Macroeconomics: The Day Ahead for 5 January

While there is a busier run of data events today, it is likely that markets will fixates on the day’s US data (ADP Employment, weekly jobless claims, and to a lesser degree Trade) and Fed speak, with China’s Caixin Services PMI (better than expected), and final Services PMIs from UK and US also on tap long with Italian CPI. France hold a chunky EUR 12.0 Bln auction of long-dated OATs, and the UK sells GBP 3.55 Bln of 4-yr. The focus will also be on the battle in the US House of Representatives to elect a new speaker, both underlining that Republicans are like the UK Conservatives are a deeply divided party, as well as raising market concerns about yet another ‘debt ceiling’ debacle, despite reassurances from some Republican officials that this will not become an issue. It also serves to remind us that the world’s political leaders remain a persistent threat in terms of ‘leftfield’ events, and that it is not difficult to suggest that what was seen as the preserve of unstable developing world regimes now appears to be rather more of a norm for the developed world.

Yesterday’s FOMC minutes were for choice even more hawkish, most notably: ‘participants noted that, because monetary policy worked importantly through financial markets, an unwarranted easing in financial conditions, especially if driven by a misperception by the public of the Committee’s reaction function, would complicate the Committee’s effort to restore price stability.’ But the comments from former ‘ultra-dove’ Kashkari that he still sees the ‘terminal rate’ at 5.4% (above the median FOMC estimate of 5.1%) are perhaps most pertinent, especially with markets (see graphic attached) continuing to discount a 5.0% terminal rate, in defiance of the Fed message. But we would caution against assuming that the fall in bond yields to start the year is primarily rates (interest and inflation) driven, with the deluge of USD and EUR corporate issuance as ever driving a lot of ‘rate lock hedging’, and the US Treasury’s Cash Balance at the Fed falling sharply (adding market liquidity), after jumping in mid-December through year end (see chart).

** Italy – December HICP **

The consensus looks for Italian HICP to drop to 12.3% y/y from 12.6%, and after much lower than expected German, French and Spanish readings, the risks certainly look skewed to the downside, with energy prices (petrol & household) likely to pull headline lower, along with base effects above all in Restaurants/Hotels, which jumped sharply in December 2021, with the latter also likely to prompt a drop in core CPI from 4.7% y/y in November. All of which suggests that tomorrow’s pan-Eurozone CPI should turn out below expectations of -0.1% m/m 9.5% y/y headline and a small rise in core CPI to 5.1% from 5.0%. However a more detailed analysis will be required, above all to try and decipher how much of the drop in inflation is being driven by base effects (above all for energy, recreation and holidays), and how much is signalling an easing in ‘sticky’ services price pressures. In passing, and tangentially, it should be noted that the unseasonably warm weather in Europe and parts of North America that has spurred a steep fall in NatGas and European Power prices is likely to come to an abrupt halt around the 18-20 January, with a fresh bout of icy weather expected as ‘the Arctic cyclone loses its grip over the polar air bubble‘

** U.S.A. – Dec ADP Employment, Weekly Jobless Claims **

– The ADP Employment measure is no longer viewed as a reliable pointer to Payrolls, though it has proved a useful guide to elements of the Household survey, from which the Unemployment Rate is derived. A modest pick-up from a soft-ish 127K in November to 150K in December is expected, by contrast to tomorrow’s Payrolls, which are forecast to rise 200K following another stronger than expected 267k in December. As yesterday’s JOLTS Job Openings (10.458 Mln vs. expected 10.05 Mln) underlined labour demand remains very robust, and as much as tech sector layoffs would seem to lean against this quite heavily (Challenger Job Cuts are also on tap today), it does appear that for those affected, finding a new position is for the time being none too challenging (as the still high level of positions unfilled in the NFIB survey implies), with Initial Claims seen unchanged at 225K.