Macroeconomics: The Day Ahead for 12 January

The week ends with a bang in data and events terms, with pretty much something for everybody across the spectrum of financial markets. There are China’s inflation and trade data, UK monthly GDP and French Consumer Spending to digest, while ahead lie India’s CPI and Industrial Production, and US PPI. There will be a smattering of Fed and ECB speakers, while agricultural commodities will be focussed on monthly S&D reports via way of China’s Agriculture Ministry’s CASDE and the USDA WASDE, as well as USDA Q4 Grains and Oilseeds stockpiles.

The US Q4 earnings season gets under way with the usual array of financials headlining: Bank of America, Bank of New York Mellon, BlackRock, Citigroup, JPMorgan Chase & Wells Fargo, accompanied by Delta Air Lines & UnitedHealth. Overall Q4 S&P 500 earnings growth is seen at 1.3% y/y, which suggests a second consecutive quarter of modest earnings growth after a protracted downturn. But with a current forward 12-month P/E ratio of 19.2 well above 5 and 10-yr averages of 18.9 and 17.6, results will need to be impressive to support current valuations, let alone driving the S&P 500 above the key current psychological barrier of 4,800 towards the nearby all-time high of 4,818.62. This is perhaps also all the more so the case, given that last week’s AAIA data showing bullish sentiment at 48.6%, a tad lower from December’s record, and well above the longer term average of 37.6%. In terms of the run of bank earnings, expectations are that most will report weaker earnings, on the back of higher funding costs, rather weak trading revenue, high levels of expenses and soft deal related fee income; but the focus may well be on outlooks above all loan loss provisions, deposits and net interest income, which may well improve given that recession risks appear to be fading. That said, analyst expectations for the sector have been steadily revised higher over the past 6 weeks, thus leaving the bar rather higher than most other sectors where expectations have been lowered.

Next week brings a broad swathe of activity data (including Retail Sales and Industrial Production) in the US and China, the latter also has Q4 GDP which is forecast at 1.0% q/q 5.2% y/y (vs. Q3 1.3/4.9%). The UK will focus on labour data, CPI, Retail Sales and RICS House Prices, with Germany seeing PPI and ZEW survey; Japan PPI, Machinery Orders and National CPI; Australia Unemployment and, Canada CPI and Retail Sales. On the central bank front, the Fed publishes its Beige Book, the ECB December policy meeting minutes and the BoE Q4 Credit Conditions and Bank Liabilities surveys, while China’s PBOC holds its monthly 1-yr MTLF operation. There will also be a much higher volume of central bank speakers, a number of whom will be at the week-long Davos World Economic Forum. The US Q4 earnings season will gradually kick into gear, still heavily dominated by financials (Goldman Sachs and Morgan Stanley inter alia), with a slow trickle of non-financials headlined by Alcoa, PPG Industries and Schlumberger.

** U.K. – November GDP and activity data **

– While GDP was better than expected at +0.3%, reversing October’s similarly sized fall and paced by a stronger than expected 0.4% m/m gain in Services, the 3-month reading was still flat, with the ONS suggesting that less strike activity in Healthcare and Transport paced the Services recovery. The latter underlines that the report is not suggesting ‘green shoots’ in the demand (above all consumer) picture. Industrial Production was in line with forecasts, but Construction remains weak with Output registering another modest -0.2% m/m against forecasts of +0.2%. Overall the data does little to change the picture of an economy flirting with recession.

** China – December CPI, PPI and Trade **

– While overall marginally better than expected, there was nothing to really cheer in China’s data run. CPI and PPI remained deflationary, with the pick up in CPI (0.1% m/m -0.3% y/y) paced mostly by less Food price deflation, which also helped to edge up PPI along with raw materials prices. Trade data were perhaps a little more encouraging with both Exports (2.3% y/y) and Imports (0.2%) eking out small gain, the latter boosted by domestic infrastructure spending, as well as a jump in coal imports ahead of the winter heating season in part due to domestic output constraints, as well as the downturn in prices. It would be premature to suggest that the rise in exports suggests a turnaround in external demand, above all given the boost from benign base effects. While there will be speculation about a further rate cut at Monday’s PBOC 1-yr MTLF operation, it will likely be no more than 10 bps, and while there are likely to be further targeted reserve requirement cuts, the burden remains on fiscal measures to boost the economy, given that the lack of consumer and business confidence continues to ensure weak demand for credit, rather than interest rate levels.

** India – December CPI, November Industrial Production **

– Headline CPI is expected to rebound modestly further to 5.86% y/y from November’s 5.55%, with the rise paced by a combination of a slightly adverse base effect and further pressure on some fruit and vegetable prices due to shortages, which will be reversed in January. Core CPI (last 4.1% y/y) should however continue its downward trajectory, given downward pressures on a good many input prices, including freight. Industrial Production will again be a story about colossal base effects as was the case in October, with a sharp fall to 3.4% y/y expected after spiking to 11.7% in October, with 2022 October Production having dropped -4.1% y/y, before spiking back up to +7.6% in November, and largely a function of the timing of the Diwali holiday. While some headwinds for the sector are emerging due to tighter financial conditions and softening external demand, these should prove to be at least partially offset by ongoing govt subsidies, continued infrastructure related demand, as such even a large downside miss should not be over interpreted.

** U.S.A. – December PPI **

– Yesterday’s upside surprise on CPI offered a very timely reminder that the path back to the Fed’s 2.0% inflation target will remain bumpy, above all due to the stickiness of Services inflation. PPI is expected to rise 0.1% m/m headline and 0.2% m/m core, with y/y rates at 1.3% (vs. prior 0.9%) and 2.0% (unchanged), per se underlining that pipeline disinflation in core goods prices has largely run its course, as was evident in CPI. One notable wild card in today’s report could be construction related prices, which may see some additional upward pressure from unseasonably warm weather given higher levels of output than would normally be expected.