Macroeconomics: The Week Ahead: 13 to 17 December

It may be the last full working week ahead of the Christmas holidays, but the calendar of data and events is a case of major data and central bank policy meeting overkill. There are no less than 20 central bank meetings, including the Fed, ECB, BoE, BoJ and SNB, while the Bank of Canada publishes its 5-yr inflation mandate review. Statistically there are a raft of first division data in the US, China, UK and Japan accompanied by G7 flash PMIs and Germany’s Ifo Business Climate. Politically UK PM Johnson faces a backbench rebellion on a vote about the latest Covid restrictions, as the Downing Street 2020 Christmas party scandal shows no signs of abating, and a defeat for Johnson could lead to a vote of confidence; the week ends with an EU leaders summit, while concerns about tensions over Russian troops massed at the Ukraine border remain very high. OPEC and the IEA publish their monthly Oil Market Reports, and some more in-depth medical research into the risks from the Omicron Covid-19 variant is also likely to be published. That said, the rally in risk assets last week underlines how long-term central bank financial repression continues to ride roughshod over pretty much any emergent risks, with volatility being once again crushed by a seemingly unquenchable thirst for risk assets and yield, and largely reducing macro data and events to little more than roadkill. Central banks may well be running scared of any sharp tightening of financial conditions, though one would have to add that they are in effect hostage to the medicine that they have deployed over the last decade, above all since the pandemic’s outbreak.

On the central bank front, the Fed meeting will be primus inter pares. The consensus looks for the pace of the Fed taper to be doubled from $15 Bln per month to $30 Bln, which would bring its QE programme to an end by March, and open the door to a rate hike after that, with June generally anticipated to be the lift-off moment. The real point of market interest will be the extent to which the rate trajectory is steepened relative to September’s ‘dot plot’ and current market pricing (see attached), even if this is a rather flawed medium for such projections. It will also be important to note any tweaks to its economic projections, above all how much less ‘transitory’ inflation is expected to be, as well as any changes to long-run projections, perhaps above all for unemployment.

Attention then moves to the BoE, who have effectively discarded forward guidance, being fearful of painting themselves into a policy corner (or bind) and wanting more room for manoeuvre, but in the process sending an array of confusing signals that further undermines their already threadbare credibility. Markets do not anticipate a rate hike at this meeting (with Friday’s soft GDP data reinforcing that view), and the BoE ruled out an early end to its QE programme, for the rather daft reason of setting a precedent for any future QE programmes. Given that the BoE’s own research has already shown that QE has not worked as it was intened to, i.e. encouraging greater credit availability, this rationale does not stand up to any scrutiny. This is not a Monetary Policy Report meeting, so markets will have to comb through the Minutes to ascertain where the MPC sees risks (up or down) relative to its November projections. As the attached graphic shows markets are anticipating Base Rate being close to 1.0% (vs. current 0.1%) by the end of 2022, though one can assert that this is rather more a case of building in a larger rate risk premium than reflecting a consensus view on the economic outlook.

The question for the ECB meeting is what it signals in terms of how it will use the APP to cushion markets against the impact of the March end to its PEPP programme, though there is clearly an unwillingness to pre-commit, even if the hawkish minority continue to rail against the current open-ended QE commitment. The challenge for Lagarde & Co is how to balance signalling a gradual withdrawal of liquidity provision, against a willingness to intervene if markets become disorderly, above all if ‘financing conditions’ were to deteriorate sharply. In that respect the updated staff forecasts, above all for inflation, will offer significant signals on how much more concerned they are about current inflation pressures, though doubtless still signalling inflation undershooting the 2.0% CPI target at the end of the forecast period.

The Bank of Japan is expected to keep rates and its 10-yr JGB target unchanged, with the focus on how long it extends its corporate funding programmes, and any adjustments it might make to them. Given recent comments by Amamiya highlighting ‘extremely favourable’ conditions for corporate debt issuance, and the slowdown in bank lending, it will not need to make any changes to the caps that are in place for BoJ holdings of corporate debt (bonds and CP). It may like all the other central banks highlight uncertainty about the impact of the Omicron variant, but express optimism about the recovery from the Q3 lockdowns, while highlighting that inflation remains well below target and largely a function of energy prices, and also noting the Kishida govt’s JPY 55.7 Trln ‘stimulus’ package.

As for the SNB, it is expected to hold rates, and signal ongoing  tolerance for a firmer CHF, above all due to the fact that the CHF’s real effective exchange rate has in fact remained well below trend. Norway’s Norges Bank is expected to hike rates by a further 25 bps to 0.50%, as previously signalled, with the focus on how recent data should prompt it to raise its longer-term rate trajectory to around 2.0%, but perhaps pushing back on the timing of the next rate hike (currently implying a further rate hike in March) due to current uncertainties. Elsewhere both Philippines BSP and Bank Indonesia are expected to hold rates, with the former likely pointing to signs that the economy is slowing with Unemployment remaining elevated, and noting that while CPI is above its 2-4% target, the trend is slowing. Bank Indonesia has no pressure from inflation to contend with (below target), and with growth below its potential rate, it is no hurry to pre-empt any FX pressure that might emerge once the Fed starts to hike rates. Russia’s Bank Rossi is expected to deliver another aggressive 100 bps given that there is as yet no sign that inflation or inflation expectations are peaking, let alone turning lower, though there is scope for a surprise on the size of the hike, given that policymakers have only signalled ‘at least’ a 50 bps. Turkey’s TCMB is expected to cut rates by a further 100 bps to 14.0%, bowing to ongoing pressure from President Erdogan, and despite the collapse in the TRY and rampant inflation. Hungary’s MNB is seen hiking its repo rate 40 bps to 2.50%, and its 1-week Depo rate by 20 bps to 3.50%. Latin America continues to see very high levels of inflation, and central banks have been hiking rates aggressively, in some cases very aggressively, a trend which is expected to continue this week with a further 125 bps hike to 4.0% seen in Chile, 50 bps to 3.0% in Colombia, while Banco de Mexico is seen sticking with its more measured approach with a 25 bps hike to 5.25%, despite a deteriorating inflation outlook, though with an eye on significant slack in the economy, and growth decelerating.

– As for the week’s busy run of statistics, the focus will be on China and the US. The run of Chinese data are projected to see Retail Sales little changed in y/y terms at 4.8%, still well below the pre-pandemic 8.0% plus trend rate, with perhaps some downside risks given a much weaker than expected boost from Singles Day, and given adverse base effects. Industrial Production is expected to pick up to 3.8% y/y from 3.5%, with the energy sector (power and rising refinery rates) providing a boost, as was signalled by the recovery in the PMI output sub-index. Fixed Asset and Property Investment are seen slowing further to to 5.4% and 5.9% y/y respectively, as the drag from the property sector continues to weigh heavily, and it will be interesting to see how much further Property Prices decline after modest drops in the past two months. Over in the US Retail Sales are seen up 0.8% m/m on headline and core measures, after jumping in October, with much of the ‘strength’ still likely due to inflation (above all gasoline), though early Christmas shopping predicated on concerns about shortages due to supply chain bottlenecks may also give a boost. Industrial Production and Manufacturing Output are both forecast to rise a solid 0.7% m/m, echoing survey data, though slowing from October’s post storm rebound, and with a smaller boost from the auto sector. Both PPI and the various regional Fed surveys will be watched closely for signs that supply chain pressures are easing, though PPI will still accelerate in y/y terms.

UK labour data are forecast to show a 224K rise in the less timely FLS Employment data for October, but it will be the HMRC payrolls and Claimant Count data for November which will be of greater significance, even if the latest Omicron related restrictions imply some downside risks for December. Average Weekly Earnings are likely to remain elevated, (headline 4.6% y/y and ex-bonus 4.0%), but continuing to slow. But there will be rather more focus on CPI and PPI, with a more modest 0.4% m/m rise seen for CPI, which would thanks to adverse base effects still see the y/y rate jump to 4.8% from 4.2%, while core is expected to rise to 3.7% from 3.4%. PPI is also expected to slow in m/m terms, but still see both Input and Output pick up in y/y terms to 13.2% and 8.2% respectively. Last but not least Retail Sales are forecast to post a solid rise of 0.8% m/m, and as with the US benefitting from early Christmas shopping, with the sharp rebound in y/y rates due to base effects, while GfK Consumer Confidence is unsurprisingly seen taking a hit from the latest round of restrictions due to the Omicron variant.

Govt bond supply will drops sharply as is seasonally typical, while the flow of corporate earnings remaining modest, though results from Accenture, Adobe, FedEx, IndiTex and Lennar will attract attention, along with an outlook update from Alibaba at this week’s Investor Day.