Macroeconomics: The Day Ahead for 12 December

The run of UK monthly GDP and activity data, accompanied by another sharp fall in Rightmove House Prices dominate the day’s otherwise light calendar, with China’s Credit Aggregates (posting a very tepid seasonal bounce), Japan’s PPI and Q4 BSI survey also to digest, and with Indian CPI and Industrial Production (see preview in Week Ahead) and the monthly US Treasury Budget data ahead. Further lifting of Covid related movement restrictions in China will also be in focus, as authorities deactivate a mobile app used to track the travel histories. But the fact is that this, as was to be expected, is resulting in a further surge in Covid cases, and has already started to put its rather fragile healthcare system under a great deal of strain, with queues building rapidly outside clinics and hospitals. 

The big freeze in Europe, with a similar pattern of arctic weather in North America will keep the focus on NatGas and Power Prices. BoC’s Macklem is the only central bank speaker scheduled, while the US gets its refunding exercise underway with $72 Bln of 3 & 10-yr T-Notes.

** U.K. – October monthly GDP **

The slightly better than expected 0.5% m/m October rebound and -0.3% q/q for the 3 months to October was paced by stronger than expected rebounds in Index of Services (0.6% m/m) Manufacturing Output (0.7% m/m) and Construction Output (0.8% m/m), which is welcome but does change the near-term outlook. It does however point to the recession being shallower than the BoE’s and many others’ very gloomy forecasts, but that may prove to be very cold comfort, given little indication of anything on the horizon that would give the UK economy a much needed kickstart, even if rates are not raised as much as is currently being discounted.

RECAP: The Week Ahead – Preview:  

The week’s schedule has Fed, BoE, ECB & SNB central bank meetings as a focal point, along with a deluge of data from the US (CPI, Retail Sales, Industrial Production; NFIB, NY & Philly Fed surveys), China Retail Sales, Industrial Production, FAI, Property Investment) and UK (monthly GDP, CPI, RPI, Unemployment, Average Earnings, Industrial Production, Trade, Construction Output, Retail Sales), which are accompanied by G7 ‘flash’ PMIs, Japan’s Q4 BoJ Tankan survey & Trade, Australian Unemployment, German ZEW survey, and India’s CPI, WPI and Industrial Production.

In the political arena: there is an EU leaders’ Summit, and ahead of that an EU Energy Ministers meeting to discuss the gas price cap and other energy crisis measures, with major divisions still very evident. China holds a key Central Economic Work Conference, which will be closely watched given the volte-face on Zero Covid and this week’s colossal CNY 750 Bln ‘Special’ 3-yr issuance that is being raised to give the economy a kickstart, and there will also be interest in the meeting of US & Chinese officials, following up on the G20 Biden-XI meeting. After a period of relative calm, the ruling UK Conservative party is once again backsliding into infighting, a reminder that another govt crisis is still just a heartbeat away. Both the US House Financial Services and Senate Banking Committees hold initial hearings into the collapse of crypto exchange FTX, and major oil companies will hold another meeting with US Energy Secretary Granholm. Developments in the war in Ukraine continue to require careful monitoring.

In the commodity space, the IEA and OPEC publish monthly outlook reports, while Brazil’s Conab publishes its quarterly Coffee S&D report, after slashing its output estimate at the end of Q3, and with drought and frosts leaving little in the way of a consensus on output, amid very tight supplies. France’s Agriculture Ministry also publishes crop production and winter plantings estimates. Cold weather in Europe will continue to be a focus, with forecasters warning that the blast of cold weather from the Arctic now engulfing northern and central Europe is moving over to North America, with California’s already experiencing a cold snap which has prompted a parabolic surge in local natural gas prices.  

As for the ‘macro’ picture, US CPI has been the prompt for some violent moves in risk assets in recent months, and per se is guaranteed top billing, and coming a day ahead of the FOMC meeting it will probably be pivotal. The consensus looks for a 0.3% m/m rise for headline and core, which would see y/y rates fall respectively from 7.7% to 7.3%, and from 6.3% to 6.0%. Aside from benign base effects, lower energy prices (above all gasoline) will bear down on headline, though as Friday’s PPI data highlighted, the question is how much of this will be offset by persistent Food price pressures. Core CPI will continue to benefit from a drag from medical insurance, with Used Car Prices likely a smaller drag than in October, but retailer discounting to shift still bloated inventories should also help to offset upward pressure from Shelter, which should start to ease going into Q1 2023, but core Services ex-Shelter will likely remain quite ‘sticky’. But for markets it will be a very binary perspective of ‘above or below’ expectations, however myopic this may be. Retail Sales are expected to fall -0.2% m/m in headline terms after October’s unexpected surge, with weaker auto sales and falling gasoline prices weighing, though the core ‘Control Group’ measure is also expected to drop 0.1% m/m, with at best a marginal boost from Black Friday and Cyber Monday. Industrial Production is seen eking out a marginal 0.1% m/m increase, boosted by energy and autos, but Manufacturing Output is seen down -0.2% m/m, echoing the ISM and other surveys, while the NY & Philly Fed Manufacturing surveys are seen at -0.5 and -10.0 respectively, with easing supply chain and price pressures evident, but demand outlooks deteriorating. The NFIB Small Business Optimism is also forecast to edge down, with the already published Employment components signalling downside risks, in so far as hiring intentions and compensation plans slipped to 18-20 month lows.

China’s busy run of activity data are primarily going to underline the case for both rolling back Zero Covid rules (which will weigh on this run of data) and for fiscal stimulus, along with measures to prop up the very beleaguered property sector. Industrial Production is seen dropping to 3.7% y/y from October’s 5.0%, while Retail Sales are forecast to drop -3.9% y/y from -0.5%, with Fixed Asset Investment expected to ease to 5.6% y/y from 5.8%, and Property Investment to post a slightly larger -9.2% y/y fall, with the Unemployment Rate seen at 5.6% from 5.5%. Credit aggregates are expected to post a seasonal bounce, but remain below year ago levels, with the PBOC’s 1-yr MTLF operation expected to be at an unchanged 2.7% rate. While there are downside risks to the forecasts, the run of data will tell us little that is not already known, what will be key going forward is how the fiscal stimulus is targeted, how much Zero Covid rollback can boost Private Consumption, and whether and when there will be any material recovery in the property sector.

October monthly GDP and the accompanying run of activity data gets a very busy week for UK statistics, though the anticipated 0.4% m/m rise in GDP and 0.5% for the Index of Services follow falls of -0.6% and -0.8% due to the period of national mourning for Queen Elizabeth II. Industrial Production, Manufacturing and Construction Output are seen little changed. Of greater interest will be the labour and inflation data (the latter not including PPI due to compilation issues). November HMRC Payrolls are seen slowing to a still solid 42K (vs. Oct 74K), though these have generally been surprising on the upside in recent months, but the focus will be on Vacancies (falling but still way above pre-pandemic levels) and October Average Weekly Earnings seen edging up 0.1 ppt to 6.1% y/y and 0.2 ppt to 5.9% y/y; however this is wholly due to base effects given a sharp deceleration in October 2021. While this remains well above long-term nominal trend rates, it will a) still be heavily negative in inflation adjusted terms, and b) echo survey data suggesting the rise in wage settlements has peaked, and is edging down, even if the current wave of national labour strikes may change this. Wednesday brings CPI, with a more modest 0.6% m/m allowing headline y/y to edge down to 10.9% from the utility price driven peak of 11.1% in October, but with core seen unchanged at a very lofty 6.5%, with food prices continuing to put a lot of pressure on headline, and services on core, despite some easing in non-food goods prices. Base effects will start to kick in heavily in Q1, even if April 2023 will see yet another boost to household energy prices. Retail Sales round off the week with a further 0.3% m/m rise expected (following October’s 0.6%, ex-Auto Fuel 0.3%), predicated on an increasingly typical early start to Christmas shopping, and a sharp 5.0% jump in CHAPS debit and credit card spending, with govt energy bill support payments perhaps adding to the boost. On net the data will likely imply a rather shallower downturn than the run of gloomy forecasts have suggested.

The week ends with G7 ‘flash’ PMIs, which for the Eurozone, UK and US are all expected to remain below the key 50.0 level, but little change from final November readings; details on Orders/New Business, Prices and Outlooks will be key. Other surveys are forecast to show Germany’s ZEW Expectations recover further to -26.4 from -37.0, as ever tracking the rebound in the DAX, while French Business and Manufacturing Confidence are seen little changed. Japan’s Q4 Tankan is seen showing a slight slip in Manufacturing DIs, but a marked improvement in Non-manufacturing, with All Industry CapEx still seen very buoyant at 20.9% (vs. Q3 21.5%). India’s Industrial Production is expected to drop back into negative territory (-0.6% y/y) after a base effect gain of 3.1% in September, premised on falling exports and a flat reading for Infrastructure Industries Output, despite a still buoyant manufacturing PMI profile, while CPI is seen edging down to 6.36% y/y, and WPI to fall back to 6.2% y/y from 8.4%, on a combination of easing food and fuel prices. Australian labour data are projected to show a historically very ‘average’ 17K rise, with the Unemployment Rate holding at its low of 3.4%. But in sum, the busy run of data will offer little insight into a very uncertain 2023 economic and indeed geopolitical outlook, and the extent of any recession in any given country or region.

The Fed kicks off the week’s 24-hour rush of central policy meetings on Wednesday and Thursday. The consensus looks for a 50 bps hike to a 4.25/4.50% Fed Funds target, with the dot plot as ever the initial point of focus, and a higher 2023 (median) peak of 4.9% (also currently discounted by markets), and likely to suggest rates will start to fall in 2024 to around 4.0% and 3.0% in 2025. As important will be the FOMC participants’ median forecast for inflation, which will be hiked by 0.2/0.3 ppts for 2022 and 2023 (Sept estimate 5.4% and 2.8% respectively), with 2024 and 2025 estimates held at 2.3% and 2.0%; adjustments to Unemployment estimates will likely be no more than tweaks. Given some divergence in Fed speakers’ views from the near unanimity for much of the year, the range of estimates may also widen. The message from Powell is likely to be that a slower pace of rates hikes does not mean any easing in their fight to bring inflation down, but gives them room to assess the cumulative impact of their policy tightening. The question is whether the statement or Powell offers any tweaks or refined guidance to the line: “The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time”, i.e. is a view emerging on what terminal rate would be “sufficiently restrictive”.

The ECB is also expected to slow its rate hike pace to 50 bps, with the Depo rate rising to 2.0% and the Refi rate to 2.50%, and the focus on any tweaks to the October statement which stated that ‘with this third major policy rate increase in a row, the Governing Council has made substantial progress in withdrawing monetary policy accommodation.’ There will be a fresh set of staff forecasts, which will likely see inflation forecasts revised higher for 2022 and 2023, and perhaps a little higher for 2024, with an initial forecast for 2025 presumably suggesting inflation around the 2.0% target (anything materially higher would obviously send a very hawkish signal). But, having made substantial adjustments to its TLTRI III term in October, the key question for this meeting is the timing and size of quantitative tightening (i.e. balance sheet reduction), with hawks and doves clearly at odds on the timing of the start of QT; hawks favouring an immediate start in Q1, while doves favour the end of Q1. A compromise will likely see a tapered start, in which some of the average EUR 29 Bln per month (in 2023) of maturing APP debt is not reinvested, before halting reinvestment completely at some point in Q2. Active QT sales are very definitely not going to be on the menu in the short-term.

As for the Bank of England, the consensus looks for a 50 bps hike to 3.50%, though a 3-way split is expected (3 for 75 bps, 4 for 50 bps and 2 for 25 bps, with some even mooting that one of the two arch doves (Dinghra & Tenreyro) might vote for no change, i.e. a four-way split. The point of interest will be whether it again leans against now lowered (relative to November’s meeting) market expectations, having stated that: ‘The majority of the Committee judges that, should the economy evolve broadly in line with the latest Monetary Policy Report projections, further increases in Bank Rate may be required for a sustainable return of inflation to target, albeit to a peak lower than priced into financial markets.’ It will also be interesting to note any adjustments to its rather overly pessimistic growth forecasts, and the week’s busy run of data may well prompt some adjustment to market expectations for this meeting.

Elsewhere Switzerland’s SNB is also expected to hike rates 50 bps to 1.0%, Norway’s Norges Bank 25 bps to 2.75%, Banco de Mexico 50 bps to 10.50% and Colombia’s Banco de la Republica 100 bps to 12.0%.

It will be a seasonally typical modest week for earnings, with Accenture, Adobe, Industria de Diseno Textil (aka Inditex) and Oracle among the highlights according to Bloomberg news, and with Friday also seeing ‘Triple Witching’ expiry of US stocks and index futures and options. Govt bond supply and corporate issuance has largely wound down for year-end, above all in Europe, with China’s CNY 750 Bln ‘Special’ 3-yr bond along with CNY 140 Bln of 3, 7 & 50-yr topping the auction schedule, while the US sells $90 Bln of 3, 10 & 30-yr, UK 3.0 Bln of 10-yr and Italy offers EUR 7.0 Bln total 2, 4 & 7-yr.