Macroeconomics: The Day Ahead for 23 March

A busier day for statistics, though their market impact looks like to be very limited given most are either second tier or too ‘rear view mirror’, while the roster of central bank speakers approaches tsunami levels. There are UK labour data (mixed, headlines better than details) to digest ahead of the CBI Industrial Trends survey, Italian Industrial Orders, US New Home Sales, Q4 Current Account and the Richmond Fed Manufacturing and Services surveys. Among the central bank speakers, pride of place goes to Powell’s joint testimony with Yellen to the House Financial Services Committee, though Brainard’s speech will be closely watched given that she has already voiced some concern about the speed of the upward move in long-term yields. In truth none of them are likely to stray from well-established mantras on economic and policy outlooks, though. Govt bond supply see the Netherlands sell 12-yr, the UK 28-yr and the US 2-yr, while China’s aluminium behemoth heads the run of corporate earnings.

In terms of US New Home Sales, the risks are again to the downside of an expected 5.7% m/m fall to 870K, and as can be seen on the attached chart, even at 800K this would still be above pre-pandemic levels. As with Existing Home Sales and probably more so low inventories, rising mortgage rates and raw materials costs will present some headwinds going forward, but still likely to remain strong overall. In terms of the Powell / Yellen testimony, they will almost certainly ‘have each other’s backs’ above all with respect to potential inflation risks being largely dismissed as nothing more than transitory. The interesting aspect will be whether Yellen offers any details on the Biden administration infrastructure spending plans. On the subject of the US, the expiry of the SLR exemption at the end of the month is impacting US term money rates, with the end of year FRA/OIS spread doubling over the past week, also reflected in a steeper profile to the Eurodollar futures curve over year end – see charts attached. Given a slightly calmer tone to long term UST yields in recent days, it does suggest the SLR will result in a deterioration of US money and Treasury market liquidity, particularly around quarter and year end, heightening the risk of volatility spikes, and requiring a closer eye to be kept on repo rates. It does suggest that the Fed and the cohort of regulators need to re-examine and adjust SLR rules.