Macroeconomics: The Day Ahead for 28 September

  • Market turmoil and quarter end likely to trample over modest run of data, digesting worse than expected German & French Consumer Confidence, UK BRC Shop Price urge, IMF/US criticism of UK; awaiting Italy confidence surveys, US Goods Trade & Pending Home Sales; plenty more central bank speakers
  • UK: huge surge in in real yields points to distressed selling by pension funds, leaves IL Gilt/Equity yield gap in unfavourable place for equities
  • US Credit seemingly defying distress elsewhere, but for how long?
  • US Goods Trade Balance: further modest narrowing seen, anecdotal evidence on goods imports hints at downside risks
  • US Pending Home Sales: further fall expected notwithstanding very sharp New Home Sales rebound

EVENTS PREVIEW

As quarter end looms large, today’s run of surveys (France, Germany, Italy & Sweden), US Goods Trade Balance, Pending Home Sales and Retail Inventories, and the overnight UK BRC Shop Prices and Australian Retail Sales will have to surprise to have anything more than very passing impact. Central bank speakers are again very plentiful, but both BoE’s Dhingra (dovish dissenter at Sept MPC meeting) and Cunliffe are not scheduled to be talking about UK monetary policy. The US also rounds off this week’s funding exercise with auctions of 7-yr and FRN 2-yr, as the modest degree of calm yesterday morning in rate and bonds proved to be little more than a mirage, doubtless reflecting the fact that many funds and investors still need to shrink portfolios to cover the losses inflicted by the sharp rise in yields in recent weeks. In the UK, the distress in evidence at the long of the Gilt curve points to pension fund position liquidation, and with real yields on Index-linked soaring into positive territory, the I-L Gilt / Equity yield gap now looks extraordinarily challenging for equities – see attached charts. One might also observe when looking at average US Investment and High Yield Credit spreads that the fact that IG spreads have only just breached 2022 highs, and High Yield spread are still a long way from their 2022 peak suggests that if this particular ‘shoe drops’, then markets are in for an even ruder awakening than the turmoil of recent weeks.

** U.S.A. – Aug Goods Trade Balance, Pending Home Sales **

The US Goods Trade Balance has narrowed sharply from the very bloated levels of Q1, and is expected to narrow a little further to $-89.0 Bln vs. July’s $90.2 Bln, but remains substantially wider than the $-65.0 to $-70.0 Bln range that preceded the pandemic. While rising exports of gas and oil to Europe as the EU and UK attempt to break the over-reliance on Russian energy imports, this is a rather modest net gain in trade terms, as it tends to see a rise in energy imports. Of potentially far greater significance is an array of anecdotal evidence from the container sector suggesting goods imports have fallen very sharply over the past 4 to 5 months, with the strength of the USD only adding to downward pressure on import values. As for Pending Home Sales, yesterday’s unexpectedly relatively sharp m/m falls in House Prices contrasted with a huge rebound 28.8% m/m rebound in New Home Sales, which did reduce the hefty volume of inventories from a huge 10.4 months to a still historically large 8.1 months of supply. Expectations are for a further fall of 1.5% m/m, it should be remembered that Pending Sales are counted at point of sale, rather than completion for Existing & New.

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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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