Macroeconomics: The Week Ahead: 17 to 21 October
Written by Marc Ostwald, ADMISI’s Global Strategist & Chief Economist
The Week Ahead – Preview:
While there is a goodly volume of economic data next week, above all from China, US and UK, it will be China’s People’s Party Congress and any signals on changes to its Zero Covid policy and measures to resolve its property sector woes, along with the energy crisis in Europe, the political crisis in the UK, the war in Ukraine, and a very adverse geopolitical backdrop which are likely to be the dominant themes, along with seemingly relentless hawkish central bank rhetoric. Markets remain very extraordinarily volatile, not helped by thin liquidity, rate hikes and the gradual withdrawal of QE, which will gain momentum in Q2 of 2023 given recent ECB comments that plans to commence QT will be on the table for discussion at upcoming meetings.
Statistically the US manufacturing and housing sectors are in focus. Industrial Production (forecast 0.1% m/m) and Manufacturing Output (0.3% m/m) are expected to edge up vs. August, but echo the message from surveys of slackening orders, lower CapEx as well as weaker demand easing supply chain and price pressures. The outlook for the manufacturing sector is expected to remain subdued with the NY Fed seen slightly lower at -4.3 vs. Aug -1.5, and the Philly Fed modestly higher at -5.0 vs. -9.9; details Orders, CapEx, Employment, Prices and outlooks will be subject to particular scrutiny, as will the Fed’s Beige Book, which lands in the middle of the week. The September edition noted “Economic activity was unchanged, on balance, since early July, with five Districts reporting slight to modest growth in activity and five others reporting slight to modest softening”, and this edition seems unlikely to see any material improvement. The US Housing sector data are expected to see a further deterioration in all measures: NAHB 43 vs. 36, Housing Starts seen down 7.0% m/m and Existing Home Sales forecast to post an eighth consecutive fall, of -2.3% m/m; and unsurprisingly hobbled by mortgage rates at 6.92%. Still for all that the economy is clearly cooling, the labour market is showing little sign of loosening, with Initial Claims forecast at a low 230K (vs. prior 228K).
China still awaits the Trade data that had been scheduled for last Friday, which is expected to see Exports slow to 4.0% y/y, echoing other trade data in other major Asian economies as external demand weakens, and Imports are seen flatlining in y/y terms, thanks to the sluggish recovery in domestic demand. But the focus will be on Q3 GDP, which is expected to post a tepid recovery of 3.4% q/q from Q2’s contraction of 2.6% q/q, with intermittent Covid lockdowns, summer power disruptions and property sectors providing major headwinds to any recovery. Monthly activity data are expected to be mixed, with Industrial Production seen rising to 4.9% y/y from 4.2%, helped by public sector spending boosting Fixed Asset Investment to 6.0% y/y (vs. 5.8%), which has given a sizeable boost to the Construction PMI, despite ongoing property sector woes. Retail Sales are however forecast to drop back to 3.5% y/y (vs. 5.4%), with lockdowns around the recent public holidays proving to be a major deterrent to the normal related boost to consumer spending. Wholly unsurprising given the latest debt default, Property Investment is expected to contract (forecast -7.5% vs. Aug -7.4%), with Residential Property Sales likely to remain in a sharp contraction (last -30.3% y/y), despite improving base effects. While the 1-yr MTLF and 1 & 5-yr Loan Prime Rates are seen unchanged, the PBOC is expected to boost liquidity in its MTLF operation by CNY 100 Bln. President Xi’s speech on Sunday offered little in the way of fresh insights, but at least continued to emphasize development (growth) as a primary objective, even if maintaining the recent mantra of balancing this against security considerations, while also continuing to promise a steadfast “push for common prosperity”. It did not however offer any hints of an easing of its Zero Covid policy, nor hints of any major moves to prop up the ailing property sector.
The UK has plenty of key data – CPI, PPI, Retail Sales, PSNB, GfK Consumer Confidence and Rightmove House Prices – but these will be very much secondary to the political crisis, with the new Chancellor of the Exchequer offering cold comfort in his weekend TV interviews. “Spending will not go up as much as people want and there’ll be more efficiencies to find,” Hunt said Saturday in a Sky News interview. “We won’t have the speed of tax cuts we’re hoping for and some taxes will have to go up — that’s the reality of the very challenging situation we face.” It remains to be seen whether the October 31 Budget and OBR Report will do enough to restore some market confidence, and comments by BoE governor Bailey that there was a ‘meeting of minds’ when he spoke with Hunt hardly change the fact that the BoE may still be forced back into intervening in the Gilt market, given that markets will hardly be in the mood to give the UK the benefit of the doubt after so much turmoil. Perhaps the more significant question is who chose Hunt to step in as Chancellor, because it was clearly not PM Truss, and as a known ‘remainer’ and pro-globalist, he will not sit at all comfortably with the pro-Brexit lobby. For the record, CPI is expected to rise 0.4% m/m to hit an emotive 10.0% in y/y terms (vs. prior 9.9%) with core CPI also forecast to edge up 0.1 ppt to 6.5%. PPI should offer some crumbs of comfort on pipeline pressures, with Input expected to fall 0.5% m/m, pushing the y/y rate down to 18.7% from 20.5%, while a modest 0.3% m/m for Output should see the y/y rate dip to 15.7% from 16.1%. Retail Sales are forecast to fall a further 0.5%, the eight m/m fall in 2022, while the PSNB is seen at £17.0 Bln, modestly lower vs. the same month of 2021 for a third month. Friday’s GfK Consumer Confidence is perhaps the most interesting of the week’s data points, with a fresh record low of -52 (vs. Sep -49) expected, and given that this has historically been highly sensitive to politics, the risks are skewed to a worse than expected outturn.
Elsewhere, Germany’s ZEW Expectations are forecast to fall again to -66.6 from -61.9, with Current Conditions expected to dive to -69.0 from -60.5, while PPI is expected to ease sharply from August’s shock 7.9% m/m to 1.3% on the back of lower gas and power prices, which would still leave the y/y rate in the stratosphere at 45.4% (vs. Aug 45.8%). French Business Confidence, Eurozone Consumer Confidence, and final Eurozone CPI are also due in the Eurozone. Japan has Trade data and National CPI, Australia Unemployment, while there are CPI data in Canada and New Zealand.
On the political front outside of the UK and China, the EU Commission sets out its latest set of proposals for energy reforms on Tuesday, though deep divisions remain all too evident, and per se, the EU Summit on Thursday and Friday may again fail to adopt the Commission’s proposals. Deep divisions over sanctions on Russia were also evident in the fact that it was not until today that a post-G20 communique was issued, three days after the end of the event, and even then it served to highlight divisions rather than even evidence any common sense of purpose.
In the commodities space, there will be a lot of focus on what is announced at China’s Party Congress and its implications for China’s raw materials demand. Oil markets continue to chop back and forth between demand concerns and a still very tight supply picture, the more so given the recent OPEC+ decision. It is also a busy week for earnings in the sector, with quarterly production reports and accompanying outlooks from both BHP and Rio Tinto set to get plenty of attention. It is also a busy week for conferences: Vanir Japan Power Week, FT Energy Transition and Mining Summits, Argus Fertilizer Europe, American Fuel & Petrochemical Manufacturers Summit, Oils & Fats International Congress and Africa Energy Week. The International Grains Council monthly report, and with logistical problems and demand concerns mounting in the US Soybean sector, Monday’s monthly NOPA Oilseeds Crushing data will also get plenty of attention.
Government bond supply is plentiful above all in the Europe: with auctions in UK, Germany, France, Spain and Finland, while the US sells 20-yr and I-L 5-yr. Credit spreads will continue to be carefully monitored, with the average USD Investment Grade threatening to break above the key 200 bps level, and major bank issuance likely to be plentiful as we work through the earnings season.
The US Q3 earnings season picks up pace and widens out from financials at the start of the week to a broader cross-section of the economy. Bloomberg News suggests the following will be among the headline makers: ABB, Abbott Labs, America Movil, American Airlines, American Express, ASML, AT&T, Atlas Copco, Bajaj Finance, Bank of America, Bank of New York Mellon, Blackstone, Charles Schwab, China Telecom, CATL, Crown Castle, CSX, Danaher, DNB Bank, Dow, Freeport-McMoRan, Goldman Sachs, HCA Healthcare, Hindustan Unilever, Hong Kong Exchanges & Clearing, IBM, Investor, J&J, Lam Research, Lockheed Martin, Marsh & McLennan, Netflix, Nokia, Nordea Bank, Philip Morris International, Procter & Gamble, Prologis, Schlumberger, Sika, State Street, Tesla, Travelers, Union Pacific, United Airlines, Verizon, Volvo, Wal-Mart de Mexico, Zijin Mining.
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