye will be kept on the usual public and behind the scenes briefings about what will be agreed at next week’s OPEC+ meeting, with a deferral of the scheduled production hike for at least 3 months seen as likely, and against a backdrop of a sharp rise in US crude storage capacity utilization. The International Sugar Organisation (ISO) hold its conference against the backdrop of a substantial expected deficit this year due to drought and/or disease hitting production in the EU, Brazil and Russia, while the EU publishes its monthly MARS (Monitoring Agricultural Resources) bulletin on agricultural crop prospects. The Deere & Co earnings results will also be in focus, given its fortunes are seen as a solid proxy for the US agricultural sector, and follows a sharp upgrade to its sales forecast when it reported its Q2 results in August. Last but not least the International Mining and Resources Conference (IMARC) takes place all week, with a host of senior executives from the sector speaking, against a backdrop of heightened optimism for the sector’s prospects pinned both on China’s recovery, as well as the likelihood of a sharp increase in infrastructure spending from governments in the developed to help revive economies as they recover from the economic scars of the pandemic

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