Macroeconomics: The Day Ahead – 8 February 2021

A quiet start to the new week in statistical terms has little more than Japan’s mixed services survey (current conditions unsurprisingly poor, outlook recovering quite sharply) and as expected German Industrial Production to digest ahead of the spurious Eurozone Sentix Investor Confidence and Taiwan’s trade data. The central bank schedule is busier with BoE Bailey facing some tough questioning in parliament on the LCF failure, while Lagarde testifies on ECB’s Annual Report, while on the political front, the Trump impeachment trial gets under way in the Senate. Outside of these items, there is little else in scheduled event terms, with markets once again opting for a willful blindness to incoming pandemic related news, focusing on flaling infection rates and US stimulus package hopes, and ignoring the withdrawal of the AstraZeneca vaccine in South Africa following a study showing it to be much less effective against the local mutation/variant.

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The new week has a busy schedule of data from the UK (Q4 advance GDP, the usual array of monthly activity indicators and BRC Retail Sales), but a modest one elsewhere, which features US and China inflation, German Trade and Industrial Production, and Japanese services survey and Wages. There are also plenty more major corporate earnings reports, the US quarterly Treasury refunding, as well as the Lunar New Year holidays in China and the rest of Asia, and the start of Carnival in Europe. The commodities space will be looking to the OPEC and IEA oil market reports, along with the WASDE and Malaysia Palm Oil monthly reports. Central bank speakers will again be plentiful, with a busy week for central bank policy meetings (mostly EM) expected to see Sweden’s Riksbank on hold, while in the EM space only Banco de Mexico is seen taking any policy action with a 25 bps cut to 4.0%. On the political front, the progress of the Biden’s US fiscal package will continue to be closely monitored, as will Draghi’s progress in forming a new Italian government, with the previously seemingly improbable, if not impossible spectre of support from both M5S and the League sending positive signals. The question is whether this is nominal support, or whether after decades of stasis in Italian politics, Draghi is finally able to bang political heads together and create some momentum for long overdue reforms. Otherwise it will be about vaccination progress (colossally uneven across the globe), and some also more encouraging news on falling infection rates, though still a very far cry from suggesting the war against the virus is being won.

Economic data remains little more than roadkill to markets that are dining out on central bank ‘largesse to excess’, and the wishful seeing and deep seated yearning for a vaccine driven economic recovery at the very latest in H2 2021, but the week’s inflation data from China and the US should still bear some scrutiny. In China CPI is expected to slip back to -0.2% y/y after December’s stronger than expected 0.1%, primarily due to base effects as CPI jumped up to and peaked at 5.4% (vs Dec 2019 4.5%). It would in fact have fallen a lot further were it not for current upward pressures in food prices due to a very cold winter and movement restrictions due to localized spike in infection rates (see chart attached), even if pork price pressures are starting to ease. China’s PPI on the other hand should at the margin be benefitting from base effects, but is expected to rise to 0.3% y/y from December’s -0.4%, which would be the highest reading since May 2019, and paced by broad based commodity price pressures, and will start to rise much more sharply in coming months due to adverse base effects (and not just in China, but through much of the world, as well as the rise in commodity prices (assuming these persist, as seems reasonable). As for the US, a 6.3% m/m rise in gasoline prices suggests some upside risks to an expected 0.3% m/m that would see the y/y rate edge up to 1.5% from 1.4%, while core CPI is seen up 0.2% m/m to push the y/y down to 1.5% from 1.6%; both obviously well below the Fed’s inflation target, for a tenth consecutive month in core terms. However underlying trends in goods and services are heavily divergent, as can be seen on the attached chart, with housing & shelter costs now heavily constraining services, while goods prices emerge from almost a decade of effectively flat lining. Central banks may be keen to look through all the noise in inflation data in coming months, but will find their forward rate and liquidity guidance severely challenged, if these trends persist into H2 2021, above if core CPI measures were to be elevated.

The other ongoing talking point will be the steepening in G7 yield curves, most notably in the US. While the latter is above all notable for rising long-term nominal (as opposed to real) yields, it is also due to short-dated yields being crushed by excess liquidity, and as noted last week, by the Treasury’s decision to halve the size of its Cash Balance at the Fed in Q1 (see charts).