Macroeconomics: The Week Ahead: 18 to 22 October 2021

A busy week is in prospect for scheduled data and events, as well as corporate earnings, government bond supply and commodity sector conferences. But the overarching themes of supply chain disruptions, the reality of long-term central bank financial repression, as well as China’s regulatory interventions, its widening property crisis and the various power crises in China, India and Europe will continue to be dominant factors. In many senses, financial markets are struggling with their tendency to ‘wishful seeing’ and ‘wilful blindness’, fostering perceptions and narratives about the state of the world economy, which are frequently disconnected from lived reality, with developed world central banks’ increasingly frayed narratives about ‘transitory inflation’ looks to be falling into that trap. A key ‘Who Moved My Cheese?’* question that historians will discuss at length is whether current inflation narratives are being conditioned by the technology boom and globalization ‘lowflation’ post-Cold War experience, just as much as the experience of the 1970’s and 1980’s conditioned the ‘inflationista’ view. It is of significance given that economic modelling is always vulnerable to erroneous assumptions about what are constants and variables, and not adapting them as some factors swing from constant to variable, and vice versa, as well as failing to stress test them sufficiently for tail-risk events. In principle, the world is getting a point lesson in Hirschman’s principle of the “Hiding Hand”, above all via the array of supply chain disruptions, and the accompanying torching of ‘just in time’ production management.

As a reminder for those that are unfamiliar with this, and with apologies to those are perhaps weary of my championing of the ‘Hiding Hand’: Hirschman articulated the principle of the “Hiding Hand”, as a counter to the hegemony of neo-classical economics’ adherence to Adam Smith’s “Invisible Hand” – the principle that “the general welfare is best served by everyone catering to his private interests, legitimated total absorption of the citizens in their own affairs”. Hirschman above all challenged the latter’s over simplification of human behaviour into a set of axioms steeped in ‘laissez-faire’ and ‘rational choice’ dogma. In contrast to Schumpeter’s concept of ‘creative destruction’, Hirschman’s ‘Hiding Hand’ argues that creativity is the key problem solving tool when we face unexpected situations; and that it is only via the experience of impotence when faced with the unexpected that we develop the innovative knowledge to solve problems, and that ‘rational choice’ often stifles innovation and creativity.’ It seems worth revisiting some of Hirschman’s ideas; above all his work in developmental economics. Hirschman stressed the need to understand local structures and resources prior to any intervention, and to eschew formulaic World Bank criteria, assumptions and models. He also emphasized the need for ‘latitude’ in planning and directing projects, on the basis that rigid project structures and procedures stifle managers’ creativity and indeed their confidence, and more than likely lead to the exclusion of solutions and products, which may perhaps be ‘no less desirable, and far more feasible, than some other’ (Hirschman, ‘Latitudes and Disciplines’ 1967). He also noted that prescribed assumptions about how and when projects are initialized and implemented can in fact foster corruption, though he also advocated applying some latitude in dealing with corruption, in so far as completely eradicating corruption leads to stagnation, instead of encouraging countries to face up to and learn to deal with such problems. Last but not least Hirschman also outlined the concept of “possibilism”, which is an approach to escaping ‘straitjacketing concepts’ such as perceived “absolute obstacles, imaginary dilemmas and one-way sequences”, noting that such “obstacles” can often turn out to be an asset or, at the very least, a spur for change. Hirschman also argued that such ‘inverted sequences’ should not be seen as having primacy over ‘orderly sequences’, but rather as a means to “increase the number of ways in which the occurrence of change can be visualized”.

Be that as it may, the data schedule gets under way with China’s Q3 GDP and array of monthly activity indicators, the US has Industrial Production, a raft of housing data, Philly Fed Manufacturing and the Fed’s Beige Book, while the UK looks to CPI and PPI, PSNB and ONS House Prices, Japan Trade and Canada CPI and Retail Sales, with G7 and Australia flash PMIs and a number of national business and consumer surveys rounding off the week. A sharp slowdown in China’s Q3 GDP (0.3% q/q vs. Q2 1.3%) and monthly activity indicators is anticipated, but given the constellation of delta variant related lockdowns, regulatory clampdowns, very adverse weather events and above all the power crisis, there would appear to be considerable downside risks, even if the monthly Trade data appeared to suggest a limited impact. Retail Sales are expected to recover modestly from 2.5% to 3.5% y/y, with weak Auto Sales continuing to be a major drag but offset by Mid-Autumn festival spending as activity restrictions were lefted ahead of it, while Industrial Production is seen slowing sharply to 3.8% from 5.3% y/y. But with the Evergrande debt woes widening, there will be particular focus on Property Investment, which is forecast to drop to 9.5% from 10.9% y/y. Given that the power crisis is clearly deepening, and continued bad weather events, perhaps the key observation is that there seems little prospect of a meaningful rebound in Q4.

Over in the US, expectations that Industrial Production and Manufacturing Output posting marginal gains of 0.2% and 0.1% m/m respectively look to be predicated on the solid Manufacturing ISM and PMI readings, but the anecdotal evidence, ranging from the impact of Hurricane Ida on the oil sector, weaker auto sector hours due to ongoing supply chain disruptions, and a drag from utilities as temperatures reverted to normal after a hot August, implies substantial downside risks. The more timely indications from the October Philly Fed Manufacturing survey are expected to see the headline index dip to a still solid 25.0 from 30.7, though with the region having a proportion of oil refiners, the recovery from Hurricane Ida disruption may give a boost; however it will be the outlook indices which will get particular attention, after softening in recent months. Housing indicators will be plentiful, with little change seen in either the NAHB index or Housing Starts, while Existing Home Sales are expected to post a robust 3.4% m/m rebound after falling 2.0% in August. Last but not least, the Fed’s Beige Book will get plenty of attention, after the September edition noted: “Economic growth downshifted slightly to a moderate pace in early July through August. The stronger sectors of the economy of late included manufacturing, transportation, nonfinancial services, and residential real estate. The deceleration in economic activity was largely attributable to a pullback in dining out, travel, and tourism in most Districts, reflecting safety concerns due to the rise of the Delta variant, and, in a few cases, international travel restrictions. The other sectors of the economy where growth slowed or activity declined were those constrained by supply disruptions and labour shortages, as opposed to softening demand.” The easing in the delta variant spread should provide a boost, but anecdotal evidence suggests that supply chain disruption constraints have not eased, and in some cases got somewhat worse.

As UK markets wrestle with an uncertain economic outlook, given a wide array of disruptions (haulage, food, labour and power), and have moved to discount a much earlier BoE rate hike, the focus will be on the gamut of inflation indicators and Retail Sales, with the PSNB, CBI Industrial Trends and GfK Consumer Confidence surveys also on tap. August’s larger than expected jump in CPI was to a non-negligible extent dictated by base effects, though food and energy prices were also a major contributor, and will likely remain so. September CPI is expected to ease somewhat to 0.4% m/m from 0.7%, which would see the y/y rate unchanged at 3.2%, while core is seen edging down to 3.0%, with beneficial base effects from the expiry of the ‘eat out to help out’ last year acting as a restraint. But this will prove to be short-lived, as higher household energy costs kick in on the back of the upward adjustment to the energy price cap as of October. While the BoE has made increasingly hawkish noises on the timing of an initial rate hike, there is little that monetary policy can do to temper the very obvious pressures in non-discretionary area, other than keeping a watchful eye on wages. As for Retail Sales, forecasts assume a big boost from panic buying of auto fuel to headline: +0.6% m/m after a much weaker than expected -0.9% in August, but the core ex-Auto Fuel measure is seen dipping 0.1% m/m after dropping -1.2% m/m in August. The latter is likely to be a combination of less spending on goods and more on services as activity restrictions have been lifted, though there should be some offset as a jump in those returning to work in offices provide a boost to clothing, take away food and personal care items. However the non-discretionary price pressures are likely to constrain spending on household goods and other big-ticket items both this month and going forward.

Last but least, the week ending ‘flash PMIs’ are expected to see rising energy prices along with extant and longer-running supply chain constraints take their toll in the UK and Eurozone, above all on Manufacturing, especially in Germany, as reflected in the latest round of sharp cuts to 2021 GDP forecasts, but also on Services; Eurozone readings may however get a partial offset from the unexpectedly strong recovery in Italy, as reflected in a sharp upward revision over the weekend to business lobby Confindustria’s 2021 GDP forecast to 6.1%. By contrast, US PMIs are seen little changed vs. September at 60.5 Manufacturing and 55.2 Services.

On the central bank front, the volume of G7 central bank speakers threatens to be a cacophony, and a high proportion will in fact be on social and environmental, rather monetary policy issues, which while intentioned, does raise the risk of criticism there is rather too much virtue signalling, particularly given the oft cited accusation that financial repression has only served to exacerbate inequality. In the EM central bank space, there are numerous policy meetings, many of which will see policy rates left unchanged, with the focus likely to be on decisions in Turkey, Russia and to lesser extent Paraguay.  Turkey’s TCMB is expected to cut rates a further 100 bps to 17.0%, and all the more so given Erdogan’s latest firings and hirings, and despite a deteriorating inflation outlook, both due to energy prices, as well as a further slide in the TRY in reaction to Erdogan’ interventions. Russia’s Bank Rossi is expected to hike rate a further 25 bps to 7.0%, with inflation continuing to climb, albeit at a slower pace, which is likely to see Nabiullina signal the likelihood of at least one more rate hike. Paraguay’s BCP is likely to follow on last month’s 75 bps hike, with a further similarly sized or perhaps even bigger hike, as it echoes the trend of very aggressive policy tightening in South America, as inflation threatens to balloon out of control (Paraguay Sept 6.4% y/y vs. prior 5.6%).

Earnings, production reports and conferences dominate the events schedule for the commodity space. Among those reporting this week are: Baker Hughes, Cleveland-Cliffs, Freeport-McMoRan, Halliburton, Kaiser Aluminum, Norilsk Nickel, Nucor, PetroChina, Schlumberger & Severstal, while there are Q3 production reports from Anglo American, BHP, Santos, South32 and Woodside. On the conference front there are ETSCEE Energy, GrainCom, India Energy Forum, Platts Sugar and Reuters Downstream USA, while in report terms the EIA publishes its monthly Drilling Productivity Report, and the USDA Milk & Red Meat Production along with Cattle on Feed; Cold Storage data for pork, beef and poultry, while China sees Q3 Pork Output and Inventories.

A busier week for government bond supply, sees the US sell 20-yr & TIPS 5-yr, the UK 10-yr and a new 32-yr ‘Green’ Gilt (via syndication), while the Eurozone has auctions in Germany, France, Spain and Finland.

The US Q3 corporate earnings season steps up a gear in volume terms, as a broad array of non-financials start to report. Among those companies reporting this week in the US and elsewhere, the following are likely to be among the headline makers: ABB, Abbott, Akzo Nobel, America Movil, American Express, ASML, AT&T, Barclays, BoC Hong Kong, Biogen, Blackstone, Bollore, BoNY Mellon,  China Mobile, Chipotle, Ericsson, Freeport-McMoRan, Honeywell, Intel, IBM, Johnson & Johnson, Mattel, Myuan Foodstuff, Netflix, NextEra Energy, Norilsk Nickel, Nucor, Philip Morris International, Philips, Ping An Bank, Procter & Gamble, SAAB, SAP, Schlumberger, Severstal, State Street, Tenet Healthcare, Tesla, Union Pacific, United Airlines, Verizon and Volvo.