Macroeconomics: The Day Ahead for 6 January

The first week of the year ends with the focus on the US labour data and a Fed and ECB speakers. But it also has Japan’s Wages, German Factory Orders and Retail Sales to digest ahead of Eurozone CPI and EC Confidence surveys, with Canada Unemployment also on tap. The US AEA/ASSA conference has numerous Fed, ECB and BoE speakers today and over the weekend. The debacle on voting for a new speaker of the US House of Representatives continues, and along with the UK government seemingly incessant proposal and then withdrawal of legislative measures on fear of them being voted down (in this case strike legislation) is an alarming reminder that in a time of crisis, and the accompanying need for governments to be very active, lawmakers across many parts of the world are ‘fiddling while Rome burns’. Markets remain volatile though outside of oil and gas, they remain within a very discernible, even if choppy range, suggesting that they are caught between their own ‘heading for a recession’ Fed pivot narrative, and the Fed and ECB’s hawkish messaging. Next week brings CPI and other inflation data in the US, China, Japan, Australia, Brazil and Mexico; UK monthly GDP, accompanying business activity indicators, and BRC Retail Sales, German Industrial Production, and US NFIB and Michigan Sentiment surveys. There will be plenty of central bank speakers, while the Bank of Korea is seen hiking rates a further 25 bps to 3.50%, it also sees the official start of the Q4 earnings season with the usual barrage of major financial earnings (Bank of America, Blackrock, BoNY Mellon, Citi, JPM and Wells Fargo).

** Germany – Nov Factory Orders & Retail Sales **

While Retail Sales were marginally weaker than forecast at -1.1% m/m -5.7% y/y, they remain weak, though as ever the read across from this incredibly poor statistical series to the Private Consumption component of GDP remains non-existent. The steep fall in Factory Orders at -5.3% m/m against expectations of -0.5% m/m, and a slight downward revision to October to -0.6% m/m is of much greater concern, even accounting for the series inherent volatility, with the Orders Index now below its 2015 level. The slide was paced above all by an -8.1% m/m fall in Foreign Orders (Eurozone -10.3% m/m, Non-Eurozone -6.8% m/m), with Capital Goods sliding 8.5% m/m and -12.4% y/y, while Intermediate Goods (generally a good proxy for the pipeline for finished goods) fell 0.9% m/m, a fourth consecutive m/m fall. It is a reminder that while manufacturing surveys suggest that the most dire recession forecasts are unlikely to be realized, the sector is indubitably contracting, and the weakness in foreign demand (with China likely to have been a key contributor) bodes poorly for both the trade balance and current account, despite the significant easing in energy price pressures and supply chain bottlenecks. See also my recent article for the Ghost In The Machine

** U.S.A. – Dec Labour report **

After a run of strong labour market indicators this week (JOLTS, ADP and Claims), today brings the official data for December, with few likely to be surprised if Payrolls beats forecasts, but focussed above all on Average Hourly Earnings. The Street whisper number on Payrolls is likely to be above the consensus for 200K (vs. Nov 267K), with Private Payrolls seen at 183K, the latter would be the weakest since the anomalous December 2020 drop, but still represent a very solid gain, with the strength in SME job gains (386K) in yesterday’s ADP (offset by a chunky 151K drop in large company) hints at some upside risks on Payrolls, but above all to the possibility of the Unemployment Rate easing slightly from an expected no change 3.7%, depending on the quirky labour force size estimate. Of particular note will be the Underemployment Rate, which stands at a record low of 6.7%, with the labour force participation rate seen edging up 0.1 ppt to 62.2%, well below its pre-pandemic pace, but less relevant given demographic trends. As for Average Hour earnings, the expected rise of 0.4% m/m would keep the 3-mth annualized rate at a lofty 6.0%, even if base effects would result in the y/y rate dip to 5.0% from 5.1%. Markets would do well to bear in mind that the Fed is as much focussed on wage growth slowing as core inflation, and that is not happening currently.