Macroeconomics: The Day Ahead – 9 September 2020

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

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

• Digesting largely as expected China inflation, surge in Australia mortgage lending; awaiting US JOLTS job openings, Brazil/Mexico  inflation; BoC rate decision accompanied by BoE & ECB speakers;  Germany, Portugal and US to auction debt; equity woes in focus amid array of negative inputs
• Equity volatility a check-in with reality, but financial repression likely to encourage dip buyers; credit spreads still well behaved despite issuance deluge
• BoC likely to express very cautious optimism, warn of downside risks

EVENTS PREVIEW

The day’s data schedule looks busy, but its market moving capacity looks rather limited, with the China inflation indicators to digest from the overnight session, ahead of Mexican and Brazil consumer prices, and US JOLTS Job openings. The Bank of Canada policy tops the run of events with BoE and ECB speakers also due, while a busier day for govt bond sales has auctions in Germany, Portugal and US 10-yr. Whether any of these can distract equity markets that are navel gazing in the wake of an attack of vertigo in large cap tech along with banking and energy stocks, with concerns about US/China tensions, a clear loss of recovery momentum in much of the global economy, Brexit and the outcome of the November US elections also casting more than a ripple after the summer’s seemingly relentless euphoria, with the suspension of AstraZeneca’s COVID-19 vaccine trial dealing a further blow. But financial repression remains a lived reality, and the setbacks and volatility will doubtless encourage dip buyers, until such time as some real pain is inflicted on portfolios, which will probably require a much sharper widening in credit spreads, with yesterday’s wider spreads owing more to a deluge of issuance (14 issuers selling $20.35 Bln in USD IG Credit alone yesterday!). However a sharp rise volatility and wider spreads would also look to be a recipe for the Fed and other central banks to pump even more liquidity into markets – this is per se a vicious circle, though no amount of central bank liquidity will stave off insolvency.

Canada – BoC rate decision

This is a statement only meeting (though governor Macklem will speak about the economy tomorrow), with no change in its official rate (0.25%) or its asset purchase programme (C$5.0 Bln/week) expected. The statement will likely express some cautious optimism in light of a modestly smaller than expected contraction in Q2 GDP (-38.7% SAAR vs. the BoC’s estimate of -43%), and signs of a relatively robust bounce in July activity indicators. But as with other central banks, the BoC will stress that it still expects the recovery to a long hard road, and that risks to the outlook are heavily skewed to the downside, including an end to both mortgage deferral measures and employment protection programmes.

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