Macroeconomics: The Day Ahead for Feb 17

A busy day for official statistics awaits, with US Retail Sales very much primus inter pares, with the overnight Japan Machinery Orders (much better than expected, Japan & Singapore Exports and gamut of UK inflation indicators (slightly higher than expected again, but still very subdued) and South Africa’s CPI to digest, while ahead lie Canada’s CPI along with US PPI, Industrial Production, Business Inventories and NAHB Housing Market Index. The January FOMC minutes accompany another busy run of Fed and other central bank speakers, with govt bond auctions seeing 14 yr sold in the UK, 27 yr in Germany and 20-yr in the US. Resource companies again feature heavily on the corporate earnings schedule – Marathon Oil, Pioneer Natural Resources, Rio Tinto – along with China’s Baidu. Rising long-term bond yields (see charts) do appear to be impinging very modestly on risk appetite, as yield differentials between bonds, credit and equities (dividend) come under closer scrutiny; notably most G7 30 yr govt yields are above pre-pandemic levels. Rising Commodity prices are playing a part as much as large fiscal deficits, but a quick look at the attached charts of ‘real’ Commodity Prices from Reuters’ John Kemp, and the Bloomberg Commodity Index underline the point that if there is to be a new Commodity Supercycle, then at the current juncture the jury is very much out, at best we may be approaching the foothills of any such rally.

U.S.A. – Jan Retail Sales, Industrial Production, PPI & NAHB Housing Index

Retail Sales are projected to post a 1.2% m/m rebound after falling for the past 3 months (on a combination of lockdowns, weak labour market, lack of fiscal support), with the core ‘Control Group’ measure seen up 0.9%. Solid auto sales, rising gasoline prices and a fresh round of ‘fiscal stimulus’ payments ($600) are all expected to have contributed to the rebound. The Q4 weakness was in part a function of seasonal patterns (holiday related strength) being ‘shot to pieces’. As such the risk is that the very favourable seasonal adjustment for January (typically the weakest month of the year in NSA terms – see attached chart) ends up overstating the rebound. The more so the setback in last Friday’s Michigan Sentiment (current and expectations) leaves considerable doubt over whether a rebound will be sustained. Energy prices are again expected to be a key driver of a forecast 0.4% m/m rise in PPI, though supply bottlenecks are also expected to boost the goods component of core PPI (f’cast 0.2% m/m), but the latter will likely be offset by flat or negative Services prices, however at 1.1% and 0.9% y/y rates will remain subdued; though very adverse base effects will come into play in coming months. Industrial Production is expected to rise a relatively modest (by recent standards) 0.4% m/m, as mild weather and some mean reversion (after Dec strength) weighs on utilities output, while Manufacturing Output is expected to rise 0.7% m/m, though raw and intermediate materials shortages and impaired staff availability may act as a restraint.  The US housing market remains the key bright spot in the US economy, with the NAHB seen holding January’s very robust 83 level, even if prospective buyer traffic may be restrained by adverse weather conditions, and Homebuilders are likely to reiterate concerns about raw materials prices (see attached Lumber future chart), and skilled labour availability.

U.S.A. – January FOMC Minutes

As noted in the Week Ahead, there is unlikely to be much to be gleaned from the FOMC minutes today (or indeed ECB tomorrow), nor from the numerous Fed speakers. The cacophonous commitment to forward guidance on low rates and endless liquidity injections for at least another two years, and to policies which continue to create colossal asset price inflation pressures, distort markets, deepen inequality, create the illusion of financial stability, and which are toothless to deal with the economic impact of the pandemic, having already totally failed to deal with disinflationary forces following the GFC. But as previously observed, this is a case of Stockholm syndrome, where the central banks’ financial repression is welcomed by markets that feel assured that they are in a ‘win-win’ situation, knowing that if central banks even hint at reneging on current levels of support, a market tantrum will lead to a tightening of financial conditions that will force central banks to reverse and indulge in even greater levels of ‘largesse to excess’.