Macroeconomics: The Day Ahead for 31 March

As a sometimes tempestuous Q1 2021 closes, there is a very busy run of data, as is typical for the final working day of the month; there are also the OPEC JMMC meeting (OPEC+ meeting on April production tomorrow), key reports from the US’ EIA (petroleum supply, gas production) and USDA (annual Prospective Plantings), and the IEA-COP26 Net Zero Summit, which will be largely meaningless as China is no longer attending due to the escalating tensions with G7 countries. Germany (15-yr) and Canada (5-yr) will auction govt debt. Statistically, there are China’s NBS PMIs, Japan and South Korea Industrial Production, UK BRC Shop Prices, Q4 Current Account and final GDP and French CPI to digest, while ahead lie German Unemployment, Eurozone & Italian CPI, Turkey’s Trade Balance, Canadian monthly GDP, US ADP Employment, Chicago PMI and Pending Home Sales.  In broad terms, the most significant economic development in the latter half of the month has been that the Eurozone economy is weathering extended lockdowns due to rapid rises in infection rates and poor vaccine roll-out much better than many had anticipated. While this is a pleasant surprise, and there is hard evidence at least in Germany of actual buoyant export demand, surveys ask very bald questions, i.e. are conditions better, the same or worse than last month? Given the pessimism and rock bottom sentiment that has been pervasive, the upswing in sentiment is from very low levels, and the pick-up in optimism may prove to be less impressive when actual hard data are presented, but at least it is a move in the right direction, even if the recovery proves to be a much longer, and likely bumpy road back to whatever is the “new normal”. In that vein, and following on from the near 20 pt rise in US Consumer Confidence yesterday, the attached chart of US gasoline demand (volume) is a useful perspective point, underlining recovery momentum, but also a reminder that there is still a long way to go to get back to the levels of 2 years ago.

In market terms, the question is whether the latest surge in long-term US Treasury yields is more SLR exemption expiry related than inflation expectations, above all given a breakdown in the broad correlation between oil prices and Treasury yields (see chart). Eminently some of the move could be in anticipation of Biden’s infrastructure spending plans outline today, though these should by rights have been offset by quarter end rebalancing after a dire quarter for US Treasuries (see charts); on the other hand Gresham’s law (bad money chasing out good) may be at work, with UST holdings being liquidated to cover Archegos related losses.

Asia data 

While the tensions between China and major western nations is starting to cast a pall on longer term global economic prospects, the stronger than expected rebound in the official NBS PMIs, above all the Non-manufacturing PMI reaching 56.3 from 51.4, close to November’s 9-year high of 56.4, while Manufacturing at 52.0 is close to 3-yr highs offer a strong counter to the emergent view that its recovery has lost most of its momentum. That said, the observation above about these surveys also holds true, in so far as February was clearly blighted by renewed lockdown measures, so it remains open for debate whether the Services rebound will hold at these levels. Japan’s weak Production data was clearly blighted by the earthquake, but supply chain disruptions in the auto and semiconductor sectors are clearly also weighing, with March expected to post a further drop (the Renesas fire will restrain), before rebounding sharply in April. Last but not least robust manufacturing and services output data from South Korea was a function of >7.0% m/m gains in Semiconductors and Chemicals, and a 20.4% m/m surge in restaurants/hotels on the easing of lockdown measures.

Eurozone – March CPI 

With German HICP in line, French CPI below and Spanish well above forecasts, risks look to be balanced for Eurozone CPI which is forecast to show a renewed upward bump to 1.4% y/y from 0.9%, though core CPI is seen unchanged at 1.1%. Energy price rises and base effects will play a key role in headline terms, but still a very long distance from the ECB’s target, though April and May data will see a much anticipated further boost from adverse base effects. But it is how prices evolve in H2 that will be a better guide as to whether the underlying trend is improving after years of undershooting; market based measures (by no means a reliable guide) suggest that any pick-up will be marginal and leave CPI below target.

U.S.A. – March ADP Employment

With the official US labour data being published when many markets will be closed for Good Friday, today’s ADP report may garner rather more reaction, despite the often colossal divergences, above all in the past year. The consensus looks for a gain of 550K following February’s 117K, which fell far short of the Feb Private Payrolls gain of 465K (seen at +650K in March), which imparts an upward revision risk. Easing lockdown restrictions should above all benefit hiring in the services sectors (seemingly reflected in a sizeable jump in the Consumer Confidence Labour Differential – see chart). It will also be interesting to see the breakdown between small, medium and large employers, the former having been the driving force behind recent gains, while the latter two have plateaued, doubtless reflecting a sizeable volume of permanent layoffs (see chart). Given the scope for some catch-up hiring after February’s bad weather impact, the risks look to be to the upside, though this is more likely to impact the official data than today’s ADP report, given classification differences (ADP – employed is on a payroll, while Payrolls – employed means received a paycheque). While notoriously volatile, the Chicago PMI is forecast to pick up modestly to 61.0 after dropping back to 59.5 from a 30 month high of 63.8 in January, thus echoing a very robust set of regional manufacturing surveys and a solid flash PMI. Pending Home Sales are expected to drop 3.0% m/m, and as with so many other February activity indicators, the risk looks to be to the downside due to those well documented weather effects.