Macroeconomics: The Day Ahead for 14 April

Once the overnight statistical items – Japanese Orders (falling sharply and unexpectedly for a second consecutive month, though foreign orders that are not included in core Machinery orders soared 76.2% m/m), Singapore Q1 GDP (a tad better than forecast, but still sluggish) and South Korean Unemployment – have been digested, the only other items of any significance are Swedish CPI and US Import Prices. As was amply demonstrated yesterday, statistics remain very much subordinate to pandemic related news, even if reaction to the US decision to pause the roll-out of the J&J vaccine also highlighted that there is rather too much (economic & market) hope invested in the vaccine, however understandable this may be in the circumstances. If communication about such moves is handled correctly, rather than bungled in spectacular fashion as has been in the case in the EU, this was always going to be part of the narrative of the roll-out, above all given the necessary emergency approvals for roll-out, which by implication mean the roll-out is a form of live beta testing. On the scheduled events side of the equation, the RBNZ left its policy rate unchanged as expected, and it will be another cacophonous day for central bank speakers, featuring Lagarde, Powell and Clarida amongst other, while the Fed publishes the latest Beige Book and the IEA follows OPEC in with its monthly Oil Market Reports. A quieter day for govt bond auctions has the UK selling 30-yr index-linked, Germany selling 27-yr and Canada offering 5-yr, which leaves the focus on the start of the US Q1 earnings season with the usual run of major banks Goldman Sachs, JPMorgan Chase & Wells Fargo getting proceedings under way – lower credit loss provisions and strong trading revenues are anticipate.

S&P 500 overall earnings are seen up a base effect flattered 24.5% y/y, the best since 2018’s corporate tax flattered surge (26.1%), Revenues are seen up a more modest 8.8% y/y. The focus very much on guidance on earnings outlooks, particularly given the fact that S&P 500 companies are currently on 22.3x forward earnings against a long-term average of 15x, in other words fully discounting good earnings news (as a whole), and leaving some vulnerability to it being “better to travel than arrive”. That said Q2 earnings will see even larger flattering base effects with something in excess of 50.0% y/y EPS growth expected. A cursory look at the attached charts of US curve spreads and VIX suggests that anticipated ‘strong’ earnings results are probably less of a driver of new equity index highs than the calmer profile of UST yields.

A close eye needs to be kept on China’s credit markets, above all SOE (state owned enterprise) Huarong Asset Management, with its offshore US dollar bonds in freefall as markets anticipate a debt restructuring (quasi default), which had been assumed to be unthinkable. However as the defaults at the end of 2020 highlighted, this no longer appears to be the case. It’s significant in so far as SOE debt accounts for from 91% of total domestic corporate bond issuance (ca $3.0 Trln equivalent), and while it would also signal a more robust and healthy approach to balance sheet risk resolution, it marks a sharp shift, particularly as Huarong is seen to be systemically important, in contrast to SOE’s such as Peking University, which defaulted at the end of 2020.

Last but not least on the key topic of supply chain and demand bottlenecks and productive capacity, the comments by Intel’s CEO that it will take a number of years to increase capacity serve as a reminder that a) onshoring production to protect supply chains (in any sector) is not something that can be achieved at a flick of a switch, and b) that the transitory boost to inflation from bottlenecks as a post Covid-19 recovery takes hold may prove to be far more enduring as the spotlight falls on lost productive capacity due to the pandemic, as well as deficient capacity as demand patterns shift.