Macroeconomics: The Day Ahead for 4 January

PMIs, French CPI and Consumer Confidence, UK BRC Shop Prices and credit aggregates along with the US Manufacturing ISM, Auto Sales and JOLTS Job Openings on the statistical agenda, while a minimalist events schedule features the December FOMC minutes and another expected no change rate decision (6.75%) from Poland’s NBP. Germany gets its mammoth 2023 budget financing exercise underway with EUR 5.0 Bln of 2-yr.

Markets’ greatest vulnerability in the new year is a very familiar one, namely conditioned positivism (negative narratives make for poor sales patter in financial markets). The yearning for a Fed (and other central bank) pivot is very much part of this, and while inflation pressures are starting to fade, they remain high. More importantly, the current bout of disinflation is being driven by falling energy prices as well as energy price base effects, the latter will play out over H1, the extent and duration of the former is written in the stars. But the perspective on the former is that it will take time to resolve the impact of the long-term upstream underinvestment, and a long time to develop the infrastructure for alternatives, and just as with ‘re-shoring’ initiatives, the bigger question is at what price? In other words, cheap Russian oil and gas supplies will be replaced as well as displaced, but at what long run increase in cost (above all in competitive terms across continents), be that of the basic raw materials, or running new energy processing and distribution channels. Secondly as previously noted, the world is lumbering under a burden of debt which has gotten a whole lot worse in the past 3 years, and further encumbered by a sharp rise in debt servicing costs. The expensive and unsustainable measures to shield economies from the impact of the energy / cost of living crisis will have to be unwound as soon as the opportunity presents itself to governments, dampening disinflationary forces. Business and consumer confidence has taken a major hit on a long-term basis, as the complacency about health and energy security has been brutally exposed by the pandemic and the Russian invasion of Ukraine, which has in turn further undermined already weak confidence in political leadership across the globe, and food security fears seem likely to amplify in 2023. The wrong perspectives on all of this are a) pessimism or ‘goldilocks thinking’, and b) anything that is binary and led by the shrieking banshees on social. The acute needs are for adaptability and agility, and above all for constructive debate about long-term solutions, and for strategic critical thinking, as opposed to blinkered closed-minded linear perspectives. Confidence and some new form of stability will return, but in the meantime sentiment and markets will continue to see sharp swings of the pendulum, i.e. remain volatile, with market liquidity continuing to be impaired both by rising rates, post-GFC regulation and the long shadow of uncertainty.

** U.S.A. – FOMC minutes, Manufacturing ISM, Auto Sales & JOLTS Job Openings **
Ahead of the December FOMC minutes, the Manufacturing ISM is forecast to slip to 48.5 from 49.0, with the run of regional surveys having been very mixed, some better than expected but still very weak, while others like the NY Fed slid sharply, while core Durable Goods eked out only a marginal gain in October/November, per se shrinking order backlogs. Much may depend on how much weak demand components are offset by lower price inputs and easing supplier deliveries. Auto Sales are expected to ease to a 13.7 Mln SAAR pace from November’s 14.15 Mln, with a combination of rising financing rates, high prices and an unfavourable seasonal adjustment likely to weigh, and anecdotal industry estimates suggesting downside risks (13.2 to 13.4 Mln). JOLTS Job Openings for November are expected to slip to 10.025 Mln from 10.34 Mln, which would be the weakest since June 2021, but still way above the pre-pandemic peak of 7.558 Mln – the US and other labour markets are very tight. As for the FOMC minutes, a key question is what prompted the FOMC to revise up their ‘dot plot’ terminal rate to 5.1%. Was it primarily the stubborn level of core services inflation, or the fact that while there has been some easing in labour market conditions, they remain very tight overall, or perhaps both. By extension what was the debate around what constitutes a ‘sufficiently restrictive’ rate, above all given the fact that there had been a few FOMC members fretting about overtightening in November, and the likelihood that they already had sight of November’s lower than expected CPI data.