Macroeconomics: The Day Ahead for 2 February

Outside of Italian and Eurozone CPI and the US ADP Employment report, the statistical schedule is very thin, with only UK BRC Shop Prices and Indonesian CPI to digest. The OPEC+ production meeting tops the events schedule, with a speech from RBA’s Lowe (a little less dovish than the RBA statement) and testimony from BoC’s Macklem and Rogers featuring in terms of central banks, with Brazil’s BCB policy meeting also due. Corporate earnings are dominated by big tech, with results from Alibaba, Alphabet and Meta Platforms, accompanied by large Japanese banks, Marathon Petroleum, Qualcomm and Spotify, while Canada sells 2-yr debt. In respect of the OPEC meeting, while there has been some speculation about a bigger March increase than the planned 400K bbls per month, yesterday’s OPEC+ technical committee’s observation that December output was 824K below the production target suggests that an even larger increase would strain OPEC+’s credibility very severely. The problem remains that while Saudi Arabia, UAE and less importantly Kuwait have plenty of additional production capacity, both Russia and Iraq are already struggling to achieve raised output targets. Eminently with updated base quotas that were agreed last year coming into effect in April, the picture on output will change quite dramatically, with the assumption being that supply will outstrip demand, regardless of any disruptions to demand from the pandemic, with US output also seen rising as DUCs come on stream. This also suggests that OPEC+ is unlikely to veer away from its current plans, and all the more so given the bust-up between Saudi Arabia and U.A.E. last year underlines how difficult achieving a new agreement would likely be, even if in the short-term it runs the risk of a further spike in price towards the emotive $100 / bbl level. Brazil’s BCB is seen hiking rates a further 150 bps to 10.75%, which would finally take official ‘real’ rates into positive territory, the question is whether there is a hint that a pause in the rate hike cycle is not far away.

RECAP: ** Eurozone – Jan prov. HICP **

– The quirks of VAT tax changes, compositional effects and winter sales timing that paced last January’s spike were expected to unwind this month, which predicated expectations of a drop of 0.4% m/m and drag the headline rate down to 4.4% from 5.0%, and the core rate even more markedly to 1.8% y/y from 2.6%. But with much higher than expected outturns in Germany (5.1% y/y vs. expected 4.3%), France (3.3% y/y vs. expected 2.9%) and Spain (6.1% y/y vs. expected 5.5%), paced by sharp rises in Household Energy and Food, and only a marginal dip in Services inflation, which had been expected to drop sharply, it would appear that the setback will be a good deal more modest on both headline and core, which leaves the ECB in an even more awkward (and divided) position ahead of Thursday’s council meeting.

** U.S.A. – June ADP Employment **

– As previously noted, the ADP measure has been much better aligned with the Employment component of the Household survey rather than Payrolls, with the former having signalled much stronger labour demand in recent months than the latter, even though forecasts for ADP and Payrolls remain generally very close. The spike in Initial Claims and well documented disruptions to workplace attendance due to the Omicron variant predicate expectations of a “weak” 200K increase, above all on the assumption  that recent strength in the Leisure & Hospitality along with Trade & Transport (see chart) will have taken a sizeable “hit” from the virus. The White House has already been ‘briefing’ the media that the Payrolls will be weak (by the sound of it negative), e.g. NEC’s Deese told MSNBC yesterday that “We expect that that (i.e. Omicron disruption) will have an impact on the numbers. We never put too much weight on any individual month; this will particularly be true in this month, because of the likely effect of the short-term absences from omicron.”  White House Press Secretary Jen Psaki said on Monday that “So we just wanted to kind of prepare, you know, people to understand how the data is taken. …As a result, the month’s jobs report may show job losses in large part because workers were out sick from omicron.” That said, in contrast to Payrolls, which is surveyed in the week including the 12th of the month, the ADP measure is an all month measure capturing who is employed rather being paid, and with cases peaking mid-month, it could also prove to be stronger than forecast, and also relative to Friday’s Payrolls. The pick-up in JOLTS Job Openings for December (10.925 Mln from Nov. 10.775 Mln, against a forecast of 10.30 Mln) confirms continued strength in labour demand, though as has been well documented, filling open positions remains highly problematic. But both today’s report and Friday’s official data are unlikely to have a material impact on Fed rate hike expectations, in so far as the Fed is effectively flying by the seat of its pants on the inflation outlook and how to rein it in, only willing to signal a March hike and unwilling to offer any material guidance on how many more hikes this year, or indeed the terminal rate, let alone its QT plans. This may well be intentional, in so far as a more aggressive market pricing of the Fed’s rate trajectory does some of the work for them by discounting tighter financial conditions (which are still extremely loose – see chart), which, for the time being, the Fed has no need or incentive to lean against (in contrast to the messages being sent by ECB, RBA and BoC).