Macroeconomics: The Day Ahead for 6 April

The war in Ukraine shows no signs of letting up, and perhaps all the more so given Zelenskiy’s admission yesterday that there may be no meeting between him and Putin, implying that even a ceasefire looks to be a very distant prospect, as EU sanctions are ramped up, but only impacting coal in terms of potential energy sanctions, and even that is meeting some resistance, with Germany seeking a phase out, rather than immediate ban. Markets are also going to have to get grips with the fact that with a record surge in China Covid-19 cases, there are now 23 cities in China with a total of 193 Mln people in partial or full lockdown, with obvious implications of increasing disruption, both domestically and to global trade.

The day’s statistical schedule is very heavily front loaded with China and India Services PMIs, German Factory Orders, Swedish monthly GDP to digest, ahead of Eurozone PPI, UK Construction PMi and the now generally overlooked Canada IVEY PMI. The much sharper than expected  slide in China’s Services PMI (42.0 vs. f’cast 49.7) was on the one hand not that surprising given the impact of Covid related lockdown measures, but equally underlines that China’s authorities face a huge uphill climb if they are to engender that long promised swing from relying on industrial investment and exports to a more services oriented economy. As for German Orders, the 2.2% m/m fall came after a run of increases of 2.3%, 2.3% and 3.1% and per se was little more than mean reversion, but as the Ifo auto sector highlighted yesterday, the outlook for German manufacturing looks to be at the very best dire in coming months.

The March FOMC minutes top the events schedule, which also has speeches from ECB’s de Guindos and Schnabel, Riskbank’s Floden and Fed’s Harker. The weekly EIA weekly oil inventories will accompany the US House Energy & Commerce Subcommittee hearing on gasoline prices, with testimony from various oil industry executives, which will as ever attempt to lay the blame for high gasoline industries on industry ‘greed’ and perhaps imply cartel like behaviour, and all the more so given the mid-term elections in November. It will be interesting to see how hard the executives counter with the argument that governments (federal and state) have actively tried to discourage, even stop up- and downstream investment in the sector, resulting in a redirection in output capacity both for crude and oil products. The other political talking point is the seemingly hardy perennial about the risk of Le Pen winning the French presidential election (first round Sunday), though with a variation this time. This being the idea that if Macron scores a very clear first round victory, then turnout may be weak in the second round, as many voters may assume it is a foregone conclusion and not turn out to vote, which in turn would favour Le Pen. There is clearly no room for complacency, but there does seem to be an element of stirring up related fears, because this is “what we do around French presidential elections”. That said, recent polls have signalled some voting drift among right wing voters towards Le Pen on the basis that she is probably the only candidate able to mount a real challenge to Macron, in contrast to Percesse and Zemmour.

** U.S.A. – March FOMC Minutes **

– The minutes will offer further details on how the Fed proposes to run down its balance sheet, as flagged by Powell at the press conference. It is likely to outline a number of possible options in terms of the pace of QT (quantitative tightening), though an initial $20/25 Bln, increasing month by month by a similar amount to a cap of $100 bln/month appears to be the consensus, with a final decision to be made at the May meeting, and given Brainard’s comments yesterday an immediate start to QT thereafter. It will probably indicate that outright sales of Fed Treasury and MBS holdings are not envisaged, but could be an option if required. The minutes will confirm that a rate hike at every meeting this year is expected by all FOMC members, though opinions differ on how many 50 bps hikes may be required/appropriate. One other interesting aspect will be the discussion around the economy and employment, above all in the context of what the various members of the FOMC view as ‘full employment’, and also in the context of Brainard’s comments on what she is watching in terms of the inflation, specifically her concern that if there is to be a rotation back to services spending from goods, whether service sector capacity can absorb this without sparking further inflation pressures. The primary concern with Fed policy, as much as the FOMC has been keen to emphasize ‘flexibility’ and optionality is their seemingly widely shared view on the labour market, which looks to be dining out on a lot of hope-ium and as well as assumption of things returning to the old normal. Brainard captured this in her relatively hawkish speech yesterday: “An increase in labor supply associated with diminishing pandemic constraints combined with a moderation in demand associated with tightening financial conditions, slowing foreign growth, and a large decrease in fiscal support could be expected to reduce imbalances later in the year.” Bear in mind that there was a FOMC narrative about inflation being ‘transitory’ until Q4 of 2021. This view was totally wrong, and the assumptions that Brainard outlines above in terms of a return to a form of equilibrium may prove to be just as flawed.