Macroeconomics: The Day Ahead for 22 December

  • Busy looking data calendar short of genuine markets movers: digesting UK Current Account and final Q3 GDP and Indonesia rate hike; awaiting US weekly Jobless claims, final Q3 GDP, KC Fed Manufacturing and Mexico CPI, Turkey and Egypt rate decisions
  • UK Q3 GDP & Current Account: stronger net exports contribution the only bright spot, as other key components all revised lower; underlines major growth challenges
  • Year Ahead thoughts part II: central banks, debt and equities

EVENTS PREVIEW

The final full trading day ahead of the holidays has a reasonably busy looking schedule of data, though closer inspection suggests that there is little that will move seasonally thin markets, with the UK Q3 Current Account and final GDP to digest, and only Mexico’s mid-month CPI and US Q3 final GDP, weekly jobless claims and KC Fed Manufacturing survey ahead. There are three EM central bank rate decisions, with Bank Indonesia hiking rates 25 bps to 5.50% as expected, Turkey’s TCMB expected to hold rates at 9.0%, having signalled an end to its aggressive rate cut cycle at its last meeting. However, Egypt’s CBE is expected to raise rate by 150 bps, though there is a broad range of forecasts from 100 to 200 bps, much being contingent on whether the official FX rate sees a further devaluation to bring it closer to the black market rate.

** U.K. – Q3 Current Account / revised Q3 GDP **
The Q3 Current Account deficit narrowed a little more than expected to £-19.4 Bln, though this was offset by a revision wider to Q2 to £-35.1 Bln, with the strong contribution from Net Exports to Q3 GDP (revised higher) accounting for pretty much all of the improvement. But the rest of the Q3 GDP revisions were all negative, with Private Consumption revised to -1.1% q/q and Govt Spending down to 0.5%, with Business Investment and Gross Fixed Capital Formation also revised lower. While the data is now rather historical, it still underlines that there is not much to cheer about for the UK economy, and the recent budget measures will only serve as a further drag.

** Year ahead thoughts – part II **
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.

d) Central banks: the year had ended with very hawkish messaging from the Fed and the ECB, what can be construed as some kite flying from the BoJ, and the BoE tacitly endorsing the markets’ rate trajectory. But there remains a still high degree of uncertainty on terminal rates, and a good deal of divergence expected in terms of the possibilities for rate pivots by the end of 2023, and as such plenty of potential for a good deal of currency volatility due to shifting views on rate differentials. At the time of writing, Fed rates are seen peaking 4.75/5.0 by the end of Q1, and counter to the Fed’s signal of no change through to the end of 2023, markets are discounting 50 bps of cuts by 2023 year end. By contrast, neither the ECB or BoE are expected to cut rates once respective peaks of 3.25% and 4.50% by Q2 have been attained. The Bank of Canada is seen closest to reaching a peak with an 80% change of on further 25 bps hike to 4.50%, and then cutting by at least 50 bps by year end, by contrast the RBA is seen hiking a further 60 bps to peak at 3.70%, and little or chance of a pivot year end. The big question is what happens to BoJ policy, above all once Kuroda has retired, with markets discounting a 35 bps rise in the o/n call rate to 0.25%, eminently still way below other major central banks, but more important will be what happens to its asset purchases, and above all how Japanese investors rebalance their portfolios, given that they are already having to deal with negative carry on hedged USD positions, and with a wider YCC band, the case for some repatriation, above all if the JPY were to strengthen further, will become stronger; financial year end in March could prove to be very choppy. The important points to bear in mind in this context from yesterday’s musings on inflation is a) that disinflation (above all due to energy price base effects) is not deflation, and b) that central bank’s 2.0% CPI targets do have some flexibility factored in, above all after recent policy review revisions, but 3.0% will not be good enough, above all on core inflation measures – expect this point to be made by many central banks next year.

e) Debt/Equities: there appears to be a relatively strong consensus that 2023 will be a much better year for bonds (govt and credit) after this year’s meltdown, but this is primarily based on relative value, for which the arguments are indeed strong. But with rate risks still skewed to the upside, refinancing costs having risen sharply, and many governments in the Euro area are running high budget deficits due to measures to curb energy prices and improve energy security, and many govt and corporates having a larger amount of debt to refinance than in 2022 (the UK in particular), while central banks shrink their balance sheets, H1 2023 will be anything but a picnic in the park, particularly if recession fears crystallize. Expect a pick-up in ratings downgrades and a rise in defaults, and expect many emerging and developing countries to run into even more problems than in 2022, following in the footsteps of the likes of Ghana, Lebanon and Sri Lanka. While credit spreads have widened in 2022, they remain rather tight on any long-term historical comparison. But perhaps most importantly, with short-dated government debt (above all US Treasuries) offering a reasonable rate of return, and the comfort of low price volatility, risk appetite will be much reduced, and also given the array of monetary policy, economic and geopolitical uncertainties, thus reducing the pool of money available for riskier assets. While European equities continue to underperform and discount a rather bleak economic outlook, the S&P 500 on a forward P/E ratio of 17.0, with the consensus seeing earnings per share rising to $230 looks to be priced for the best of all possible worlds.

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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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