Macroeconomics: The Day Ahead for 21 December

As the wind down for the holidays continues, there is a modest run of data and little in the way of events, with South Korean mid-month Trade, UK Lloyds Business Barometer, PSNB and German GfK Consumer Confidence to digest ahead of Canadian CPI and US Consumer Confidence and Q3 Current Account. There are rate decisions in Czechia and Georgia, the US sells 20-yr and Micron Technology features in terms of US corporate earnings.

** U.S.A. – Nov Consumer Confidence / Existing Home Sales **
Consumer Confidence is expected to be marginally better at 101.0 after drifting lower in November to 100.2, with the forecast predicated on somewhat lower gasoline prices and the uptick in preliminary Dec Michigan Sentiment. The public / media narrative on the economy remains negative, and while there has been some easing in CPI and labour demand remains generally tight, cost of living pressures (above all food) and the downturn in the housing market and high mortgage rates remain very real. The Labour Differential (Jobs Plentiful minus Hard to get) ticked up to 32.8 from October’s 17-month low of 31.8, and still remains high from a historical perspective, even if well below March’s peak of 47.1, and will be closely watched, given a good deal of noise in terms of hard and anecdotal evidence. Existing Home Sales are again forecast to fall sharply (median -5.2% m/m vs. October -5.9%) to a 4.20 Mln SAAR pace, close to the Covid induced lows, and not that far from the post GFC low in 2010 of 3.45 Mln. But inventories at 3.3 months of supply remain low on any historical comparison, which suggests that while there are regional pockets of distress, many homeowners are ‘sitting out’ the downturn (for the time being).

** Canada – November CPI **
The BoC has signalled that rates (current 4.25%) are close to their peak, but as governor Macklem underlined in press interviews, the BoC will not settle for anything less than a return to 2.0%, in other words, inflation will have to fall sharply in 2023, if there is to be any prospect of a rate cut(s) later in the year. Today’s CPI is expected to see a flat mm/m reading for headline that would push the y/y rate down to 6.7% from 6.99%, and now well off the June peak of 8.1%, but core CPI measures are seen little changed to slightly higher at 4.9% (Median) and 5.3% (Trimmed Mean). While headline could well fall to just above the 2.0% target by the end of 2023, as food and energy price base effects kick in (above all in H1), core measures are likely to fall more slowly to around 3.0%.

** Year ahead thoughts – part I **
This is a relatively random collection of views, which make no pretence to be either comprehensive or logically ordered (Lol!), but rather offer some food for thought.

a) Firstly a gentle reminder that if there is one lesson from the decade to date: expect the unexpected, remember that everything is connected and ‘domino effects’ remain the order of the day, above all in an increasingly fractured world, be that geopolitically or in supply chain terms. It will take years for supply chains to settle down, and there will be plenty more disruption. As I noted back in 2020, supply chain disruptions due to Covid were likely to lead to hoarding, and eventually to an inventory overhang, which is currently above all being felt in retail and wholesale, as consumer demand wanes due to immense cost of living pressures; given a very uncertain outlook and the difficulties in managing supplies and inventory levels, it seems likely that these may well be cut back too far, and supply deficits re-emerge in some sectors. Above all keep in mind that the economic models that policymakers have relied on are ‘shot’, and per se heighten the risk of policy errors, this applies above all to labour supply and demand. As was the case in Europe and North America, China’s recovery from its Zero Covid rollback will be very much stop/start, but as we move into Q2, there is likely to be a substantial boost to demand, above all for commodities, but much still depends on engineering a good deal more balance sheet resolution in the property sector.

b) Energy and Inflation: the demand outlook has for the time being won out in the oil sector, and above all, as it has alleviated capacity constraints in oil products. But the prolonged period of upstream underinvestment remains a problem and will a) take a good few years to resolve (and the current upturn in investment looks at best tepid, thanks to windfall taxes and ESG considerations), and therefore b) any upturn in demand immediately puts supply constraints back into the driving seat. As for the gas sector, Europe appears likely to be able to get through the current winter, but replenishing stocks for winter 2023/24 will be challenging, above all due to the lack of LNG re-gasification and distribution capacity (above all cross border), and if long-term weather forecasts are correct, then the Northern Hemisphere looks to be in for a very long winter, which will prompt volatility and price spikes. Energy price base effects should definitely help to bring down headline inflation rates quite rapidly in H1 2023, but it should be remembered that many countries (above all in Europe and some parts of Asia) have spent vast sums of government money (Germany’s EUR >500 Bln stands out, but it is anything but alone) on measures to cap and/or subsidize prices. As with the vast sums of money spent on protecting economies during the worst of the pandemic, this has a) resulted in a rapid accumulation of debt that is in no way sustainable in the medium term, above all given the sharp rise in debt servicing costs, and b) will be rolled back if energy prices stay down, and therefore restrain some of the downward drag from energy prices, and c) has not been accompanied by measures to reduce consumption (though German business and household consumption are well down on typical seasonal patterns), which are above all necessary to improve medium-term energy security. Bear in mind that while there may be statistical disinflation, this should not in any way be mistaken for deflation and that all the second round services inflation will be sticky, above all as companies try to recoup the broad rise in their cost base, including wages and higher debt servicing costs. Bear in mind that with the US SPR and other international strategic oil reserves having been sharply reduced, in many cases to their lowest levels in many decades, the world will struggle to deal with any new supply shocks.

c) Food price inflation remains elevated everywhere, and while the UN FAO Food Price index has declined since the end of H1, it remains some 20% higher in y/y terms, and for many countries, local currency increases have been higher, due to the strength of the USD. Prices should start to decline from Q2 2023, but with supplies of maize (corn) and rice (reduced output expected in both China and India) expected to decline in 2022/23, while wheat supplies are seen picking up marginally, and edible oils to rise some 4%, there are risks, above all if rice prices, which have been stable during 2022, were to rise significantly. Given sky-high prices for fertilizers for much of this year, and supply disruptions, the big question is how much this may affect crop yields.