Macroeconomics: The Week Ahead: 11 to 18 December

The Week Ahead – Preview:

As the year draws to an end, this week’s schedule is jam packed with major inflation, labour and/or activity data from the US, China, UK and Japan, which are accompanied by a raft of central bank policy meetings, mostly notably Fed, ECB, BOE and SNB as the PBOC conducts its monthly 1-yr MTLF operation, while energy markets will focus on the EIA, IEA and OPEC monthly Oil Market reports. Politically Argentina swears in its new radical president Milei; Poland should finally see the new coalition govt finally sworn in; while the UK watches to see whether PM Sunak can survive yet another government crisis, and EU leaders gather for their end of year summit on Thursday and Friday, with the focus still on budget reform plans and aid for Ukraine. The govt bond auction schedule becomes seasonally light outside of the US, which sells 108 Bln of 3, 10 & 30-yr, the UK offers GBP 5.75 Bln of 5 & 30-yr, Italy EUR 6.0 Bln 3 & 7-yr, Canada offers CAD 8.0 Bln 3 & 32-yr. But after some poorly received sales, it may be that Japan’s JPY 3.7 Trln of 5 & 20-yr may prove to be most sensitive, ahead of next week’s BoJ policy meeting. The run of corporate earnings is also limited, with Bloomberg News identifying the following as likely to be among the highlights: Adobe, Costco Wholesale, Inditex, Johnson Controls and Lennar.

This week’s run of G7 central bank meetings will be eagerly anticipated for the signals they send on the outlook for rates in H1 2024, and the extent of their respective push backs or tacit endorsement of current market rate expectations, and how the week’s busy run of data plays into their and markets expectations. The Fed is expected to hold rates again at 5.25-5.50%, the big question is how they tweak the statement, given that November’s: “Recent indicators suggest that economic activity expanded at a strong pace in the third quarter. Job gains have moderated since earlier in the year but remain strong, and the unemployment rate has remained low. Inflation remains elevated” has been superseded by the slowdown evident in Q4. Inflation data has eased a little further in core terms, but remains at 4.0%, while headline has bobbled above 3.0% since June – see chart; and Friday’s labour data were on balance stronger than expected, and not indicative of a sharper slowdown in labour demand. Markets appear to be anticipating that the Fed will hint at the possibility of a rate cut in the not too distant future. But the Fed may well stress that the inflation fight has yet not been won, despite the improvement over the year, and that the Unemployment Rate remains low, and the economy continues to expand, albeit at a notably slower pace than Q3’s outlier. They may also perhaps note that real long-term rates and overall financial conditions have eased significantly since the previous meeting, and per se require greater Fed vigilance. On balance, they may well want to implicitly, rather than explicitly push back on rate expectations, in contrast to both the BoE and the ECB.

After the sharp fall in November CPI, and arch hawk Schnabel’s comment that the outturn was as a game changer in terms of effectively precluding a further rate hike, and with incoming data & surveys remaining weak, it is little wonder that markets have now priced in a 60% chance of a first ECB rate cut in March, and 125 bps in total in 2024, though no changes are expected this week or in January. There will be a fresh set of staff forecasts, with the focus on the downward revisions to CPI forecasts for 2024 and 2025, and a first forecast for 2026. In September staff expected core to fall to 2.1% in Q4 2025, and should be revised down to or even below 2.0%, and definitely below in 2026, but the 2024 forecasts may be held, by way of an implicit protest against current market rate expectations, which will likely be vocalized more robustly by Lagarde. Downward revisions to GDP forecasts which already looked optimistic in September are also likely, and also upward to Unemployment. Many top ECB officials have called for the current timing of starting to end PEPP reinvestments to be brought forward from end 2024, with more hawkish members suggest the start of Q2. In all likelihood, the message will be that this was discussed, but a final decision and timetable will be announced at the January meeting.

The BoE is expected to hold rates again, but the consensus still looks for a 6-3 vote, as Greene, Haskel and Mann reprise their prior vote for a hike. While the slightly larger than expected fall in CPI will be welcomed, the stickiness of Core (5.7% y/y) and Services (6.6%) will be highlighted as being far too high, with a likely long and protracted path to bring it back down. It will also be noted that wage growth remains very high, even if Tuesday’s labour data post a larger than consensus fall. The MPC will likely stress that rate cuts are very simply not a topic for discussion, and protest markets discounting a first rate cut in June vociferously, and perhaps all the more so if the latest employment data echo the prior month, and suggest little further loosening in labour demand (though other surveys have suggested renewed weakness). A rate cut prior to H2 2024 still looks very unlikely.

Switzerland’s SNB is seen holding rate again at 1.75%, and accompanying forecasts for CPI and GDP are likely to be revised down (both SECO and KOF update their forecasts on Wednesday ahead of the Thursday SNB meeting), and given the CPI undershoot for November, the SNB will likely signal steady rates ahead. Norges Bank is also expected to hold rates at 4.25% also on Thursday, with Monday’s CPI seen rebounding sharply at the headline level to 4.9% y/y from 4.0% largely due to energy prices and base effects, but easing very slightly on core to 5.9% y/y. The latter will likely prompt the central bank to also warn that with core CPI so high, albeit falling, and the NOK still very weak, that there will not be any scope to respond to a continued loss of momentum in the economy with a rate cut until the final quarter of 2024. Brazil’s BCB also meets this week, with a further 50 bps cut to 11.75% expected, while Russia’s bank Rossiya is seen hiking rates at a more modest 50 bps pace to 15.50%, though the risk of a larger hike are quite high given renewed RUB weakness.

Statistically China’s weaker than expected CPI (-0.5% y/y vs. forecast -0.2%) and PPI (-3.0% y/y vs. forecast -2.8%) on Saturday underlined that disinflationary pressures in both goods and services remain all too clear. That said the Politburo statement on Friday dropped the reference to ‘forceful’ monetary policy, and replaced it with ‘flexible, appropriate, targeted and effective’, suggesting no chance of an unexpected rate cut from the current 2.50% at this week’s PBoC 1-yr MTLF operation. The Politburo statement also changed the language on fiscal policy, calling for ‘proactive’ policy to be ‘appropriately intensified and improved in quality and efficiency’, perhaps a very clear, but tacit admission of disappointment at the lack of a significant boost from the hotch-potch of measures implemented this year. The rest of this week’s run of major data are expected to see a seasonally typical bump higher in both Aggregate Financing and New Yuan Loans in nominal money terms, though the y/y rate for Loan growth is seen easing to 10.0% from 10.2%. Activity data will be very heavily boosted by benign base effects, with Retail Sales seen rising to 12.4% y/y (Nov 2022 saw a drop of -5.9% y/y after Oct -0.5%), and Industrial Production seen at 5.7% (Nov 2022 2.2% y/y vs. Oct 5.0%), and base effects will turn adverse in December, and very adverse at the start of 2024. Property Investment also has some benign base effects (Nov 2022 -9.8% vs. prior -8.8%), but is still expected to deteriorate to -9.4% y/y from October’s -9.3%, with Property Sales and New Home Prices also likely to remain negative. Per se concerns about China’s oil demand growth after a strong year overall in 2022 are likely to persist, and the focus will remain on how the central govt will deploy fiscal policy to support the economy, and help to resolve the debt woes of the property sector and local governments.

Ahead of the FOMC meeting, November CPI is forecast to be flat m/m, restrained heavily by a more than 6.0% m/m fall in gasoline prices (which likely drove Friday’s sharp fall in Michigan 1-yr inflation expectations), along with used car prices (though new are seen ticking up), but core is seen edging up to 0.3% m/m, which implies a 0.1 ppt dip in headline y/y to 3.0%, and an unchanged Core at 4.0%, with no moderation in Housing OER from October’s 0.4% m/m stalling any improvement in core CPI. PPI is expected to ease modestly in y/y terms on both headline and core. But markets have reverted to type in focussing rather more on growth metrics of late, and will zero in on Retail Sales, with lower gasoline prices and weaker Auto Sales seen dragging headline down -0.1% m/m, while core measures are expected to eke out growth of 0.2% m/m, with little or no boost seen from Black Friday or Cyber Monday. 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. NFIB Small Business Optimism, Business Inventories and the super volatile NY Fed Manufacturing survey are also due. If forecasters are largely correct, then markets discounting a first rate cut in May still look a tad optimistic. Perhaps more importantly markets would do well to think about the overall extent of any Fed rate cut cycle, which will like be modest.

In the UK, Tuesday’s labour data are forecast to show Average Weekly Earnings easing 0.3 ppt to 7.6% y/y headline and 7.4% ex-Bonus, though much of that fall will be due to base effects, and only offering marginal comfort to the MPC in trend terms. HMRC Payrolls are expected to remain marginally positive at +5K vs. prior +33K, despite a continued quite sharp deterioration in the REC Employment survey, with the “experimental” Unemployment Rate likely unchanged at 4.2%. Vacancies are likely to fall again from October’s 957K, but will inevitably still be much higher than the pre-pandemic peak around 800K. Wednesday’s run of monthly activity data are projected to show a small drop of -0.1% m/m in monthly GDP, with a dip in Industrial Production (-0.1% m/m) and Construction Output (-0.2%), accompanied by a flat m/m Index of Services. Sluggish remains the best description of the UK economy, and likely to remain so going into H1 2024. Rightmove House Prices on Monday, RICS House Price Balance on Thursday and GfK Consumer Confidence on Friday are also due.

G7 Flash PMIs bring the week to a close, and 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. Germany’s ZEW survey is expected to defy a typically close correlation between Expectations and the performance of the Dax index over the month, with a slight slip to 8.0 from 9.8, while Current Conditions are forecast to improve modestly to a still desultory -76.0.

In Japan, the BoJ’s Q4 Tankan is anticipated to show little change vs. Q3 for Large Manufacturing and Services, though a notable improvement in the outlook for Non-Manufacturing (25 vs. Q3 21), with CapEx expected to hold at a relatively robust 12.7% y/y (vs. Q3 13.6%). Monday’s PPI is projected to slow to 0.1% in m/m terms, with base effects pushing up the y/y rate to a modest 0.2%, while Private Machinery Orders are expected to drop 0.4% m/m after a 1.4% m/m rise in September. Australia’s labour data has frequently seen greater strength than had been expected for much of H2, with a modest 11K rise in Employment expected after a much stronger than anticipated gain of 55K in October.