Macroeconomics: The Day Ahead – 7 December 2020

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

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

  • Brexit knife edge drama set to dominate, as record China trade surplus and better than expected auto led German Production are digested;  Eurozone Sentix Investor Confidence no more than a distraction, as further  ratcheting of US/China tensions plays against hope for US fiscal package
  • Record China trade surplus on strong exports a reminder that decoupling rather easier said than done, import data miss masks underlying strength in volumes
  • Week Ahead: busy week for data, but politics and pandemic related news to continue to rule the roost, as markets await ECB’s ‘big bazooka’


A busy looking calendar of data is primarily about digesting the China Trade and German production data, with only the rearview mirror of the Eurozone Sentix Investor Confidence likely to attract any attention ahead of tonight’s run of Japanese data. Politics has plenty to offer as outlined in the Week Ahead below, with markets needing to weigh up a further flare-up in US-China tensions and Barnier’s denial that a breakthrough has been made on fisheries in EU/UK talks, against talk that US Republican Senate leader McConnell is ‘on board’ with the bi-partisan $908 Coronavirus fiscal support package. Sadly it seems likely that the Brexit brinkmanship will likely continue with threat and counter threat with not an ounce of common sense or diplomacy in evidence. China’s record trade surplus on the back of a combination of robust shipments of PPE equipment, “home working” equipment, household and Christmas goods underscores the simple point that it will take considerable time before supply chains can become less China dependent, while the lower than expected imports data were mostly about lower copper and iron imports, though underlying volume growth remains robust.


RECAP The Week Ahead – Preview:

There is a lot of meat on the proverbial bone in terms of both data and events this week, the question is whether markets (above all “risk” assets) will continue to ride roughshod over anything negative on the view that ‘sunlit uplands’ in 2021 facilitated by ‘vaccines are the only show in town’, and any short-term issues only increase the likelihood of further fiscal and/or monetary ‘stimulus’ measures. Statistically China’s Trade data get the week underway, and China will also see CPI as will the US; monthly GDP and the usual raft of activity data top the UK schedule, while a busy week in Japan has Machinery Orders, Wages, Household Spending and the Economy Watchers survey, the Eurozone has various national Industrial Production & Trade readings and the German ZEW survey. A much anticipated ECB council meeting tops the central bank schedule, with the BoC meeting expected to hold policy, as is the case for a busy run of EM central bank policy meetings. But if the vaccine idyll in markets is to founder on the rocks of reality, it will likely be politics that throws a spanner in the works. The Brexit negotiations saga continues, US Congress will attempt to pass a stimulus package and a series of spending bills to keep govt open ahead of Friday’s deadline, while the EU Summit needs to find a compromise with Hungary and Poland to complete the long overdue ratification of its EUR 1.8 Trln 2021-2027 Budget and Covid-19 Recovery programme, and there are also the various (above all US and Australian) tensions with China, not to mention the Italian parliament’s vote on ESM reforms, where 5* opposition threatens to bring down the Conte govt. But the primary risk for markets is the extremely skewed and leveraged positioning, for which the attached charts of US Total Equity and Index Call Option Volumes, and US M1 as the key driver thereof, more than amply attests without any further comment. In the commodity space, there are the monthly US WASDE and China CASDE reports on agricultural supply and demand, accompanied by the quarterly equivalent Abers report in Australia, while oil markets will look to the EIA’s monthly Short-term Energy Outlook. A busy week for govt bond auctions is led by the US with $118 Bln of 3, 10 & 30-yr, with the UK, Germany, Italy, Spain and Japan also holding sales.

– The usual caveats apply to China’s trade data: month to month patterns are highly erratic and subject to frequent supply disruptions or bottlenecks, which the pandemic has only served to amplify. Be that as it may, both Exports (f’cast 12.0% y/y vs. Oct 11.4%), and Imports (7.0% vs. 4.7%) are expected to pick-up, with oil and iron ore potential drags, livestock may well boost, and soybeans/grains a sizeable wildcard, while base effects are neutral on Imports, but quite adverse for Exports. Base effects continue to be a key factor on China’s inflation, with an expected CPI drop to Flat y/y from 0.5% being due to the unwind of the surge in pork and to a lesser extent fruit prices last year; that said non-food prices (last Flat y/y) continue to signal soft demand, and PPI (exp. -1.8% y/y vs. -2.1%) implies little in the way of pipeline pressures, with a stronger CNY offsetting rises in commodity prices to a degree; monetary and lending aggregates are also due.

A busy week for UK data has BRC Retail Sales for November that are likely to slow due to lockdown, though there is anecdotal evidence suggesting consumers have been “going early” on Christmas purchases; the RICS House Price Balance is forecast to drop vs. October, but remain high at 62 (vs. 68) on any historical comparison. The “hard” data is for October, and expected to show a sharp deceleration at the start of Q4, with monthly GDP seen at 0.2% m/m, the Index of Services at 0.3% m/m and Industrial Production at 0.3% m/m, and all likely to turn negative in November, due to the national lockdown. But this has already been discounted by markets and the latest BoE policy moves. The open question is how weak will November and December be, and as importantly how much impact will Brexit related disruptions (deal or no deal) have in Q1.

In the US, both CPI and PPI are due, but again merely likely to reinforce the Fed’s lower for longer mantra, above all in the context of its Average Inflation Target, with CPI seen up 0.1% m/m headline and core, to edge headline y/y down to 1.1%, and leaving core unchanged at 1.6%. Core PPI measures are forecast to rise a very average 0.2%, with base effects accounting for an anticipated y/y rise in ex-Food & Energy to 1.5% from 1.1%. Rising infection rates and activity restrictions pace expectations of a relatively sharp drop in NFIB Small Business Optimism to a still very respectable 102.5 from 104.0, though the already published Employment measures posted gains across the board, most notably Plans to Hire at 21% vs 18%, and suggest an above forecast print. Preliminary Michigan Sentiment is however likely to continue to be adversely affected by the pandemic, with the consensus looking for a dip to 76.0 from 76.9, which would be the weakest since May. Consumer Credit, Treasury Budget and final Non-farm Productivity are also due.

For the Eurozone, the focus will be on German Production and Trade data, with the former seen posting another solid 1.6% m/m gain, though this would still leave it down 4.6% y/y, while the latter is forecast to show gains of 1.3% and 1.2% m/m for Exports and Imports, while the overall strength of the Dax in November predicates a forecast of 46.0 from 39.0 for ZEW Expectations, though the slightly more relevant Current Situation is seen dipping to -66.0 from -64.6. But as with the US and UK, it is what happens on the fiscal (recovery programme implementation) and monetary policy (ECB meeting) fronts that will be of greater importance this week.

A busy week for Japanese statistics is expected to see a sharp rebound in Household Spending (2.4% y/y from -10.2%), though this will be wholly attributable to base effects as October 2019’s 9.5% y/y surge falls out of the comparison, with a slight improvement in Labour Cash Earnings to -0.7% y/y from -0.9% also due to a beneficial base effect. Q3 GDP is expected to be unrevised at 5.0% q/q, despite an anticipated small upward revision to Business Capex to -3.1% from -3.4%. Of greater current relevance will be the ever volatile Private Machinery Orders (exp. +2.1% m/m vs. Sep -4.4%) and the services sector Economy Watchers Survey, which is forecast to dip from October’s 6-yr high of 54.5 to a still solid 52.5.

– The ECB meeting dominates the central bank calendar, with the Bank of Canada seen maintaining rates and QE at unchanged levels, and the Fed going into its ‘purdah’ period ahead of the Dec 15-16 FOMC meeting. For all that the ECB has put enormous weight on the need for immediate ratification and implementation of the recovery programme package, it will have to wait until after its policy meeting to see what comes of this week’s EU Summit. ECB speakers have erred on the side of talking up market expectations for this meeting, with a EUR 500 Bln top-up of its PEPP programme and an extension of at least 6 months, perhaps a year for both the PEPP and TLTROs, with Lane having suggested that it is also considering other measures, without being specific.  The strength of the EUR along with the adverse impact of the extended lockdown measures will doubtless feature in the rationale, and also be evident in downward revisions to its growth and inflation forecasts. But all of this puts it under pressure to exceed market expectations, and in a sense runs a) the risk that if the EU summit fails to ratify the budget/recovery programme, there will be pressure to do even more, and b) if that is the case perhaps begs deeper questions about benefits, efficacy and what would be left in terms of monetary ammunition, and longer term whether any of the cumulative measures can actually ever be unwound.


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