Macroeconomics: The Week Ahead: 14 to 18 Feb

The Week Ahead – Preview: 

Second guessing central bank policy moves, and watching warily as the threat of a Russian invasion of Ukraine appears ever more likely, will remain the overarching themes dominating price action in markets. The data calendar has a lot of first division statistics in the US (Retail Sales, Industrial Production, PPI, Existing Home Sales and NY/Philly Fed manufacturing surveys), China (CPI, PPI), Japan (Q4 GDP, Trade) and the UK (CPI, Unemployment and Retail Sales), accompanied by Australian labour data, and Canadian and Indian CPI. There will be plenty of central bank speakers, along with Fed and RBA policy meeting minutes, expected no change rate decisions in China (MTLF), Philippines and Turkey, and a meeting of G20 Finance Ministers and central bankers. On the political front, and in the context of the Ukraine crisis German Chancellor meets with Putin in Moscow on Tuesday, which seems unlikely to achieve anything, but after an awkward meeting with Biden last week, above all the conflicting comments on Nord Stream 2, there will be particular focus on the rapport (or lack thereof) at the press conference, after Putin’s frosty meetings with Macron and UK foreign secretary Truss; NATO defence ministers then hold a 2-day meeting starting Wednesday. UK Prime Minister Johnson remains under siege from the ‘partygate’ scandal, while governments in Europe and elsewhere appear to be in an ever greater hurry to ease or end pandemic restrictions to appease weary electorates who are now facing a cost of living crisis. In the commodity space, outside of the potential fall-out from a Russian invasion of the Ukraine (above all energy and agriculture), the focus will be on the International Grains Council monthly report on Wednesday, as well as a broad cross section of corporate earnings (miners, food producers, energy companies and equipment manufacturers). Corporate earnings will again be plentiful around the world, while a busy week for government bond sales sees auctions in the US, UK, Germany, France, Spain, Japan, Australia and Canada.

On the statistical front, a sharp rebound in US Retail Sales led by the 20.9% surge in unit Auto Sales is seen, after the unexpected 1.9% m/m slide in December, with headline expected at 2.0% m/m, and the core ‘Control Group’ measure posting a more modest 1.4% m/m following December’s -3.1%, with a sizeable fall in Restaurant sales due to Omicron disruptions acting as something of a drag. As ever, a reminder that US retail sales are a nominal measure, and any strength will look a lot impressive when adjusted for surging inflation. If last week’s CPI were an unpleasant surprise for markets and the Fed, this week’s PPI may offer a little solace, with headline seen up 0.5% m/m and core measures 0.4% m/m, which thanks to base effects would see headline y/y drop to 9.0% from 9.7%, while ex-Food, Energy & Trade would drop to 6.3% from 6.9%, with a close eye needing to be kept on intermediate PPI measures, which have tentatively been signalling some easing in pipeline pressures. Industrial Production is forecast to rebound a modest 0.4% m/m after dipping 0.1% m/m, though the January cold snap after a relatively mild December suggest utilities could provide a bigger boost, while the 0.2% m/m drop in manufacturing hours imparts some downside risk to the anticipated 0.3% m/m rise in Manufacturing Output, with much depending on Auto assembly rates. After a precipitous slide to -0.7 in January from 31.9 in December, the frequently volatile NY Fed Manufacturing index is seen rebounding to 11.0, while the Philly Fed measure is expected to dip to 20.0 after a unexpectedly robust 23.2 in January. A busy run of housing sector reports (NAHB, Housing Starts and Existing Home Sales) are expected to show continued strength.

A busy week for the UK, but all eyes will be on CPI, with headline seen falling 0.2% m/m (seasonal sales) to leave the y/y rate unchanged at 5.4%, while core is forecast to edge up 0.1 ppt to 4.3% y/y, with food prices and household goods exercising upward pressure in y/y terms, offset somewhat by base effects in housing. After signalling some easing in pipeline pressures in December, UK PPI is expected to see renewed upward pressure from food and energy on Input (median 1.0% m/m 13.4% y/y), and start of year price hikes (i.e. pass-through) on Output (0.6% m/m 9.1% y/y). But with household energy prices set to surge in April accompanied by sharp Council Tax increases, there is still plenty of upside on UK inflation, with headline CPI seen peaking around 7.0% in April. UK labour data are expected to show another solid 135K (vs. prior 184K) gain in January HMRC Payrolls, and a further fall in the Claimant Count, with the less timely Q4 Unemployment Rate seen unchanged at 4.1%, with FLS Employment dipping 50K due to Omicron effects; Vacancies (last 1.247 Mln) are likely to have remained close to record highs. Retail Sales round off the week, with a 1.2% m/m headline rebound expected after front loading of Xmas shopping and Omicron disruptions weighed heavily in December’s -3.7% m/m, and the cost of living squeeze on household incomes set to dampen spending in H1. A relatively quiet week in the Eurozone with an array of final or revised CPI and Q4 GDP readings, and Germany’s ZEW survey which is expected to see Expectations rise more modestly to a robust 55.0 from 51.7, after surging in January, though the correlation with the Dax implies downside risks, while rising inflation is likely to offset better signals on economic activity as Omicron restrictions are lifted and thus see the Current Situation edging up to -7.0 from -10.2.

In Asia, the week kicks off with the provisional estimate of Japan Q4 GDP which is expected to rebound 5.9% q/q after contracting 3.6% in Q3, led by a 2.2% q/q rebound in Private Consumption, a more modest 0.5% q/q pick-up in Private CapEx, which could well prove stronger than forecast, as well a 0.3 ppt boost from Net Exports. But with restrictions re-imposed in Q1, any Q4 strength will be at least partially reversed. December Private Machinery Orders are seen dropping 2.0% m/m, in a mean reversion after solid gains of 3.8% and 3.4% to start Q4, while Trade data are expected to see a deficit posted on rising energy prices, with Exports seen holding roughly steady at a solid 17.0% y/y. Over in China falling food prices (above all pork) are set to more than offset any upward pressure from energy prices in bringing down headline CPI to 1.0% y/y from 1.5%, and despite adverse base effects. PPI is also expected to drop back to a still high 9.5% y/y from a 25 year high of 10.3%, with coal and steel prices offsetting a modest rise in domestic energy prices. Australia’s labour data are forecast to show Employment unchanged on the month, due to Omicron disruptions, with the Unemployment seen holding at 4.2%, only marginally above the RBA’s key 4.0% threshold for policy tightening. As restrictions have been lifted and labour demand remains strong, Employment should register solid gains in coming months.

On the central bank front, markets are piling on the pressure on the Fed, BoE and ECB to hike rates faster and more aggressively, and are already discounting 50 bps hikes in March from the Fed and BoE, and a 25 bps hike by the ECB in June (which implies a dramatic shift in terms of QE, which the ECB will simply not be willing to countenance, not even the hawks) see charts attached. To an extent these central banks are victims of following reactive policy paths, with momentum traders adding to the pressure; on the other hand markets are doing a lot of the central banks’ work for them. However, as much as guidance is a heavily impaired tool at rate inflection points, there will need to be considerable push back between now and March from Fed and BoE speakers, if they want to avoid delivering less than markets are discounting. The FOMC minutes will be watched for the debate on a more aggressive rate and QT path. The Fed’s highly influential Brainard and Waller both speak this week, with Bullard best dismissed given his tendency to express policy views which blow with the winds of market pricing. ECB’s Lagarde, Lane, Schnabel and Villeroy are also scheduled to speak, doubtless continuing to emphasize flexibility, and the need to eschew aggressive policy measures. Base effects should kick in on inflation readings as we move into Q2, but much depends on energy prices (above all oil and gas), which look to be very vulnerable to a sharp correction after spiking even higher on Friday, following the US warning about an imminent threat of Russian invading Ukraine. This leaves central banks the option to point to political risk as a key argument for not opting for aggressive policy actions at the current juncture, but were these risks not to materialize, they would have to hope that energy prices slide sharply, in to avoid markets re-pricing a more aggressive trajectory. In either scenario, a great deal of volatility seems to be a sine qua non.

In the commodity space, all eyes will remain on oil prices in the context of the Ukraine crisis, with supply capacity (both OPEC+ and US shale) relegated to a second tier influence in the very short-term, though still key going forward. The large array of corporate earnings features amongst others: miners BHP and Glencore, lithium producer Albemarle and a host of Australian and Canadian miners (e.g. Barrick Gold and Fortescue), with Kraft Heinz and Nestle topping the run of food producers, EDF and Eni featuring in terms of energy, and agricultural equipment maker Deere & Co also on tap.

In broader earnings terms, the US season may be well past its peak with 80% of companies having reported (and on balance somewhat better than expected), but retailer reports get under way with Walmart, and it’s also a busy week for Asian earnings. Bloomberg News highlight the following as likely to be among the headline makers: Airbnb, Airbus, Allianz, AIG, Applied Materials, Barrick Gold, Baxter International, BHP Group, Bridgestone, Michelin, Cisco, DBS Group, Deere, Devon Energy, DoorDash, Electricite de France, Engie, Eni, Fortescue, Glencore, Heineken, Japan Tobacco, Kraft Heinz, NatWest Group, Nestle, Nvidia, Orange, Palantir Technologies, Pioneer Natural Resources, Reckitt Benckiser, Roblox, Schindler, Schneider Electric, Shopify, Tokio Marine, United Overseas Bank, Wal-Mart de Mexico.