Macroeconomics: The Day Ahead for 30 November

As is typical on the final working day of the month, the data schedule is busy, though Eurozone and US inflation data and the overnight China NBS PMIs will be the primary focal points. There are Industrial Production data from Japan & South Korea, Australia’s Q3 CapEx, UK Lloyds Business Barometer, German Retail Sales and French CPI and Consumer Spending to digest. Ahead lie German Unemployment, Eurozone CPI, Canadian GDP and US Personal Income/PCE, weekly jobless claims and Pending Home Sales. The OPEC+ meeting will be very closely watched as it meets to discuss 2024 production quotas, with little sign as yet that either Angola or Nigeria are willing to acquiesce to Saudi demands for production cuts, and over in Dubai UN’s COP28 Climate Change Conference gets under way. As expected the Bank of Korea held rates overnight, with a smattering of central bank speakers on tap as the ECB Forum on Banking Supervision begins. The earnings schedule is dominated by Canadian Banks with CIBC, RBC and Toronto-Dominion Bank all reporting.

There was not a lot of cheer in the run of data from Asia overnight, with weaker than expected China NBS PMIs both raising questions about the relative strength of official data, as well as suggesting that businesses have taken little comfort from the array of piecemeal stimulus measures in the past 6 months. To an extent this is unsurprising given that external demand has softened substantially, and balance sheet resolution efforts in woe begone property sector remain elusive. Japan’s slightly stronger than expected Industrial Production (1.0% m/m vs. forecast 0.8%) was paced by tech hardware and auto output, but heavily offset by an unexpected sharp -1.6% m/m fall in Retail Sales (vs. forecast +0.4%). South Korea’s Industrial Production slide (-3.5% m/m) was way more than a mean reversion of the 1.7% m/m gain in September suggesting that prior hopes of a turnaround were misplaced, particularly given that Services Output also dropped 0.9% m/m and Retail Sales fell -0.8% m/m; the weakness was probably amplified by holiday effects, but overall indicates the economy is struggling to regain some momentum. Australia’s Q3 CapEx was below forecast at +0.6% q/q, but nevertheless robust, and suggests some modest upside risks to forecasts of 0.3% q/q for next week’s Q3 GDP, following the strong gain in Construction Output, though much depends on the extent of the drag from both inventories and net exports (due Monday and Tuesday). It also presents a continued dilemma for the RBA, as demand is clearly running ahead of supply, exacerbated by record inward migration, and thus imparting upside inflation risks.

** Eurozone – November HICP **

– As was already well flagged by the much lower than expected German, French and Spanish CPI, the pan Eurozone data will come in well below forecasts of -0.2% m/m 2.7% y/y headline, and 3.9% y/y core. While energy price base effects will play a significant role, holidays/tourism will also be another significant drag, the question is whether the latter is purely an unwinding of summer premiums or signals that the pent-up post Covid demand that was evident in the summer has run its course, with cost of living pressures now forcing many households to pull in their horns. While core CPI remains stubbornly high, if the current downtrend persists over the next couple of months, particularly with activity indicators either stalling or contracting (French Consumer Spending at -0.9% m/m only adding to that body of evidence), then the case for the ECB to cut rates may well look a lot stronger than the Fed, which implies that current EUR strength vs. the USD may be misplaced. It should however be noted that headline HICP will rebound on an adverse turn in energy price base effects, with a drop of -6.6% y/y last year falling out of the comparison.

** U.S.A. – October Personal Income / PCE ** Both Personal Income and PCE are seen posting a modest rise of 0.2% m/m, but as ever the focus will be on the PCE deflators, which are expected to echo CPI with y/y rates slipping to 3.0% and 3.5% from September’s 3.4% and 3.7%. As Waller noted on Tuesday, the Fed will still need to see further falls through the end of Q1, before a rate cut becomes a talking point. The Fed is very clearly focussed on real yields in judging whether its policy stance is “sufficiently restrictive”, and with the core PCE deflator seen at 3.5% and 10-yr yields at 4.3%, they are not likely to be happy with how sharply real yields have fallen. So inflation will have to drop sharply in coming months, and the labour market will need to loosen a lot more to justify a rate cut in H1 2024. It would not be surprising to see some pushback on market rate expectations from Fed speakers in the remaining days before they go into their purdah period next week ahead of the FOMC meeting.

** India – Q3 GDP/GVA

– Despite comments from RBI’s Das a few weeks ago suggesting Q3 GDP will surprise on the upside, forecasts have been steadily edged lower over the past fortnight, with the consensus looking for 6.8% y/y on both GDP & GVA, with adverse base effects accounting for the slowdown vs. Q2’s 7.8%. The question is whether the drag from Agricultural sector after a weak monsoon season, is more than offset by strength in industrial output, paced by govt subsidies and incentives and infrastructure spending, most notably boosting construction output, as well as the ongoing boost to services export from international demand as efforts to de-risk and diversify supply chains pick up.