Macroeconomics: The Day Ahead for 15 December

Following on from the FOMC meeting yesterday, there are a further seven rate decisions today, with the BoE and ECB centre stage, but 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%, with China holding its 1-yr MTLF rate, Philippines’ BSP having hiked 50 bps, and Taiwan’s CBC 12.5 bps, all as expected. As is that were not enough, it is also a bumper day for major statistics, with the run of unsurprisingly downbeat China economic activity and property sector data to digest, along with Australia’s Unemployment, Indonesian Trade, German WPI, French Business Confidence and EU27 New Car Registrations. Ahead lie Canadian Housing Starts and Existing Home Sales, and more significantly in market terms, US Retail Sales, Industrial Production, NY and Philly Fed Manufacturing surveys, weekly Jobless Claims and Business Inventories. Throw into this mix, the seemingly bewildering and quick fire rollback of China’s Zero Covid policies, at the same time as the central bank cajoles banks into propping up the local bond market after a hefty wave of fund redemptions by retail investors, and the govt rolls over CNY 750 Bln in 3-yr Special Govt bonds. Given the wave of cold weather in North America as well as Europe, today’s EIA weekly report on U.S. NatGas inventories will also get plenty of attention.

** China – Nov Retail Sales, Industrial Production and FAI **

Be it the protests against Zero Covid restrictions, or today’s very weak set of activity data, it is clear that the sharp and rapid volte face on Zero Covid and the measures to offer support for the property were acutely needed, even if there are very obvious risks that the spike in new cases overwhelming China’s fragile healthcare system. Retail Sales were particularly weak at -5.9% y/y vs. expectations of -3.9%, while a sharp drop in Auto Output (-9.9% y/y) accounted for the weaker than expected 2.2% y/y for Industrial Production, and the rise in the surveyed Unemployment Rate to 5.7% (from 5.6%) attests to few companies wanting to hire in the face of so much disruption, weak demand and uncertainty. Given the spike in cases and associated disruptions to activity due to absences, it is very likely that December data will be even worse, and it may well not be until Q2 that any benefits of “re-opening” really start to show up in official statistics in a significant way. The net CNY 150 bln liquidity injection at today’s PBOC 1-yr MTLF operation (at an unchanged 2.75%) underlines the determination to try and reverse the current weakness, and further modest and targeted easing measures are very likely in Q1.

** U.K. – BoE MPC Rate Decision **

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 has on balance mitigated the risk of a majority opting for a 75 bps hike.

** Eurozone – ECB Rate Decision **

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.

** U.S.A. – FOMC post mortem **

Once again the message from the Fed’s projections, the statement and Powell’s press conference was rather more hawkish than markets had and is still anticipating; ‘still’ in the sense that there was only a very modest reaction in rates markets post meeting and Powell’s presser. While there has been some widening for FOMC 2024/2025 Fed Funds projections, the more remarkable aspect was the tightening up for 2023 to a median 5.1, with the range of committee expectations narrowing to 5.1-5.4 from September’s 4.4-4.9 – clearly 5.1% is very much the FOMC consensus view on ‘sufficiently restrictive’. There was the odd chink in the press conference, with Powell not taking the opportunity to push back on market rate expectations, when asked about loosening financial conditions, he merely replied ‘financial conditions have tightened a lot in the past year”, and he called the expected fall in core PCE to 3.5% y/y ‘substantial’. He was nevertheless emphatic in rejecting any changes to the 2.0% inflation target, though in truth he and the Fed have no other option than to stick with this, as to move the goal posts now would in truth send a confused signal. On balance, one might well observe that market and Fed rate projections are in fact only somewhat misaligned in timing terms, with the Fed looking for 100 bps of rate cuts in 2024 and 2025, while markets expect similar sized reductions but starting in H2 2023.

** U.S.A. – Nov Nov Retail Sales, Industrial Production and NY/Philly Fed surveys **

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.