Macroeconomics: The Day Ahead for 30 October

Today’s run of data and earnings offers a veritable assault on market senses, even if it struggles to dislodge the primary focus on next week’s elections, though the much anticipated UK Budget will certainly prompt plenty of reaction from UK assets. Q3 GDP data from Europe, the US and indeed Mexico tops the agenda along with the first national CPI readings in the Eurozone. There is also Australia’s CPI and Japan’s Consumer Confidence to absorb, and the US also looking to Pending Home Sales. Meta Platforms and Microsoft top and earnings run that also has results from BYD, Foxconn and Posco in Asia; Amundi, BASF, Standard Chartered, UBS and Volkswagen, while the US also looks to Caterpillar, Eli Lilly and Starbucks amongst others. South Africa’s medium-term Budget may struggle to generate the deluge of column inches in the UK, but is of significance, while speeches by ECB’s Schnabel and incoming SNB president Schlegel will require attention, as major currency rate outlook divergence evolves. Italy will also hold its regular end of month auction of 5 & 10-yr BTPs.

** U.K. – Budget **

– Today’s Budget will be pivotal, not only in the very short-term, but also with respect to long-term expectations for the UK economy, as well as the overall credibility of the new Labour government. It should be added that the details which will go well beyond Reeves’s lunchtime presentation to parliament will need to be combed with a very fine toothcomb. As such expect considerable volatility during and after the presentation, as the analytical and business fraternity dig deep into the details to discern trend implications. There are essentially three big questions: how will the already heavily trailed changes to the fiscal rules, which looks to switch to targeting bringing down Public Sector Net Financial Liabilities (PSNFL), i.e. current (as opposed to total) govt spending relative to revenues over the usual 5-yr horizon, and thus freeing up investment spending, be achieved. Media reports suggest that among other things this will be achieved by extending the freeze on income tax thresholds, adjustments to Capital Gains and Inheritance Tax, mostly through scrapping exemptions, and by making employer contributions to private pension plans subject to National Insurance. Labour has stated that it wants to scrap the previous government’s planned reduction in Capital Spending from 2.4% to 1.7% of GDP, above all to encourage more investment spending. While plans to improve Child care and reform the NHS will be watched, markets will be focussed on the OBR’s (Office for Budget Responsibility) assessment of the budget plans, which will to an extent depend on its judgement on these will impact inflation. In turn this will feed into how the BoE assesses the impact of fiscal policy and its likely rate trajectory, with many forecasters expecting this to mean a slower rate cut path, and an end point that is perhaps 25-50 bps higher for Base Rate than had been assumed.

** Germany/Spain – October CPI **

– Rises in road fuel costs, unfavourable energy prices base effects, offset modestly by tourism, recreation and food prices are likely to be the key factors in both Germany and Spain to varying degrees, and also in France, Italy and pan-Eurozone readings tomorrow. German HICP seen up 0.2% m/m that would see the y/y rate rise to 2.1%. While Spanish domestic headline CPI was below forecast, the HICP reading was in line, but perhaps more ominously domestic core CPI edged up 0.1 ppt to 2.5% y/y, against expectations of a slip to 2.3%, imparting some upside risk for tomorrow’s Eurozone core CPI, and 

** Eurozone – Q3 GDP **

– In terms of Q3 GDP, pan Eurozone growth is expected to be unchanged at a still sluggish, though widely assumed trend rate 0.2% q/q, which thanks to base effects would see the y/y rate pick up 0.2 ppt to an unimpressive 0.8%. But this will mask a lot of divergence between the four major economies. Italy is expected to hold steady at 0.2% q/q, while Germany again contracts modestly (-0.1% q/q), with the risks slightly to the downside. But with French GDP at 0.4% q/q getting a bigger boost from the Olympics than forecast, and Spanish GDP again beating forecasts at an unchanged 0.8% q/q, a higher than expected outturn for Eurozone GDP looks very likely. There is also the added wild card for Eurozone GDP emanating from a robust 2.0% q/q increase in Ireland reported yesterday, not quite in the league of some of the hefty distortions that have added to or dragged on pan-Eurozone GDP in the past, but potentially making for a slightly flattering outturn, barring a worse than expected reading from Germany. 

** U.S.A. – October ADP Employment **

– As has been the case for much of this year, US data has either confounded markets’ trend expectation, or provided colossal dissonance that is difficult to interpret, outside perhaps of recognizing that sentiment as reflected in surveys of any description is fickle, and nowadays often reflective of enormous uncertainty, and perhaps political bias. Yesterday’s JOLTS Job Openings slide to a fresh cyclical low of 7.443 Mln (and a downward revision to August to 7.861 Mln from 8.04 Mln) contrasted with a broad based surge in Consumer Confidence to 108.7 from 99.2, that was paced somewhat more by Current Situation (138.0 vs. prior 123.8) than Expectations (89.2 vs. 82.8), and also saw a sharp rebound in the Labour Differential to 18.3 from 12.7, and a more modest improvement in major purchases intentions. Per se, today’s ADP Employment looks to be something of a lottery number, with the consensus looking for 110K (the same as Friday’s Payrolls) vs. prior 143K, amid disruption from hurricanes and labour disputes, which in turn argue against making any meaningful deductions about current labour market trends.

** U.S.A. – Q3 GDP **

–  Q3 GDP is forecast to post a robust rise of 3.0% SAAR, paced by a pick-up in Personal Consumption to 3.2% from Q2’s 2.8%, as well as strength in non-residential construction and business equipment, while housing investment acts as a small drag, and the ususal wildcard that is inventories seen having little impact. That said, a much wider than expected Goods Trade Balance yesterday ($-108.2 Bln vs. expected $-96.0 Bln), which fits with port traffic data showing a surge in import volumes in recent months, suggests inventories may add to GDP, while Net Exports that had also been expected to be largely GDP neutral, may act as a drag. Be that as it may, Final Sales to Domestic Buyers, which has been remarkably steady between 2.7% and 2.9% SAAR for the past four quarters will be the ultimate arbiter of whether the perception of underlying strength in the US economy stands up to today’s spotlight test.