Macroeconomics: The Day Ahead for 3 February

The week ends with the US labour data and array of Services PMIs/ISM as its highlights, with French Industrial Production and Turkish CPI to digest, accompanied by a smattering of central bank speakers (BoE’s Pill, ECB’s Elderson & Visco and Fed’ Daly), and a more modest run of corporate earnings. The aftermath of the Fed, ECB and BoE is effectively that markets think that they have won the war with the central banks on rates and the inflation outlook, and are assuming a form of goldilocks scenario in which inflation returns to “normal” in the second half of the year, any recession is mild, but sufficient to prompt central banks to embark on rate cuts by the end of the year – per se a case of ‘cue risk rally’, a good deal of which will have been a case of short-covering. It has to be said that all of this week’s central bank decisions and accompanying press conferences were notable for the lack of a robust pushback on loosening financial conditions, and relatively less hawkish rhetoric. Powell with his ‘disinflation process has started’, Lagarde’s ‘risks to inflation outlook are more balanced’ and Bailey’s we have ‘turned the corner on inflation’ taken on their own are testament to that, but note that all suggested that it was too early ‘to declare victory’ on inflation. Markets are for the most part wilfully blind, with a strong penchant for ‘wishful seeing’, and the sharp moves that have been seen are a) testament to woeful levels of underlying market liquidity, and b) underline that central banks with their balance sheet reduction programmes have barely made a dent in the colossal volume of liquidity that was injected during the pandemic, let alone the QE of the last decade. Even if they are in most cases close to a peak, rates are much less likely to fall by the end of the year than markets are discounting, though the nascent earnings recession (cd. the Alphabet, Amazon & Apple results yesterday) could well be key to this. But an earnings recession is de facto not a recipe for a risk asset rally.

Next week’s calendar is quite light on economic data with the exception of the UK, but will see peak volume in terms of the US earnings season. Statistically the US has Trade, Consumer Credit, preliminary Michigan Sentiment and annual CPI revisions; Q4 GDP tops the UK run, accompanied by the usual array of monthly business and trade activity indicators, BRC Retail Sales and RICS House Price survey; German publishes its delayed CPI data along with Factory Orders and Industrial Production, while PPI, CPI and credit aggregates are on tap in China. Japan looks to Wages, Household Spending and the Economy Watchers survey, and Canada has labour data. Both Australia’s RBA and India’s RBI are seen hiking rates a further 25 bps to 3.35% and 6.50% respectively, and there are plenty of Fed, ECB and BoE speakers. In the commodity space, the EIA publishes its Short Term Energy Outlook, while a busy run of S&D reports will be the focus for agricultural markets, headlined by the USDA’s WASDE, accompanied by China’s CASDE and Brazil’s CONAB Agri and UNICA Sugar data, and StatsCan grains and oilseeds inventories.

** January Services PMIs/ISM **

The run of Services and national PMI readings from Asia were generally positive, posting increases vs. December, with the setback in India still implying a very robust pace of activity. Eurozone readings are expected to be unrevised from improved, though still weak preliminary readings, while both the UK and US are seen unrevised at clearly contractionary levels, with the US Services ISM is expected to inch back above the 50.0 level to 50.5. All of which continues to fit with the idea that any recession is likely to be mild, but attention does need to be kept on the contrast between weakening orders, and the potential for some rebound in price sub-indices.

** U.S.A. – January Labour data **

Yesterday’s seismic 440% y/y jump in Challenger Layoffs should have come as no surprise given the array of tech sector layoffs, but it was also accompanied by yet another super low 183K Initial Claims print and a drop in Continued Claims. Be that as it may, the consensus looks for a drop in Non-farm Payrolls growth to 185K, though markets have generally under-clubbed forecasts for many months in what looks to be a case of ‘wishful seeing’, and a failure to understand that while tech sector layoffs are large, other parts of the economy are still struggling to fill positions. The Unemployment Rate is seen ticking up 0.1 ppt to 3.6%, though the more pertinent question will be whether the Underemployment Rate holds at an all-time low of 6.5%, with the Participation Rate seen unchanged at 62.3%. There will be annual revisions accompanying the January report, with the BLS having flagged that this “will affect more historical data than is typical”, and per se backward comparisons will at best tenuous. Even if employment data are better than expected, markets will likely be focussed on Average Hourly Earnings, which are expected to post a 0.3% m/m rise, which would leave the 3-mth annualized rate unchanged at 4.0%, and the y/y rate drop to 4.3% from 4.6%, thus accelerating the decline from September’s 5.1% and March 2022’s peak of 5.6%. While the debate on where rates will peak is more or less now a case of splitting hairs, the key in terms of inflation indicators is about how far they will fall, and while the deceleration has been significant, if core inflation measures settle around 3.0% y/y and wages at 3.5% y/y, then the Fed (and indeed ECB and BoE) will see no room to cut rates.