Macroeconomics: The Day Ahead for 13 January

Within the regular realm of macro and micro market inputs, US CPI and the official start of the US Q4 earnings season (via JP Morgan Chase and BoNY Mellon) top the day’s agenda, with Japan’s services (economy Watchers) survey and UK BRC Retail Sales to digest, and a smattering of central banks speakers to round off proceedings. A busy day for government debt auctions sees sales in the US, UK, Germany, Austria and Italy. But with the US administration deploying a whirlwind of measures and legal initiatives to try and garner votes at November’s mid-term elections (though the Republican party is increasingly at odds with itself, the medium-term fate of Venezuela very uncertain, and threats against other states perhaps most notably Colombia, and Iran seeing the biggest popular insurrection since the 1979 revolution, politics continues to be a feeding frenzy for left-field items. That said a quick trawl through the attached FX, US Bond and Equity volatility indices might give the impression that markets are in their summer doldrums, or perhaps that the investing and trading fraternities are rabbits caught in the headlights of all these political tensions.

Uncertainty, Ambiguity and constant Disruption are the new normal. The latest US threat to impose 25% tariffs on any country doing business with Iran most obviously would impact China and India, and implicitly threatens the current US/China ‘trade truce’, and in the later case puts up yet another barrier to an India/US trade agreement, as well as potentially creating some upward pressure on oil prices. The question in policy consistency terms would be whether Russia, which has imported more than USD 3.0 Bln of arms (or arms manufacturing licenses), which have been deployed in Ukraine from Iran over the past couple of years, would also be included. In Japan, it should have come as no surprise that new PM Takaichi is considering snap lower house elections for February, especially given that she is riding high in current opinion polls, but with the supplementary budget still needing ratification in the Diet, this may create some financing issues, given that sunsetted legislation allowing deficit financing debt issuance has to be renewed by March.

** U.S.A. – December CPI **

Much of this week’s run of US statistics are ‘old’ catch-up reports for things like Retail Sales, PPI, New Home Sales, leaving the primary focus on today’s CPI. The distortions from the lack of an October CPI report render yr/yr readings largely meaningless, until they are unwound over coming months, with forecasters looking for an elevated 0.3% m/m rise for both headline and core, on the back of tariff pass through effects, and upside risks due to the artificial distortions from the Oct/Nov data.  Given that mean reversion risk, the temptation will be to average the data, which would more than likely show a Q4 average monthly reading of around 0.2%. One yr/yr element of CPI does requires attention, namely the surge in electricity prices which hit 6.9% in November vs. 5.1% in September, with upward pressure on prices from data centres playing a key role – a perhaps small reminder that gasoline prices are not the be all and all of consumer energy inflation concerns. Given the latest dramatic judicial intervention and the incessant and escalating pressure, it is difficult to see the Fed making any adjustment to interest rates in the next few months, even if the die hard ‘doves’ will likely continue to vote for further rate cuts. But an upward drift in bond yields due to the political interference looks rather inevitable.