Macroeconomics: The Day Ahead for 15 December

As the dust settles on this week’s major western central bank policy meetings, in which the Fed opened the door to 2024 rate cuts, while the ECB and BoE pushed back forcibly on market rate views, there are the run of China activity & property data and unchanged PBOC 1-yr MTLF operation, Japan PMIs and UK GfK Consumer Confidence to digest. Ahead lie Eurozone, UK and US PMIs, US Industrial Production and NY Fed Manufacturing survey, along with a smattering of ECB and BoC speakers, as markets start winding down for the holidays. Next week’s schedule is not overwhelming, but has the BoJ policy meeting (with the BoJ pushing back quite heavily on ‘policy tweak’ talk ahead of the meeting), UK and Canada CPI, US Personal Income, PCE, Consumer Confidence and Durable Goods Orders as its likely highlights, along with the ECB Biennial Conference on Fiscal Policy and EMU Governance, and a good number of central speakers overall. There is clearly a lot of dissonance in market interest rate views for 2024, not only in terms of the gap between what is being discounted by markets in the way of rate cuts and actual central bank rate and economic projections. But above all if rates are to fall as markets expect, then this implies a perceived need for central banks to counter a sharp economic downturn, which in turn suggests a very adverse environment for corporate profits, and equity valuations, and perhaps above all Credit spreads (see chart). All of which looks like a recipe for volatility, and some sharp reversals (back and forth), which in truth fits well with the high level of uncertainty about the economic outlook. Nevertheless as noted on Wednesday: the sharp fall in yields over the past month is also testament to how much money has been parked in money market assets (see chart), and has been mobilized to some extent on a FOMO basis, but also a logical move to lengthen duration as inflation falls and curves disinvert, and the next move in rates in most countries will be lower. The fact that market liquidity (depth) is so poor serves to exaggerate the moves.

** China – Nov Retail Sales, Industrial Production, Fixed Asset & Property Investment **

– To be frank, there was nothing encouraging about the base effect driven rise in activity indicators, which mostly missed expectations, above all Retail Sales at 10.1% y/y vs. expected 12.5% ((Nov 2022 saw a drop of -5.9% y/y after Oct -0.5%), though Industrial Production at 6.6% y/y vs. expected 5.7% y/y (Nov 2022 2.2% y/y vs. Oct 5.0%) offered a small chink of light, while FAI at 2.9% y/y against an expected 3.0% remains very weak given the volume of stimulus measures. The property sector remains the economy’s debilitating Achilles heel, with the contraction in both Sales (-4.3% y/y vs. prior -3.7%) and Investment (-9.4% y/y vs. prior -9.3%) accelerating. As such the very large PBOC 1-yr MTLF net cash injection of CNY 800 Bln should come as no surprise, but looks to be a case of bad money chasing out good, underlining the stress that property sector woes is inflicting on bank balance sheets. The sectoral data on output was also testament to the strengths and weaknesses in the economy, as well as the concerns about China oil demand going forward, with refinery throughput falling to 1.48 Mln bpd from October’s 15.05 Mln, while Steel Output dropped for a fifth month and capacity use down 3.1% m/m. The bright spot remains anything related to the energy transition, as exemplified by Aluminium Output up 4.8% y/y, and 3.9% year to date, though curbs on energy use (due to grid constraints) in the key Yunnan production area will likely dampen this in coming months.

** Eurozone, UK and US – November ‘flash’ PMIs **

– Flash PMIs are generally expected to show an improvement vs. final November readings, but signal a sharp contraction in Eurozone and UK Manufacturing, and a marginal one in the US, while Services are seen slightly negative in the Eurozone, and expanding mostly in the UK and US. Japan’s PMIs were a mixed bag, with the fall in Manufacturing (47.7 vs. Nov 48.3) running counter to the evidence from the BoJ’s Q4 Tankan earlier this week, but Services looking quite sprightly with a jump to 52.0 from 50.8.

** U.S.A. – Nov Industrial Production **

– While only modestly better than expected once downward revisions to October’s readings are taken into consideration, yesterday’s Retail Sales again defied the downbeat narrative on consumer spending, and broader activity measures. Today’s Industrial Production data will be distorted by the end of the UAW autoworkers strike, with a rise of 0.3% m/m, and more visibly in a 0.5% m/m rise in Manufacturing Output, but still not fully reversing falls of -0.6% and -0.7% m/m in October.  The NY Fed Manufacturing survey has been extremely volatile over the past year, frequently missing forecasts by up to 20 points, per se the consensus for a setback to 2.6 from 9.1 is no more than a guesstimate.