Macroeconomics: The Day Ahead for 17 January

EVENTS PREVIEW

Markets will be confronted with a deluge of hard data and central bank speakers today, and also have the Fed’s Beige Book and OPEC monthly Oil Market Reports to contend with, as well as more US corporate earnings, with second tier banks (Citizens Financial, US Bancorp) and real economy corporates (Alcoa, Kinder Morgan, Prologis i.a.) among the highlights, while the US, UK and Germany hold debt auctions. Statistically the focus is on China, the US and UK, with China’s Q4 GDP, monthly activity and property indicators and the gamut of UK inflation data, as well as Singapore trade to digest. Ahead lie Eurozone final CPI (seen unrevised, but with details on core inflation metrics), US Retail Sales, Industrial Production, Import Prices and NAHB Housing Market Index, and Canadian producer price metrics.

** China – Q4 GDP, Dec Retail Sales, Industrial Production & Property data **

While Q4 GDP, Industrial Production and Fixed Asset Investment were in line with expectations, Retail Sales at 7.4% vs. expected 8.0% decelerated more rapidly than expected, and as with GDP (despite meeting the offical target) were flattered by base effects, and bode poorly for 2024. Property sector data can only be described as abject, with the fall in Sales accelerating to -6.0% y/y from November’s -4.3%, while the Property Investment slump at -9.6% y/y was all the worse given that it might have been hoped that December 2022’s -10.0% might have offered a minor base effect boost. Rate cuts will do nothing to boost confidence, and as much as Premier Li is quoted as saying that GDP was impressive given the lack of major stimulus, the fact is that the economy will slow sharply in 2024 unless a combination of property sector balance sheet reconciliation and sizeable fiscal stimulus are deployed, with property sector contagion risks getting ever larger.

** U.K. – December CPI and PPI **

After a run of better than expected readings, this was a reality check with tax related increases in alcohol & tobacco, along with transport (airfares) and restaurants & hotels the major contributors, with both Core (unchanged 5.1% y/y vs. expected 4.9%) and above all the rise in Services (6.4% y/y vs. expected 6.1%, prior 6.3%) putting paid to any lingering expectations of an early year rate cut. PPI data did however undershoot at -1.2%/-2.8% on Input and -0.6%/0.1% on Output, underlining that there are no pipeline goods price pressures. But the latter is of little comfort for the BoE, given the high and sticky level of Services CPI, and still high wage growth, as evidenced by the 6.6% increase the Indeed private sector wages metric published overnight.

** U.S.A. – Dec Retail Sales, Industrial Production, January NAHB & Fed Beige Book **

As noted in the weekly US official (‘hard’) data have proven to be much more resilient than surveys have suggested, with some surveys such as yesterday’s NY Fed Manufacturing looking rather schizophrenic, as per the total collapse in current Business Conditions (-4.7 vs. Dec -14.5), while the 6-month Outlook jumped to 18.8 from 12.1. Per se, those hard data sceptics, of which there are a sizeable number, pointing to surveys as offering the counterfactual to hard data are skating on very thin ice. This may offer a lens through which to view today’s stats and the Fed’s Beige Book. Retail Sales are seen posting modest m/m gains across the board (headline 0.4% m/m, ex-Autos & Gas 0.3%, Control Group 0.2% m/m).

The simple observation being that Retail Sales have fallen only once in the past 8 months, and while Q4 Private Consumption will decelerate sharply from Q3’s outlier, it will still be expanding, once again defying the permafrost. Industrial Production and Manufacturing are seen flat m/m, but turning higher in y/y after a protracted fall, with some further catch-up in auto output following the end of the UAW strike likely offset by a drag from utilities output given an unseasonably warm December.

The NAHB survey is expected to tick up a little to 39 from 37 on lower mortgage rates, but remaining weak, while headline Import Prices are likely to be dragged lower by energy prices, though flat ex-Petroleum. November’s Fed Beige Book noted ‘economic activity slowed since the previous report, with four Districts reporting modest growth, two indicating conditions were flat to slightly down, and six noting slight declines in activity’, it also noted that ‘the economic outlook for the next six to twelve months diminished over the reporting period’. This in turn appeared to be a trigger for the shift away from the prior hawkish narrative.

December’s regional Fed surveys were on balance better than November, per suggesting that today’s Beige Book may see a slight improvement in current assessments, and perhaps a somewhat improved outlook. Waller’s speech yesterday, while clearly on board with 2024 rate cuts was nevertheless cautious, emphasizing that while he felt confident that inflation was on the way back to target, it may yet rebound, and noting the needs for a moderation in consumption and hiring, as well as further low readings on monthly inflation data to strengthen the case for a cut. He also pushed back quite hard on the idea of rapid rate cuts “When the time is right to begin lowering rates, I believe it can and should be lowered methodically and carefully”, adding “With economic activity and labor markets in good shape and inflation coming down gradually to 2%, I see no reason to move as quickly or cut as rapidly as in the past.” One would have to add that those previous rapid rate cutting cycles were prompted by bouts of financial instability and emergent contagion effects on the economy, effectively forcing the Fed’s hand. What Waller is describing is how the Fed will likely respond to the economic cycle absent financial instability. In that respect, the Fed’s discussions on reducing the pace of QT (balance sheet reduction) will offer rather more insight into how concerned they are about not reprising the money market meltdown that brought its prior QT cycle to a very abrupt halt in 2019.