Macroeconomics: The Week Ahead: 8 to 12 January

The Week Ahead – Preview:

The first full working week of 2024 sees rather more in the way of major economic data, with the US and China both looking to CPI and PPI, as China also awaits Trade and Credit aggregates, while the UK has monthly GDP and activity indicators along with BRC Retail Sales, and Japan looks to Tokyo CPI, Household Spending and Labor Cash Earnings. There will be rather more in the way of central bank speakers, while rates are seen on hold in South Korea, Poland and Romania, while a further 25 bps cut to 6.50% is expected in Peru. The US Q4 corporate earnings season kicks off on Friday with the usual run of financials, while in the commodity/energy space there are the EIA’s Short-Term Energy Outlook (STEO) and USDA’s monthly WASDE report. The week ends with the presidential and parliamentary elections in Taiwan, while the US Congress returns from recess, with focus on whether it can pass legislation to ratify aid to Ukraine and Israel, along with measures to curb immigration on its southern border. There will be plenty of govt bond supply with the US headlining with $110 Bln of 3, 10 & 30-yr, Japan also selling 10 & 30-yr, while Europe sees auctions in UK, EU, Germany, Italy, Austria and Netherlands, as well as the probability of one or more Eurozone sovereigns selling debt via syndication.

In the US, inflation data follows Friday’s mixed labour data, which net of revisions was slightly weaker than expected in terms of Payrolls, but saw Average Hourly Average Earnings tick up to 4.4% on a 3-month annualized basis (mostly due to the UAW autoworkers wage settlement), but also an unexpectedly sharp drop in the labour force participation rate to 62.5%, and a slight rise in the Underemployment Rate to 7.1%. After dragging headline CPI lower in recent months, gasoline prices are set to boost December CPI to 0.2% m/m, edging the y/y rate up to 3.1%, while core is seen remaining a little bit sticky at 0.3% m/m, but easing in y/y terms to 3.8% from 4.0%. PPI is expected to rise 0.2% m/m headline and core, with y/y rates at 1.3% and 2.0%, per se underlining that pipeline disinflation in core goods prices has largely run its course. On balance, this would not make the case for the Fed to be concerned about rates being ‘overly restrictive’, and by extension kicks the can down the road for an early year rate cut. NFIB Small Business Optimism and Treasury Budget data are the other items scheduled for release.

China’s run of lending, inflation and trade data are not likely to assuage considerable concerns about its economic outlook, above all due to contagion from the property sector’s woes. Aggregate Financing is seen slowing in m/m terms to CNY 2.15 Trln, while New Yuan Loans are expected to tick up to CNY 1.35 Trln, both relatively depressed due to seasonal factors, and with risks to the downside of the consensus estimates given weak credit demand. Deflation is expected to remain entrenched, with CPI forecast at -0.4% y/y and PPI at -2.6% y/y (vs. Nov -0.5% and -3.0%), with food prices seen giving a marginal boost to CPI, and some raw materials prices countering broader finished goods deflation for PPI. Trade data will likely underline that external demand remains sluggish, with Exports seen ticking up to 1.6% y/y on benign base effects, while Imports are seen flat y/y, though anecdotal evidence on seasonal trends suggests some downside risks for both. Elsewhere in Asia, Japan’s Tokyo CPI is expected to ease on all measures (headline 2.5% y/y, ex-Fresh Food 2.1% and ex-Fresh Food & Energy 3.5%), while Labour Cash Earnings are seen steady at 1.5% y/y in nominal terms and marginally better at -2.0% in real terms, with Household Spending expected to contract -2.3% y/y; none of which makes the case for an early year BoJ exit from its ultra-easy policy. Australian November CPI is also expected to slow to a fresh cyclical low of 4.5% y/y from 4.9%, though both the November and December data will benefit heavily from benign base effects.

In the UK, the week gets underway with the latest REC/KPMG Employment PMI and BRC Retail Sales, while Friday brings the run of monthly GDP and activity data. Forecasters look for a 0.2% m/m rebound in GDP after a sharper than expected -0.3% m/m in October, paced by a 0.2% m/m rebound in Index of Services (Oct -0.2%), and tepid rebounds in Industrial Production and Construction Output, and a small improvement in the Trade deficit. As with the Eurozone, the impression will be that the UK economy continues to flirt with recession. In Germany, Factory Orders are seen rebounding 1.1% after a relatively sharp 3.7% m/m drop in October, seemingly on course to repeat the pattern seen in Q3 with a sharp drop in the first month of the quarter followed by dead cat bounces in the two following months. Similar patterns are expected for Industrial Production (+0.5% m/m), and Exports (0.3% m/m) and Imports (0.4% m/m), while French Industrial Production is forecast to eke out a 0.1% m/m rise, but decelerate to just 0.7% y/y.

Overall Q4 S&P 500 earnings growth is seen at 1.3% y/y, which suggests a second consecutive quarter of modest earnings growth after a protracted downturn. But with a current forward 12-month P/E ratio of 19.2 well above 5 and 10-yr averages of 18.9 and 17.6, results will need to be impressive to support current valuations, let alone driving the S&P 500 above the key current psychological barrier of 4,800 towards the nearby all-time high of 4,818.62. This is perhaps also all the more so the case, given that the latest AAIA data showing bullish sentiment at 48.6%, a tad lower from December’s record, and well above the longer term average of 37.6%.