Macroeconomics: The Week Ahead: 20 Sep to 24 Sep 2021

The new week will be dominated by central bank policy meetings, with the focus on the Fed, BoE and Norges Bank, and rather less on the BoJ and SNB, while Turkey’s TCMB faces yet another round of political pressure to reduce rates, as Brazil’s BCB delivers another aggressive rate hike. Politically the week is bookended by elections in Canada (Monday) and Germany (Sunday), with opinion polls suggesting a period of political gridlock in both, before some form of ruling coalition can be established. The Quad (US, India, Japan and Australia) meeting will get some extra attention, as Franco-US/UK relations have plunged to their worst levels since the invasion of Iraq in 2003, and to an extent pushing Afghanistan off the front page, though the unfolding human catastrophe and the rising threat as a consequence of the Taliban ‘takeover’ remain very real. Per se, a statistically light week is likely to get limited attention, featuring ‘flash’ G7 & Australia PMI readings, along with numerous surveys in the Eurozone and the UK, including Germany’s Ifo. The US has a raft of housing data, and Brazil and Mexico inflation; the OECD will also publish its latest Interim Economic Outlook. Govt bond supply is relatively light, though there will be another deluge of China local govt issuance, as are corporate earnings, with the focus remaining squarely on the debt woes of China’s Evergrande and property sector, and the extent to which China’s authorities can effect an orderly wind down. Europe’s power crisis will continue to hog the headlines in the commodity space, though with food prices at their highest level since the 1970s, the UN’s Food Systems Summit will also grab plenty of headlines, as will the EU’s MARS monthly crop bulletin; with the Dubai Gastech conference and India’s Globoil conference on edible oils and oilseeds also of relevance. It has to be added that there is now little escaping the fact that the pandemic and its accompanying array of disruptions is exposing the woeful decades long underinvestment in developed world economies’ infrastructure, and in turn begging many questions about how badly this will impair the transition from hydrocarbons to renewables, above all given the completely feckless, blinkered and harmful approach to co-operation being evidenced across the globe.

There are no less than eleven central bank policy meetings in the DM and EM space, along with a busy run of G7 central speakers. The Fed is expected to hold rates and maintain its current $120 Bln/month QE pace, and to defer a decision on a taper, though it may tweak the statement’s ‘….  until substantial further progress has been made toward its maximum employment and price stability goals. Since then, the economy has made progress toward these goals, and the Committee will continue to assess progress in coming meetings.’ That said, the infamous ‘dot plot’ could easily see a steeper rate trajectory emerge, above all in terms of 2022 projections (see attached chart), which would clearly be unsettling for markets, particularly at a seasonally sensitive time of the year in markets. Given that the run of incoming data has clearly been mixed, there is perhaps some risk of some downward tweaks to its near-term unemployment and growth projections, and upwards to PCE deflators, even if they should still convey the message that the FOMC still believes inflation pressures will prove to be ‘transitory’. The focus thereafter will be on Powell’s press conference, and the degree of confidence expressed about the inflation and labour market outlook, and the language around risks to the economic outlook both from infection rates as well as supply chain bottlenecks. If last week’s choppy performance in bonds and equities is anything to go by, and was not just about re-hedging quarterly expiries, then markets are clearly wary that there may be a less dovish narrative shift.

While the BoJ and SNB policy meetings are expected to continue to tally with a deeply held market view that policy rates will be held at current levels for as far as the eye can see, there is considerably more uncertainty around the BoE’s MPC meeting. While no changes to Base Rate or QE volumes are expected, the CPI and labour data still leave the possibility that one or other MPC member (with new Chief Economist Huw Pill being touted as a hawk) joins Saunders in voting for a QE reduction. The MPC majority will likely remain very cautious about making any changes to policy until some data becomes available about the impact of the termination of the furlough scheme at the end of this month, despite labour market developments proving to be a lot better than many had feared. There will also be interest in how the MPC views the array of supply chain disruptions, above all to logistics, power and agri-food, and their potential impact on the inflation outlook, even if central bank policy can do precisely nothing to resolve any of these structural supply side issues.

In Scandinavia, the divergence in policy outlooks in Norway and Sweden will be all too clear, with Norges Bank expected to initiate a rate hike cycle with a 25 bps rate hike to 0.25%, and signal further rate hikes in December and in 2022; it should be repeated that Norges Bank tightening policy is above all motivated not by inflation (core CPI is very low), but a solid recovery in growth and the labour market, as well as concerns about financial stability, above all due to a very frothy housing market. By contrast the Riksbank is seen holding rates at 0.0%, but the focus will be on its revised forecasts for the economy and its rete trajectory, following a run of generally stronger than expected activity data, and the much sharper than expected jump in August CPI. The latter may prompt it to adjust its long-term rate forecasts slightly higher, given that its current forecasts assume rates will be held at current levels until 2024.

In the EM space, Brazil’s BCB is expected to follow up on its signal of a further 100 bps rate hike (to 6.25%) at this week’s meeting, and signal further aggressive tightening, with this week’s IPCA-15 inflation data (published after the BCB meeting) seen rising yet again to 9.8% y/y from 9.3%, and likely to deter the BCB from offering any hints where it sees the terminal rate. Markets are discounting a further 200 bps by year end and 350 bps by the end of Q1 2022, despite the small contraction in Q2 GDP, and little likelihood of any improvement in H2, given the headwinds from the acute drought on the agricultural, mining, manufacturing and utility sectors. Turkey’s TCMB faces the very familiar political pressure to cut rates from the current 19.0% level, but with headline inflation at 19.25% y/y it should in fact be tightening policy, which it has attempted to avoid, both via tightening bank FX reserve requirements and shifting its focus to core CPI. Over in Asia, Bank Indonesia is seen continuing to hold rates at 3.50%, despite a weak economy and below target inflation, but reflecting a clear risk of a renewed about of IDR weakness, above all once the Fed starts to taper. Philippines’ BSP is also expected to hold its Borrowing Rate at 2.0% and signal no near-term rate hike, even with above target inflation paced by food and energy prices, but very much with an eye on a weak labour market, given an Underemployment Rate of 20.9% gives the lie to an ostensibly much improved Unemployment rate of 6.9%. Last but not least, South Africa’s SARB is also seen on hold at 3.5%, but may hint that if above target inflation continues to persist, then it might have to tighten policy by the end of the year.

The light flow of statistics for the week puts the focus on G7 ‘flash’ PMIs and the accompanying run of national business and consumer surveys in the Eurozone and UK. Consensus forecasts look for a further modest setback in Services PMIs, and a slightly more pronounced setback in Manufacturing PMIs, above all in the UK and Eurozone, with Germany’s Ifo also expected to echo PMIs, though in all cases, actual levels would remain robust or very strong on any historical comparison. The risk on manufacturing readings above all in the UK and Eurozone is clearly to the downside, given supply chain bottlenecks and power / energy prices. Indeed the scale of auto output impairment across the globe due to semiconductor shortages does give plenty of reason to be very sceptical about the ostensible strength in these surveys, even if some of the “strength” is for the wrong reasons – supplier deliveries, low inventories and prices paid. Of particular note in the Eurozone surveys will be any indications on export demand, which other anecdotal evidence suggests has taken sharp knock from the delta variant spread in China and East/SE Asia, and accompanying activity restrictions. US Housing indicators are forecast to show a further modest dip in NAHB Housing Index to a still strong 74 from 75, though the very negative evaluation on big ticket purchases (Housing, Cars) in the latest Michigan Sentiment survey points to downside risks. Housing Starts are seen edging back up 1.0% after a sharp 7.0% fall in July, while Existing and New Home Sales are seen maintaining a solid pace, though in all cases there may be some impact from Hurricane Ida and the accompanying bout of bad weather.

The light corporate earnings run will likely see the following feature, according to Bloomberg News: Accenture, Adobe, AutoZone, Aurora Cannabis, BlackBerry, Costco Wholesale, FedEx, British home improvement company Kingfisher, Bisquick and Cheerios maker General Mills, Lennar, KB Home, Vail Resorts, and sneaker giant Nike.