Macroeconomics: The Week Ahead: 22 to 26 November 2021

The US Thanksgiving holiday will thin market trading conditions and volumes, and thus heighten volatility risk as the array of uncertainties on the global economic outlook are for choice still rising, as year-end approaches. The data schedule features a rush of US data mid-week, G7 ‘flash’ PMIs, numerous surveys in the Eurozone and UK, along with inflation data in Japan, Brazil and Mexico. Central bank speakers (Fed, ECB & BoE) will again be out in force, with the November Fed and ECB minutes also on tap, and rate hikes expected in New Zealand, South Korea, Hungary and Paraguay.

Politically the primary focus will be on what measures are taken by governments in Europe to contain the surge in infection rates, after Austria opted to lockdown, and Germany, Ireland and Netherlands imposed restrictions on the unvaccinated. The rising level of social unrest as restrictions are re-imposed underlines the risk that governments’ authority comes increasingly into question, which only adds to the array of political uncertainties.  Biden is due to announce his Fed Chair choice, still generally expected to see Powell re-nominated. However if he opts for Brainard, then it is worth noting that the more dovish monetary policy chatter in markets is entirely spurious, being a case of splitting hairs in differential terms. However her hawkish view (very much in line with Senator Warren) on banking/financial sector regulation could prove to be of major significance and ruffle some market feathers, even if the usual array of vested interests would make every effort to push back hard on any more radical moves, above all on the shadow banking sector. A formal agreement to form the first ever three party coalition in Germany is also expected, which would also enable a successor to Weidmann as Bundesbank president to be nominated.

In the commodity space, a light week in terms of conferences and monthly reports with the EU MARS crop bulletin due, while concerns around China and European growth (i.e. demand) outlooks continue to prompt spikes in volatility, even though it is quite clearly supply issues that are pacing longer term trends. On the govt bond supply front, the US dominates with a total of $200 Bln of 2, 5 & 7-yr and FRN 2-yr, the UK sells a new 2073 I-L gilt via syndication, while a light week in the EUR (ca. EUR 9.0 Bln total) sees debt sales in Germany, Italy & the Netherlands. A lighter week for corporate earnings features Deere & Co, Xiaomi, XPeng and Zoom, as well as more retailer reports in the US.

Statistically the US dominates, with a logjam of data packed into Wednesday ahead of the holiday, within which the Personal Income and PCE data will likely get most attention, above all the deflators, just as even the most dovish FOMC members concede that the policy tightening timetable (pace of QE taper and first rate hike) may have to be moved up. The headline deflator is seen up 0.7% m/m and core 0.4%, to jump y/y rates to 5.1% (from 4.4%) and 4.1% (from 3.6%) respectively, underlining the pressure on the Fed. The accompanying Personal Income and PCE are expected to see a tepid 0.2% m/m bounce from the -1.0% m/m drop in September (due to the ending of enhanced benefits) in Personal Income, while PCE is seen up 1.0% m/m, with the focus on whether the jump in goods spending (as per Retail Sales), tempered services (leisure, hospitality, health care) spending. Outside of these, Durable Goods Orders are anticipated to see a drag on headline (exp. 0.2% m/m) from aircraft, but to continue to see solid gains in core measures (0.5% m/m), as signalled by manufacturing surveys, and perhaps also reflecting an element of ‘hoarding’ given supply chain bottlenecks. The first revision to Q2 GDP is expected to be modestly higher (2.2% SAAR vs. advance 2.0%) on the back of upward revisions to trade, inventories and construction output, but is now rather historical, above all given the upside surprise on early Q4 activity data in recent weeks. Home Sales data will likely remain robust in SAAR terms, even if a reactive correction (-1.8% vs. Sep 7.0%) is forecast for Existing, primarily due to low inventory constraints, but New Home Sales are seen unchanged at 800K, despite surging 14.0% m/m in September, while the Goods Trade Balance is expected to narrow very modestly to $-95.0 Bln after widening sharply the previous month.

The consensus for US ‘flash’ PMIs looks for a pick-up on both Manufacturing and Services, in contrast to the UK and Eurozone, which are forecast to decelerate modestly across the board, even if remaining at solid levels in historical terms, with the surveys only likely to capture reaction to restrictions and lockdown measures in December, though these may be captured in the generally overlooked Austrian Manufacturing PMI that is also due. Germany’s Ifo Business Climate heads a busy run of national business and consumer confidence surveys to be published this week in the Eurozone and UK, with a fifth consecutive drop to 96.6 from 97.6 expected, leaving the headline index back at March levels. Final Q3 German GDP is seen unrevised at 1.8% q/q will offer a detailed breakdown of contributions, with Private Consumption expected to have been the key driver (4.8% q/q), with CapEx seen flat q/q and Govt Spending expected to slow to 0.4% q/q vs. Q2 1.8%. Australia starts to release the component contributions for Q3 GDP (due the week after), and unsurprisingly expected to see contractions in CapEx (-2.4% q/q) and Construction (-3.0%). Tokyo CPI is forecast to pick up to 0.4% y/y from 0.1% on the back of energy price pressures, but core ex-Fresh Food & Energy is still seen falling 0.3% y/y, barely changed from October’s -0.4%. By contrast the inflationary pressures in Latin America, which have prompted aggressive rate hikes across the region (with Paraguay’s central bank seen hiking a further 100 bps this week), are forecast to show Brazil’s IPCA-15 inflation rising to 10.66% y/y (vs. 10.33%), and Mexico’s mid-month CPI jumping to 6.88% (vs. 6.36%), as energy and food price pressures are sustained, though core price pressures are likely to remain restrained.

The November Fed and ECB minutes will offer some insights into their respective debates on inflation pressures. The FOMC minutes will likely highlight that both hawks and doves now see considerable risks to the ‘transitory inflation’ narrative, with the hawks suggesting that there is much less slack in the labour market than official labour data would suggest, while doves remained of the view that labour force participation rates can get back to pre-pandemics, though, as noted, more recent comments suggest that views are shifting. The ECB minutes should offer some hints on the debate on how hard to push back on market rate expectations, as well as how the battle lines on how to adapt its QE programme, given that the PEPP programme will have to be transitioned into the APP in some form or another by the end of Q1 2022. There are again numerous speakers from both the Fed and ECB this week, and indeed from the BoE, with governor Bailey and chief economist Pill due to speak again, with both offering little in the way of clarity in their most recent comments, other than restating that risks on inflation are ‘two-sided’, that a rate in December is not a foregone conclusion, and noting that there is nothing that the BoE can do to contain rising energy prices, or resolve labour shortages and supply-chain bottlenecks. As noted both the Bank of Korea and RBNZ are expected to follow up on initial rate hikes with further 25 bp rate hikes, with some speculation that the RBNZ might opt for a more aggressive move given that its next policy meeting (due to holiday break) is not until the end of February. Sweden’s Riksbank is expected to hold rates at 0%, and continue to signal no rate hikes over the next two years.

While less plentiful as the earnings season winds down, there will still be a number of major corporate quarterly reports, with those making the headlines likely to include: Agilent, Airports of Thailand, Alimentation Couche-Tard, Analog Devices, Autodesk, Best Buy, Compass Group, Deere & Co, Dell, Dollar Tree, Gap, HP, Keysight Technologies, Kuaishou Technology, Lukoil, Medtronic, Meituan, Naspers, Nordstrom, VMware, Xiaomi, XPeng and Zoom Video Communications.