Macroeconomics: The Day Ahead for 11 October

While the data schedule is relatively busy, with UK BRC Retail Sales and labour data, Australia NAB Business and Westpac Consumer Confidence and Japan’s Economy Watchers surveys to digest ahead of Italian Industrial Production, US NFIB Small Business Optimism and Brazil IPCA IBGE inflation, the events scheduled will likely dominate. IMF/World Bank meetings continue with a raft of central bank speakers, both there and elsewhere, and the IMF’s World Economic Outlook update, which will see broad downward revisions to GDP and trade forecasts, and upward revisions to inflation forecasts. It’s also quite a busy day for govt bond auctions, with the Netherlands selling 7-yr, UK 29-yr Index-Linked and the US 3-yr. The BoE’s measures to avoid a pension sector meltdown were in theory due to expire at the end of the week. Its decision yesterday to double the volume of daily purchases to £10 Bln only saw £853 Mln of offers accepted, and with the to-date total at £13.0 Bln, there is clearly a much deeper problem and made today’s decision to include Index-Linked Gilts (not previously included as an asset class in any QE measures) inevitable. Primarily this means that in order to meet the LDI collateral ‘margin call,’ pension funds will need to raise in the range of £100-150 Bln (by this Friday), according to estimates. Given the unprecedented volatility at the long end of the Gilt market – see attached chart and UK money market table – this is more than a very tall order, the more so given that the BoE still wants to stick with its plan for “active QT” (outright selling of Gilts), even though postponing this for at least a quarter would seem to be one measure that should help to ease some of the pain. But it has to be stressed that like the 2008 GFC crisis, this is a solvency crisis, and was indeed presaged by former BoE Chief Economist and before that Director for Financial Stability Andy Haldane in his article ‘Halfway Up The Stairs’ … put simply: “read, mark and inwardly digest”, it is effectively the text for this crisis.

** U.K. – Aug/Sep labour market data **

Once again labour market readings have proven to be stronger than forecasts, with HMRC Payrolls holding steady at 69K against forecasts of a 35K rise, even if the far-from-reliable Claimant Count rose 25.5K (but revisions have been consistently better than originally reported data). The less timely ILO Unemployment Rate posted a fresh record low at 3.5% against forecasts of no change at 3.6%. Average Weekly Earnings jumped slightly more than expected to 6.0% y/y from 5.5%, as did core earnings (5.4% y/y from prior 5.2%), but obviously and more importantly remain deeply negative in inflation adjusted terms. But as the discussion above on the UK’s LDI crisis underlines, this is all rather moot, and in no small a reflection of a very high level of labour market inactivity, primarily due to long-term illness, in turn, due to far too little preventative care in the NHS, for which funding issues have to bear some of the blame.

** U.S.A. – Sep NFIB Small Business Optimism **

The NFIB survey is seen little changed at 91.6, after a slightly larger than expected rebound to August 91.8 from July’s 89.9 and the recent cyclical low of 89.5 in June. The already published labour sub-indices suggest some easing in hiring difficulties and compensation plans, but a further rebound in Plans to Hire, which on balance should be positive for the headline outturn. But as has been very clear, the modest rebound in the headline in recent months has been primarily driven by falling gasoline prices, which have rebounded slightly, and may again weigh on or at least restrain the still very pessimistic ‘Expect Better Economy’ sub-index. which bounced from an all-time low of -61% in June to a still very negative -42% in August.