Macroeconomics: The Week Ahead: 7 to 11 Feb

The Week Ahead – Preview: 

The new week’s data run is busy in the UK (Q4 GDP and array ofmonthly activity indicators, BRC Sales and RICS), but is otherwise relatively modest, but headlined by US CPI, accompanied by China Caixin Services PMI and monetary & credit aggregates, German Production and Trade, US NFIB, Trade and prov. Michigan Sentiment. In event terms there are plenty of central bank speakers, rates hikes are expected in Mexico, Poland, Romania and Russia, and the EC will update its Economic Forecasts, and there is a busy run of monthly commodity reports. Corporate earnings will remain plentiful around the world, there are 89 S&P 500 companies reporting, with many consumer behemoths reporting (e.g. Coca Cola, Pepsico, Tyson Foods & Unilever) and also oil/energy majors, the former will be closely watched in terms of price hike intentions, and the latter for up and downstream investment plans, with a number of major European banks also reporting. Politics (domestic and international) will continue to cast a long shadow, with UK PM Johnson “hanging on in quiet desperation” (to borrow from Pink Floyd), and Germany’s confused positioning and total lack of strategic thinking in focus as Chancellor Scholz meets with President Biden on Monday to discuss the Ukraine/Russia tensions. But even with a better defined German position, and rather too many empty and toothless threats from NATO, the bigger problem is, as former UK MI6 chief Alex Younger described, that Putin is “playing poker rather than chess”, adding that “at the moment I cannot see a scenario where he can back down in a way that satisfies the expectations that he has created.” A close eye also still needs to be kept on Italian politics, as the presidential election highlighted just how fractious Draghi’s government of national unity has become.

But as noted on Friday in terms of central bank policy shifts and markets, the simple question is how easily will markets weather what is increasingly looking like a very abrupt shift in liquidity provisioning- Fed taper complete by March followed by QT, BoE reducing its balance sheet by £70 Bln this year, ECB fast tracking its taper, RBA terminating QE – in what has all the appearances of a co-ordinated move. It’s not co-ordinated, but it will be occurring at the same time. Financial conditions could well tighten quite sharply, and this in turn speaks to much greater volatility (see attached chart on rates volatility for USD, EUR and GBP swaps), particularly with the ugly concentration risk in portfolios being so brutally exposed by the collapse in the Meta Platforms (aka Facebook) share price. This in turn speaks to higher margins on leveraged positions, and therefore some risk related deleveraging, as well as a higher risk of margin calls amid elevated volatility. The question that arises then is how many times can central banks can again turn tail in the face of a market meltdown or tantrum, before markets have an ‘Emperor’s New Clothes’ moment, rather than continuing to indulge in ‘Wilful Blindness’ and ‘Wishful Seeing’ (e.g. ‘the dovish hike’ meme)

In terms of the highlights of this week’s data schedule, US CPI is expected to rise 0.4% m/m headline and 0.5% m/m core, which would push y/y rates up to 7.3% (from 7.0%) and 5.9% (from 5.5%) respectively. While the 3-mth annualized rate for headline would slip to 6.8%, the core rate would remain at 6.4%, underlining how much upward pressure is coming from housing and services, as well as food and energy. There should be some Omicron related downward pressure on travel and leisure related prices, while auto price pressures should be a smaller contributor than in December. Beneficial base effects should start to kick in March, particularly energy and auto related, but with wage pressures all too obvious in Friday’s Average Hourly Earnings (0.7% m/m 5.7% y/y), second round effects clearly have gotten some traction.

Over in the UK Q4 GDP is forecast to hold at the prior quarter’s pace of 1.1% q/q, which would see the y/y rate slow to a still robust 6.4% (vs. 6.8%). The detail will be markedly different to Q3 with a strong contribution from Net Exports and Govt Spending, in stark contrast to the drag from both in Q3, while Private Consumption is seen slowing to a more ‘normal’ 0.8% q/q after a sizzling 2.7% q/q in Q3. But the primary focus will be on how much of a hit the economy took from the Omicron variant, with December GDP seen dipping 0.5% m/m following the unexpectedly strong 0.9% m/m in November. The other activity indicators are likely to confirm that the light ‘Plan B’ restrictions primarily hit Services (-0.7% m/m), with Industrial Production and Manufacturing seen posting marginal gains, while ever volatile Construction Output expected to drop 0.9% after surging 3.5% in November. But this is now all rather historical, and the bigger question being what sort of a drag the cost of living crisis and April tax and energy price hikes will have.

There will be a good number of Fed, ECB, BoE, BOC and RBA speakers this week, as G7 ex-Japan policy environment moves into a less accommodative, but still very much reactive rather than aggressive proactive stance, and a clearly heightened risk of a policy error, or at the very least poor communication unsettling markets. In the CEE & EM space, rate hikes are again on the agenda except in Asia, where rates are seen on hold in Indonesia and Thailand. Poland’s NBP is expected to hike rates 50 bps to 2.75%, while Romania’s BNR is seen hiking a modest 25 bps to 2.25%, and in both cases this would still leave policy well behind the curve. Polish NBP governor Glapinski, who said a stronger PLN would be helpful last week, is clearly failing to understand (probably wilfully and at the behest of the vile PIS government) that a weak PLN is a function of poor NBP policy, and the idiotic national socialist (description used very intentionally, Ed.) government’s appalling policies and needless confrontations with the EU. Meanwhile Banco de Mexico is expected to hike rates 50 bps to 6.0%, and will be hoping that this week’s CPI data is no worse than the expected 0.54% m/m 7.01% (vs. prior 7.36%), given that GDP is now in recession territory. Last but least Russia’s Bank Rossi is expected to hike rates by a further 100 bps to 9.50% bringing its cumulative tightening to 525 bps, as supply chain bottlenecks, food price pressures, and a weaker RUB on the back of geopolitical tensions put paid to its December signal that a pause might not be far off, and this week’s January CPI expected to jump higher in both headline (9.2% y/y) and core (8.9% y/y vs prior 8.3%).

The commodity arena has a very busy week as OPEC, EIA and IEA all publish their monthly oil market reports, with the focus increasingly on output rather then demand prospects, and increasing questions about spare capacity. There are a raft of monthly reports in the agricultural space headlined by the USDA WASDE, and accompanied by Brazilian CONAB crop estimates and Unica sugar output, StatsCan crop inventories, along Malaysian Palm Oil Board’s report and France’s Agriculture Ministry publishing estimates of 2022 Winter Grain and Rapeseed plantings. In the metals space, Australia publishes Port Hedland monthly Iron Ore Exports, with another busy week for corporate earnings featuring ArcelorMittal, Cleveland-Cliffs, Kobe Steel and Sumitomo Metal Mining, amongst others.

As noted above, there are plenty more corporate earnings this week, with Bloomberg News highlighting the following as likely to be among the headline makers: America Movil, Amgen, Apollo Global Management, ArcelorMittal, AstraZeneca, Bradesco, Bharti Airtel, BP,Brookfield Asset Management, CME Group, Coca-Cola, Commonwealth Bank of Australia, Duke Energy, Fujifilm, GlaxoSmithKline, Honda Motor, Itau Unibanco, KKR, L’Oreal, Motorola Solutions, Nippon Telegraph & Telephone, PepsiCo, Pernod Ricard, Pfizer, Siemens, SoftBank Group, State Bank of India, Sun Life Financial, TotalEnergies, Toyota Motor, Twitter, Tyson Foods, Uber, Unilever, Walt Disney.