Macroeconomics: The Week Ahead: 25 to 29 October 2021

The new week brings month end as well as a very busy run of data and major central bank meetings, as the US earnings season moves into top gear with 165 S&P 500 companies reporting, including many ‘big tech’ companies, and a very busy run of earnings in Asia, Europe and Latin America elsewhere, providing some microeconomic perspectives on the global economy’s current challenges. Advance Q3 GDP readings from the US, Eurozone, France, Germany, Italy, Spain, Mexico and South Korea top the schedule, which also has US Consumer Confidence, Durable Goods, House Prices, New & Pending Home Sales, Goods Trade Balance, Personal Income and PCE. October provisional CPI readings top the rest of the run of Eurozone data, with Germany looking to the Ifo survey and Unemployment, the UK has mortgage and credit data to accompany Wednesday’s much anticipated Autumn Budget, while the usual month end of activity data and Tokyo CPI feature in Japan, Australia has Q3 CPI, Canada monthly GDP and Brazil IPCA-15 inflation. The Bank of Canada leads off the run of G20 central bank meetings, which includes the BoJ, ECB and Brazil’s BCB. In the commodity space, energy supply and demand and the various power crises around the world will continue to be the key overarching theme, along with a very busy run of corporate earnings from energy, mining and industrial capital goods manufacturers, and the EU’s extraordinary meeting of energy ministers amid very divergent views on how to combat the crisis. Given the sheer volume of inputs, volatile price action and often very fickle and fluid market reaction seems likely, even if month end is also likely to provide some distortions, and perhaps dampen reaction to some data and events.

While markets’ attention is already on Q4 and the outlook for 2022 growth, the week’s run of Q3 GDP readings may well throw up some market moving surprises, as yr/yr performances revert to something akin to trend rates, after the hefty base effect and US fiscal stimulus distortions of recent quarters. Given the scale of supply chain disruptions, inventories may prove to be the biggest wildcard, and will need careful monitoring. As the overview table below highlights, the Euro area will see the strongest performance, and it is worth emphasizing that it is Italy that is expected to have seen the strongest performance over the past 2 quarters.

Q3 GDP expectations vs. Q2 actual

(US adjusted to q/q for comparison purposes)

             Q3 expected   Q2 actual

===============================================

  U.S.A.         0.2%         1.7%

  Eurozone       2.1%         2.2%

  France         2.3%         1.1%

  Germany        2.1%         1.6%

  Italy          1.9%         2.7%

  Spain          2.8%         1.1%

  Portugal       1.6%         4.9%

  Sweden         0.8%         0.9%

    —–

  South Korea    0.6%         0.8%

  Taiwan yr/yr   4.3%         7.4%

  Mexico         0.1%         1.5%

– The US has a very busy run of monthly data to contend with, starting with both FHFA and Core Logic House Prices which are seen up another 1.5% m/m, and thus maintaining a 20.0% y/y pace, even if this looks very bubble like given that rents have lagged substantially, while Consumer Confidence is projected to dip modestly (for a fourth month) to 108.5 from 109.3, as rising gasoline prices, and broader inflationary pressures continue to dampen demand for big ticket household goods, autos and homes, and offset labour market strength. Durable Goods are expected to see a substantial drag from aircraft and autos at the headline level with a 1.0% m/m drop expected, though core measures are likely to remain solid with gains of 0.4% & 0.5%. Home Sales are expected to remain robust with New seen up 2.2% m/m vs 1.5%, and Pending up 0.5% m/m after surging 8.1% in August. The Goods Trade Balance is seen fractionally wider at $-88.3 Bln, though port disruptions and hurricane Ida impart risk of an outlier and implying a positive contribution to Q3 GDP, though the read across is complicated by inflation adjustments. Richmond and Dallas Fed surveys and the Chicago PMI are also due.

– The Eurozone kicks off with Germany’s Ifo Business Climate which is seen dipping further to 98.0 from 98.8, with current conditions and expectations seen falling in equal measures, and in contrast to the distortions to the Manufacturing due to prices and supplier deliveries. German & French Consumer Confidence are also expected to dip modestly, as are the EC’s run of confidence surveys, but it is Italy’s Manufacturing and Consumer Confidence which may be of most interest, with the former expected to dip for a third month, while the latter is seen slipping to 118.5 from an all-time high of 119.6 in September. But the primary focus in the Eurozone will be the array of CPI readings, which are projected to show another energy paced rise (both household and auto fuel) to 3.7% y/y from 3.4%, with some offset still showing in national readings due to unseasonal patterns to summer sales (above all Italy). Core CPI readings where published are likely to be little changed or lower.

– The UK will be more focussed on Wednesday’s Autumn Budget and Spending Review than its modest data run, with an already long list of spending measures on local transport, health related research, family support, social care and crime already pre-announced (even if many are very modest). The question is then what will be announced to help with acute household energy pressures, and what will be sacrificed via spending cuts to pay for all these measures, given the limited fiscal leeway available to Chancellor Sunak. In that respect it will be interesting to see what estimates the OBR comes up with in terms of rising interest costs to service government debt, as well as its economic forecasts. Statistically BRC Shop Prices will get plenty of attention given the array of inflation pressures, which may push the y/y rate into positive territory this month, and certainly will do in November through March thanks to very adverse base effects. Consumer Credit growth is expected to remain sluggish at £500 Mln, while Mortgage Lending is forecast to remain very robust at £5.7 Bln; the CBI Retailing survey is also due.

– Elsewhere Japan’s Retail Sales are seen rebounding 1.5% m/m from a lockdown induced -4.0% in August, but extended output caps in the Auto and other sectors are likely to see Industrial Production drop a further 2.6% m/m after sliding -3.6% m/m in August. October Tokyo CPI is expected to show slight y/y gains on both headline and core measures, thanks to rising energy prices, however the ongoing drag from the reduction in mobile phone charges continue to weigh heavily, and CPI is running considerably higher (ca. 1.5% y/y) when these are excluded. Australia Q3 CPI is expected to fall in headline terms to 3.1% y/y from 3.8%, with core measures seen rising to 1.8%/1.9%, but would still be below the RBA’s target range. Last but not least Canada’s monthly GDP data have been very choppy throughout the years, but are expected to post a gain of 0.7% m/m after dropping 0.1% m/m to start the quarter, and suggesting a solid Q3 rebound after contracting unexpectedly in Q2.

– On the central bank front, it will be a much quieter week in terms of speakers, with the Fed going into its purdah period ahead of the 2/3 November meeting. The Bank of Canada leads off the week’s run of G7 central bank meetings, with rates expected to be held at 0.25%, and the focus on a) how much it pushes back on a sharp rise in market rate expectations since its July meeting, which have moved to discount a rate hike in March 2022, as against the BoC’s prior projection of an initial rate hike in the middle of H2 2022, b) how it shift its QE programme from outright purchases to reinvestment, with the consensus looking for a C$5.0 Bln monthly pace for the November through March 2022 period. It will also make some likely substantial changes to its economic forecasts, with GDP forecasts for 2021 and 2022 likely to be downgraded by up to 1.0 ppt, but CPI forecasts likely to be raised sharply for 2021, and also higher for 2022 & 2023, though its estimates for when the ‘output gap’ will be closed are unlikely to change from Q4 2022.

No changes are expected to ECB rates or its other policy measures and parameters at this week’s meeting, the question is how much guidance will be offered on how it might shift its QE from the PEPP to its ‘normal’ APP programme, which is likely to be the subject for some very heated debate on the council, even with the departure of Weidmann. It is unlikely to change the language on the ‘flexible’ pace of its net purchases, i.e. ‘that favourable financing conditions can be maintained with a moderately lower pace of net asset purchases under the pandemic emergency purchase programme (PEPP) than in the previous two quarters.’ It will almost certainly stick with the view that there “may” be “a transitory period in which inflation is moderately above target” (there is in fact no “may be”, only ‘will be’), and see risks to the economic outlook as “broadly balanced”, though it may point to protracted supply chain disruptions and energy prices pressures as posing greater downside risks than previously anticipated. As ever it may be the post meeting comments in coming weeks which offer greater insight than the press conference in indicating how difficult it will be to find a council consensus on how its QE programmes are adjusted for the post March 2002 period.

The BoJ is also not expected to make any policy changes at this week’s meeting, though it may adjust its GDP projections, downgrading its FY2021 estimate due to the extended lockdown and supply chain disruptions, and upgrade FY2022; it will be interesting to see it highlights any possible headwinds from China’s current woes. While there remains a lot of criticism about its corporate financing support programme, the current state of the economy suggests it will be extended for at least another quarter, though it could in theory defer a decision on the extension until its December 16/17 meeting.

Elsewhere, there is a growing view that with serious doubts about Brazilian fiscal policy sending the BRL into a tailspin, and no sign of any material easing in extant inflation pressures (IPCA-15 inflation is expected be 10.15% y/y), the BCB may have to follow the likes of Chile’s BCC and Russia’s Bank Rossi last week and opt for an even more aggressive rate hike than the consensus for another 100 bps hike to 7.50%.

Government bond supply is plentiful this week, led by the US with $183 Bln of 2, 5 & 7-yr and $28.0 Bln of 2-yr FRN , while the UK sells £2.75 Bln 5-yr. There will be around EUR 20 Bln in total in the Eurozone from Germany, Italy, Netherlands and EU, but this will be dwarfed by some EUR 47 Bln of redemptions from France. The UK sells 5-yr and Japan 2-yr.

On the Commodities front the week’s oil inventories data will again be very sensitive, as will any comments from the various members of OPEC+ about whether there is any willingness to increase its current 400K bbls/month production cut rollback, with thus far little sign that either Saudi Arabia or Russia are willing to change this. There was little sign of any form of consensus emerging at last week’s EU summit in how to deal with the current energy crisis, and Monday’s extraordinary meeting of EU Energy Ministers is unlikely to achieve anything material, particularly given the already hefty differences related to both Nordstream2, the ‘green energy transition’, and within that the deep chasm between French and German opinion on how to classify nuclear energy. As noted above it is big week for sector corporate earnings reports: Chevron, Equinor, Eni, Exxon Mobil, Neste, PetroBras, PetroChina, Repsol, Royal Dutch Shell, Tokyo Gas and TotalEnergies top the energy run; ADM, Bunge, Marfrig Global Foods and WH Group feature in the agri sector; while mining and metals has Baosteel, Caterpillar, Chalco, China Molybdenum, Cia de Minas Buenaventura, Fortescue, Ganfeng Lithium, Glencore, Hitachi Construction Machinery, Maanshan Steel, Newmont, Rusal, Southern Copper SSAB, US Steel, Usinas Siderurgicas de Minas Gerais, Vale, Yamana Gold & Zhejiang Huayou Cobalt.

As noted above the US earnings season reaches a crescendo, and it is in fact a busy week around the world, so busy that the headline makers may well extend well beyond this list of likely other highlights beyond the commodity & energy sectors: Amazon, AMD, Anheuser-Busch InBev, Apple, Banco Santander, Bank of Communications, BNP Paribas, BYD, Canon, China Vanke, CME Group, Coca-Cola, Deutsche Bank, Eli Lilly,  Facebook, First Abu Dhabi Bank, Ford Motor, General Electric, General Motors, Hong Kong Exchanges & Clearing, HSBC Holdings, ICICI Bank, Intercontinental Exchange, Kimberly-Clark, Lloyds Banking Group, Lockheed Martin, Macquarie Group, Mastercard, McDonald’s, Microsoft, Moody’s, MSCI, Ping An Insurance, Raytheon Technologies, S&P Global, SABIC, Samsung Electronics, SK Hynix, Spotify Technology, Starbucks, STMicroelectronics, Swiss Re, Twitter, UBS Group, Visa & Yum! Brands.