Macroeconomics: The Day Ahead – 9 October 2020

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

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

•  Overarching themes of pandemic and politics likely to dominate over  modest run of data; digesting China Services PMI, Japan Wages & Spending,  UK GDP and activity data, French Production; awaiting Italy Production  and Canada labour report; smattering of central bank speakers
• UK GDP & activity data: recovery momentum waning sharply despite fiscal  incentives; infection rate rise to muffle rebound going forward
• Canada labour data: solid Employment gain expected, but lagging behind  expected Q3 GDP surge
• Week Ahead: US and China data dominate, US Q3 earnings season kicks off

EVENTS PREVIEW

The focus remains firmly on the US election, pandemic and Brexit, and today’s run of data will, aside from the run of UK activity indicators, to get any real traction. From the overnight session, there are China’s Caixin Services PMI, Japan’s wages, UK GDP, Index of Services & Industrial Production (also from France, and Italy later this morning) to digest, while ahead lie Brazilian IPCA inflation and Canadian labour data. On the policy side of the equation, India’s RBI left rates unchanged as expected (unsurprising given stubbornly high CPI), with today’s speaker roster including BoE’s Haldane and Fed’s Barkin and Evans, all of whom have spoken recently. The US and China top next week’s run of statistics, with the former seeing Retail Sales, CPI, PPI, and NY Fed, Philly Fed & NFIB surveys, while China looks to Trade, credit and inflation data, with labour data due in the UK, adn the US Q3 earnings season kicks off with the usual run of major financials. The real challenge economically for markets is the impotence of monetary policy in the face of the pandemic, and the seeming inability of the political fraternity to craft anything more than ‘spaghetti principle’ (throw enough against the wall and some will stick) fire fighting fiscal policies. The bigger challenge is as Boston Fed’s Rosengren noted yesterday: “Clearly a deadly pandemic was bound to badly impact the economy. However, I am sorry to say that the slow build-up of risk in the low-interest-rate environment that preceded the current recession likely will make the economic recovery from the pandemic more difficult”. “The increased risk build-up, such as the reaching-for-yield behavior in commercial real estate or increased corporate leverage, make economic downturns including this one more severe. These are issues that I and others spoke about quite extensively in the years before the pandemic hit, in particular with respect to questions about the need for accommodative interest rates when the economy was doing well, and the potential for a build-up of financial stability risks.”  In other words, the analogy is that global economy is suffering from antibiotic resistance, made all the more ironic sadly by the desperate search for an effective Covid-19 vaccine(s).

Of the overnight data, the mortgage lending binge in Australia (Housing Finance surging a further 12.9% m/m after July’s 8.8%) and has more than recovered all of the April/May slump. The UK GDP, Services, Manufacturing and Construction Output all turned out lower than expected. It suggests that despite the boost from the ‘eat out’ campaign, the recovery momentum has lost ground substantially, with the 8.0% q/q in the Jun-Aug period underlining that the road back from the Q2’s precipitous -19.8% q/q is going to be an arduous one, particularly with the recent infection rate surge likely to weigh on the recovery in September and October data. As has been the case for some months, Canada’s labour data look likely to mirror the US report, with Employment growth seen slowing to 150K, while the Unemployment Rate is seen dropping to 9.8% from 10.2%, and as elsewhere implying that labour demand is likely to lag a long way behind an expected 45% q/q SAAR recovery in Q3 GDP, which given uncertainties related to the pandemic, the US election and a rather sluggish recovery in the energy sector should not come as a great surprise.

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