Macroeconomics: The Day Ahead for 20 January

A busier day for data, though heavily fron loaded, with Japanese Trade, Australian Unemployment, UK RICS House Price Balance, French Business Confidence and a monumental surge in German PPI to digest, while the afternoon brings US weekly jobless claims, Philly Fed Manufacturing and Existing Home Sales. A very busy day for central bank rate decisions, with China holding its LPR rates, while only Ukraine (+50 bps) is expected to follow Sri Lanka in hiking rates, with Norway and Indonesia central banks on hold, and Turkey’s TCMB set to hold after a cumulative 500 bps of cuts, which sent the TRY into a well documented deep tailspin. ECB’s Lagarde speaks at the WEF Forum after what can only be described as badly mistimed comments banging the disintegrating drum that ‘inflation driver will ese during the year’, mistimed by way of her headlines literally coming minutes after the outsized rise in German PPI, with the 5.0% m/m rise being the largest since the data series started to be compiled in 1949. The US corporate earnings run features Netflix, Bakers Hughes and Union Pacific, while France (mediums & I-l), Spain and the US hold debt auctions. Oil prices remain very much front and centre, with obvious implications for inflation risk, though the current squeeze looks to be increasingly momentum driven (i.e. speculative), rather than reflecting underlying fundamentals, in turn raising the risk of a sharp correction at some point, which the very extreme level of oil curve’s backwardation also suggests (see chart), and thus sustaining the very volatile Q4 performance, and in turn feed volatility in bonds and rates.

In terms of the rest of the overnight run of data and events, Japan’s trade data were robust with exports hitting record levels, but imports also showing plenty of inflation Pressure. French Business Confidence dropped more than expected, despite Manufacturing holding up, though the production outlook fell quite sharply to a still solid +13, but Services (105 from 107) took a hot from the wildfire spread of the Omicron variant. Australia’s labour data were considerably stronger than expected, with the Unemployment Rate falling to 4.2% (vs. forecast 4.5%), it’s lowest level since 2008, and more importantly close to the RBA’s pre-pandemic ‘line in the sand’ for hiking rates of 4.0%, suggesting that it like many other G10 central banks may well have to eat humble pie on rates, though it can at least point to a drop back in Consumer Inflation Expectations (4.4% vs. 4.8%), and for the time being still low wage growth, even if this seems likely to trend a lot higher given the tightness of the labour market. Last but not least, China’s key benchmark LPR rates were cut as was broadly expected, though the 10 bps cut in 1-yr rate to 3.80% looks to be aimed at easing some of the pressure on woe begotten property developers, while the smaller than expected 5 bps cut in the 5-yr rate (which dictates mortgage rates) also underlines continued caution about reigniting property speculation.

** U.S.A. – Jobless Claims. Philly Fed Manufacturing, Existing Home Sales **
– The consensus looks for little change in Initial Claims at 225K, following last week’s small jump due to Omicron disruptions, though with very unfavourable seasonal adjustment, and the sharp drop in the NY Fed Manufacturing’s Employment sub-index, the risk of a further jump looks to be quite high. Expectations for the Philly Fed Manufacturing survey will be skewed to the downside of a forecast rebound to 19.0 from 14.4, given the steep decline in the generally rather more volatile NY survey, and despite often sharp divergence between the two surveys. After a run of strong readings (1.8%, 1.0% and 7.0% m/m) in prior months, a modest -0.8% m/m setback is expected, though the strength of Mortgage Applications and pipeline of Pending Home Sales, and indeed a very favourable seasonal adjustment imply the risks are skewed to the upside, though the tornadoes that swept the South may have dented sales somewhat.