Macroeconomics: The Day Ahead for 16 December

The week ends on a rather subdued in terms of data and events, with UK GfK Consumer Confidence and Retail Sales to digest, and flash PMIs for the Eurozone, UK and US ahead, along with Eurozone Trade Balance and final CPI. ECB speakers are out in force today, with SF Fed’s Daly the sole scheduled Fed speaker. It’s also ‘Triple witching’ futures and options expiry day for equity markets. Next week’s schedule, as markets wind down for the holiday season, has numerous surveys, including Germany’s Ifo Business Climate, with the US looking to housing indicators, Personal Income/PCE and Durable Goods, with CPI due in Canada and Japan, which also sees the final BoJ policy meeting of the year. The hawkish message from the Fed and the ECB leaves risk sentiment under a cloud going into year end, with talk of a renewed Russian offensive in Ukraine, and the rapid surge in Covid cases in China also casting a long shadow.

The run of data overnight was not particularly encouraging, with a much sharper than expected fall in Singapore Exports, generally a good yardstick for developed world demand, though in this case driven by sharp drops in exports to China and SE Asia, accompanying a marginally better than expected but still near record low UK GfK Consumer Confidence. The unexpected drop in UK Retail Sales came despite a rebound in Clothing and Household Goods in m/m terms, though ‘Other Stores’ saw sales fall a very sharp 7.2% m/m, and overall suggesting households continuing to cut back on discretionary spending due to cost of living pressures.

In terms of the post mortem on the BoE and ECB rate hike decisions, the BoE rate vote was at the margin less hawkish, with the no hike votes from Dinghra and Tenreyro less surprising than the sole 75 bps vote from Mann, and also very notable was the lack of any pushback on the markets’ current terminal rate projection of 4.50% (well below the 5.2% at the time of the November meeting). The BoE continues to eschew any formal rate guidance, and the tweaks to its forecasts were largely reactive, in other words, adjustments to reflect the Fiscal update and incoming data.

By contrast, the ECB could really not have been more hawkish, even if the timing of the start of QT (APP balance sheet reduction) and size were at the lower end of the range of forecasts. The latter reflects a shift back to deploying rates as the primary policy, and also reflecting hawkish forecasts and even more hawkish rhetoric from Lagarde, above all the message that markets are underpricing the rate trajectory. BUT the headline forecast of 2.3% y/y in 2025 and for core CPI at 2.4% y/y make little sense when one has a look at the ‘technical assumptions’ on key inputs (above all energy prices) for 2025 relative to 2024, which suggest a sharp drop in a number of key variables. Given the hefty spike in Euro area yields and peripheral spread widening, it will be interesting to see if there is any pushback from today’s run of speakers.

G7 ‘flash’ PMIs for the Eurozone, UK and US are all expected to remain below the key 50.0 level, but little change from final November readings, and details on Orders/New Business, Prices and Outlooks will as ever be key. Of some note after the weak data and manufacturing surveys out of the US yesterday, and the mounting evidence that the Euro area and UK downturns are likely to be rather shallower (though quite possibly more protracted) than had been expected, will be whether the US underperforms relative to its G7 peers.