Macroeconomics: The Day Ahead for 20 September

  • All eyes on Fed, but German PPI surge and even more aggressive 100 bps Sweden Riksbank hike likely to jangle nerves; digesting Japan CPI, Malaysia Trade, awaiting US Housing Starts and Canada CPI, Dutch Budget, Lagarde and BoC Beaudry  speeches; Finnish 10-yr and US 20-yr
  • Sweden: Riksbank hike underlines ‘whatever it takes’ to tame upwardly revised CPI forecasts, even tipping economy into mild recession
  • Germany PPI: outsized surge a reminder of the colossal scale of pipeline pressures and consequent demand destruction; September fall will still leave energy prices way above historic levels
  • US Housing Starts seen edging up after sharp falls, but Permits and NAHB survey point to further falls ahead as mortgage rates climb
  • Week Ahead: Fed, BoJ and SNB top run of 15 central bank policy meetings in light data week: flash PMIs; US housing data; Canada, Mexico, South Africa CPI; UK ‘Fiscal Event’ & UN General Assembly
  • Charts: Germany PPI; TTF Gas future vs. German 1-yr Baseload Power; US vs Eurozone GS Financial Conditions; US Services PMI vs ISM sector respondents

EVENTS PREVIEW

While there is a good volume of data and events on the day’s agenda, the fact is that markets are fully focussed on tomorrow’s Fed meeting, but both German PPI and a larger than expected Swedish rate hike will try and muscle in on the market narrative. There are Japan’s national CPI, that German PPI mega shock and the super strong Malaysia trade data to digest, along with the confirmation of the tentative RBA signal that it is looking to ease the pace of rate hikes, as Sweden’s Riksbank tops for an aggressive 100 bps hike. Ahead lie Polish Industrial Production, PPI and labour data, US Housing Starts and Canadian CPI, which accompany Sweden’s Riksbank rate decision, speeches by ECB’s Lagarde and BoC’s Beaudry, with govt bond auctions taking the form of Finnish 10-yr and US 20-yr. But perhaps the most significant item on today’s agenda will be the Dutch govt’s plan to outline an EUR 16.0 Bln package to ease energy crisis cost induced cost of living pressures on households, which amongst other things a 10% hike in the minimum wage. While this will certainly be popular with the public, the ECB will surely be bristling at the inflation knock-on effects from the minimum wage hike, even if this and other measures are expected to be financed via various tax measures, rather than additional debt. But as the accelerating German PPI surge underlines, these measures may prove to be a water on a hot stone given that the pipeline pressures are so colossal, and likely to create further demand destruction, which will inevitably see many manufacturers throw in the towel, even if the falls in Power and Baseload Power prices over the past month (see chart) should result in a large drop in September PPI, but still remain way above 2021 levels and indeed historic averages.

** Sweden – Riksbank rate decision **

The Riksbank decision to hike rates 100 bps to 1.75% was unsurprising given the hefty upward revisions to CPI forecasts (2022 7.8% vs. prior 6.9%, 2023 5.1% vs. prior 4.2%), and an upward revision to 2022 GDP to 2.7% from 1.8%. But with 2023 GDP revised to -0.7% from 0.7%, and 2024 CPI revised down to 1.6% from 2.0%, this really underlines that it is determined to do whatever it takes, even if this means sending the economy into what its forecasts assume would be a mild recession, given a forecast of 1.1% for 2024 GDP. More importantly in this week packed with rate decisions, this will sets nerves jangling about more aggressive moves elsewhere, with the SNB perhaps the most obvious.

** U.S.A. – Aug Housing Starts **

Housing Starts are seen edging up a meagre 0.3% m/m, following very steep m/m falls in 2 of the past 3 months (Jul -9.6% m/m, June 2.4% and May -13.5%), while the more forward looking Building Permits are forecast to drop 4.3% m/m. With mortgage rates continuing to ratchet higher, there is little prospect of any respite for the housing sector. As the NAHB comments accompanying the reported drop in its Housing Market Index to 46 from 49 noted: “Builder sentiment has declined every month in 2022, and the housing recession shows no signs of abating as builders continue to grapple with elevated construction costs and an aggressive monetary policy from the Federal Reserve that helped pushed mortgage rates above 6% last week, the highest level since 2008”. It also noted that: “more than half of the builders in our survey reported using incentives to bolster sales, including mortgage rate buydowns, free amenities and price reductions”.

RECAP: The Week Ahead Preview:

The new week is all about central banks, with a cumulative 525 bps of rate hikes expected at 11 of the 15 policy meetings scheduled, with the Fed, BoE, BoJ and SNB getting the lion’s share of attention. The data schedule is very light, featuring G7 flash PMIs and an array of other business and consumer surveys, a number US housing sector indicators, along with CPI from Canada, Japan and Mexico. Europe’s energy crisis, China’s array of property and zero Covid policy headwinds, and mounting recessionary signals (perhaps most notably a very sharp drop in container freight traffic to the US, and falling gasoline consumption in terms of high frequency data) continue to be the overarching themes. These are allied with a vast array of geopolitical tensions, most obviously the Russian invasion of Ukraine, but also the decision at last week’s SCO meeting to increase the use of national currencies in trade, underlining an increasingly bifurcated and polarized world, and posing a longer term threat to USD hegemony. While the UK will focus on the state funeral of Queen Elizabeth II on Monday, the political and social tensions over the cost of living crisis will move straight back to centre stage on Tuesday, with finance minister Kwarteng scheduled to outline the details of the new Truss government’s fiscal plans to support the economy and mitigate the impact of energy prices on Friday. Still perhaps the most under-discussed phenomenon is how policymakers (monetary and political) continue to rely on economic models, whose primary assumptions have mostly been shredded by the pandemic, the upending of supply lines due to the Russian invasion of the Ukraine, and more than a decade of capital misallocation and concomitant lack of capital investment in infrastructure (for which the energy crises around the world are the most obvious manifestation). There also appears to be far too much emphasis on how high energy prices are causing, and will continue to cause demand destruction, and far too little on how energy consumption can be reduced, primarily as part of cost efficiencies in an increasingly resource challenged world. The latter is yet another example of how the opportunity of ‘technological revolution’ of the past 30 years has to date been squandered, though this can obviously be remediated going forward.

In terms of the light data schedule: suffice it to say that forecasters assume most PMI readings in the G7 will likely deteriorate on the month, save for a dead cat bounce in the US Services PMI to a still very contractionary 45.5 from August’s 43.7. Some may point to the strength in the equivalent ISM measure, but they should look at what sectors are not included in the PMI (see attached table) and decide for themselves what the PMI says about the outlook for the US private sector, outside of the ‘winners’ from the rise in energy prices, which dominate the ISM. CPI data in Canada, Japan, Mexico and South Africa are set to underline that while some headline y/y rates have probably peaked thanks to the fall in oil prices, core measures continue to evidence robust second round effects. US Housing data are forecast to show continued and/or growing weakness, outside of a likely very temporary bounce in Housing Starts, after very steep falls two of the past three months.

But as noted, the focus will be on central banks, above all the Fed. The US CPI data has fomented some speculation about a 100 bps Fed rate hike, which is currently seen as a 19% probability. But having already raised the rate hike pace up to 75 bps (from prior 50 bps) in June and July, and then ratcheting up to 100 bps this week would have more than a whiff of desperation about it. Given that financial conditions are at or close to their tightest levels since mid-2020, this might be the trigger for a much sharper tightening in conditions that sends risk premia much higher, and thereby constricts the Fed in its inflation fight. There will also be a new ‘dot plot’ and updated FOMC forecasts, which will as ever attract attention in terms of the message that they send on the rate trajectory and the economy. But both the statement and Powell’s press conference will likely re-emphasize data dependence, an effective ‘single mandate’ resolve to bring down inflation, a very tight labour market, even if markets may well construct some comments as indicating a willingness to ease up on policy tightening in coming months.

Friday’s UK Retail Sales served as a poignant reminder of why the BoE’s MPC has been less willing to adopt an aggressive policy tightening stance than many of its G7 peers, even if it is still expected to hike rates 50 bps to 2.25% (highest since end 2008). The question is whether the statement offers any hints on how fiscal policy changes might influence the BoE’s rate path, though the BoE may not be given advance details of Friday’s ‘fiscal event’, in what one might term a patronizing and contemptuous display of behaviour that is so typical of the UK’s political fraternity.

While Japan’s Finance Ministry and the BoJ are becoming more vociferous about JPY weakness, this is not expected to prompt the BoJ to offer even the slightest hint that it might row back on its super easy monetary policy, even if the official end of its Covid corporate credit support programmes does occur as expected. That said, this may prove to be more of a migration to a programme that is designed to support private CapEx, thus complementing the government’s upcoming package of fiscal stimulus measures. Ahead of the BoJ, China’s LPR rates are expected to echo the no change in the 1-yr PBOC MTLF operation. The weakness of both the JPY and CNY is a major headache for the rest of Asia, both in terms of piling on the pressure to hike rates (Philippines +50 bps and Indonesia +25 bps are seen hiking this week), and indeed to indulge in competitive currency devaluation, on a scale not seen since the 1997/98 Asian FX crisis. Eminently most Asian economies are in a much better position than they were then, be that in terms of current accounts and external liabilities, and above all with their enormous FX reserves.

On the opposite end of the currency spectrum, Switzerland’s SNB is expected to move rates back in to positive territory for the first time in more than 10 years, with a 75 bps hike to 0.50%. It will again emphasize the need for a strong CHF to combat imported inflation pressures. Meanwhile in Norway, the rise in Underlying (core) CPI to a record 4.7% y/y in August has cemented expectations of a further 50 bps hike to 2.25% as Norges Bank plays catch up, with a very steep fall in the latest Regions Survey 6-mth Outlook index to -0.16 (lowest since 2009) leaning heavily against a more aggressive hike.

Three other EM countries also see rate decisions, though they are all in very divergent spaces economically and in monetary policy terms. After a cumulative 1,175 bps of rate hikes in the past 18 months, Brazil’s BCB is seen on hold at 13.75%, with inflation clearly starting to turn lower on a combination of base effects and govt measures to reduce energy prices, and with the presidential election looming. Turkey’s TCMB is expected to hold rates at 13.0% after last month’s unexpected 100 bps cut, despite inflation running at 80.2% y/y, and stronger than expected Q2 GDP (7.6% y/y), though leading indicators suggest Q3 will see quite a sharp loss of momentum, and this may prompt a further cut in Q4. But for the moment, TCMB seems to be more focussed on politically dictated macro-prudential measures in its seemingly vain and futile attempt at ‘Lira-ization’, which will likely fail without a change in government. Last but least South Africa’s SARB is seen hiking a further 75 bps to 6.25%, with inflation continuing to head higher (headline 7.8% and core 4.6% y/y), and a weak ZAR adding to pressure going forward (and offsetting the benefit of lower energy prices), with SARB governor Kganyago also noting that it is still too early to call a peak in inflation.

Elsewhere there are plenty of ECB speakers, and the ECB will publish its latest Economic Bulletin and the RBA releases its September Monetary Policy meeting minutes. Monday sees the release of the latest BIS Quarterly Report, and the OECD publishes a highly topical States of Fragility report, examining the impact of multiple, concurring crises around the world. In the US big bank CEOs will testify to Congressional committee hearings titled “Holding Megabanks Accountable”. In the commodity space, there is the annual Denver Gold Summit, while USDA monthly reports on livestock inventories and production will also be in focus, as farmers fret over the drought in many regions, and consumers opting for cheaper cuts as they contend with cost of living pressures.

The govt bond auction schedule is quite light, with sales in the US, Germany and Finland, but in the wake of last week’s bond yield volatility the focus will be on the flow of corporate primary issuance, which is now well behind where it should be seasonally, with issuers baulking at some of the premiums being demanded to place new debt or refinancings, and hoping that this week’s run of central bank meetings helps to calm rates volatility, and facilitate issuance. The corporate earnings schedule is again very light this week, with Bloomberg News highlighting the following as likely to be among the headline makers: Accenture, AutoZone, Costco Wholesale, shipping giant FedEx, General Mills, Haleon and home-builder Lennar.

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Risk Warning: Investments in Equities, Contracts for Difference (CFDs) in any instrument, Futures, Options, Derivatives and Foreign Exchange can fluctuate in value. Investors should therefore be aware that they may not realise the initial amount invested and may incur additional liabilities. These investments may be subject to above average financial risk of loss. Investors should consider their financial circumstances, investment experience and if it is appropriate to invest. If necessary, seek independent financial advice.

ADM Investor Services International Limited, registered in England No. 2547805, is authorised and regulated by the Financial Conduct Authority [FRN 148474] and is a member of the London Stock Exchange. Registered office: 3rd Floor, The Minster Building, 21 Mincing Lane, London EC3R 7AG.                  

A subsidiary of Archer Daniels Midland Company.

© 2021 ADM Investor Services International Limited.

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