Macroeconomics: The Day Ahead – 26 October 2020

Good Morning: The Long & the Short of it and The Bigger Picture

Written by Marc Ostwald, ADMISI’s Global Strategist & Chief Economist

• Modest run of data, events and earnings to start the week; Singapore  Production, German Ifo survey US New Home Sales; China CPCC plenum and US Supreme Court nomination vote; Pandemic and Politics still  dominant market influence
• Busy run of provisional Q3 GDP readings across world top weekly data run,  but risks to Q4 from surge in infection rates moving front and centre
• BoJ, BoC and ECB meetings to promise do ‘whatever is necessary’, warn on  downside risks to outlook, but not expected to see any fresh policy moves

EVENTS PREVIEW

A fairly light data and events schedule features the overnight Singapore Industrial Production (smashing forecasts thanks to Covid-19 related bio-medical output), with Germany’s Ifo Business Climate (seen dipping, risks downside of the consensus) and US New Home Sales  (modest rise expected, shortage of supply restraining) the only items likely so attract much market attention, which as noted in the week ahead below is unlikely to jump over the shadow of the pandemic and politics. The CPCC plenum in China will doubtless throw up a number of headlines, but otherwise the events schedule is equally modest, while Hasbro and HCA Healthcare top the US Q3 earnings run today, in a week in which roughly half of the S&P 500 companies will be reporting.

I have been reminded that not everyone may be familiar with Hirschmann’s ‘hiding hand’ referenced in  the week ahead, so to recap: “It was the economist Albert Hirschman who articulated the principle of the “Hiding Hand”, as a counter to the hegemony of neo-classical economics’ adherence to Adam Smith’s “Invisible Hand” – the principle that “the general welfare is best served by everyone catering to his private interests, legitimated total absorption of the citizens in their own affairs”. Hirschman above all challenged the latter’s over simplification of human behaviour into a set of axioms steeped in ‘laissez-faire’ and ‘rational choice’ dogma. In contrast to Schumpeter’s concept of ‘creative destruction’, Hirschman’s ‘Hiding Hand’ argues that creativity is the key problem solving tool when we face unexpected situations; and that it is only via the experience of impotence when faced with the unexpected that we develop the innovative knowledge to solve problems, and that ‘rational choice’ often stifles innovation and creativity.’ It seems worth revisiting some of Hirschman’s ideas; above all his work in developmental economics. Hirschman stressed the need to understand local structures and resources prior to any intervention, and to eschew formulaic World Bank criteria, assumptions and models. He also emphasized the need for ‘latitude’ in planning and directing projects, on the basis that rigid project structures and procedures stifle managers’ creativity and indeed their confidence, and more than likely lead to the exclusion of solutions and products, which may perhaps be ‘no less desirable, and far more feasible, than some other’ (Hirschman, ‘Latitudes and Disciplines’ 1967). He also noted that prescribed assumptions about how and when projects are initialized and implemented can in fact foster corruption, though he also advocated applying some latitude in dealing with corruption, in so far as completely eradicating corruption leads to stagnation, instead of encouraging countries to face up to and learn to deal with such problems. Last but not least Hirschman also outlined the concept of “possibilism”, which is an approach to escaping ‘straitjacketing concepts’ such as perceived “absolute obstacles, imaginary dilemmas and one-way sequences”, noting that such “obstacles” can often turn out to be an asset or, at the very least, a spur for change. Hirschman also argued that such “inverted sequences” should not be seen as having primacy over ‘orderly sequences’, but rather as a means to ‘increase the number of ways in which the occurrence of change can be visualized’.” (excerpt from my 2016 Ghost in the Machine article ‘Visions of China’… see archive https://www.admisi.com/market-information/the-ghost-in-the-machine/ )

Recap: WEEK AHEAD PREVIEW

It’s probably safe to assume that new week, same overarching political and pandemic themes, which will continue to subordinate data and central bank decisions and speakers, with month end thrown into the mix, which may well add to a degree of market paralysis, and bouts of choppy but ultimately directionless trading, ahead of the perceived event risks of the November US elections and prospects for an EU/UK Brexit trade deal. Be that as it may, advance / provisional Q3 GDP readings for South Korea, US, Germany, France, Italy & the Eurozone top the statistical schedule, which also sees US Durable Goods & Consumer Confidence, Eurozone (Oct) & Australian (Q3) CPI & Japan’s Retail Sales, accompanied by BoJ, ECB and BoC policy meetings, as well as peak week for US S&P 500 and a busy week elsewhere for Q3 corporate earnings. Govt bond supply is plentiful with the US offering $161 Bln of T-Notes & $26 Bln 2-YR FRN, the UK weighs in with £6.75 Bln of 4, 10 & 51-yr, Italy will sell in the region of EUR 10 Bln of 5 & 10-yr along with zeros & I-L, Canada sees C$11.0 Bln 4 & 30-yr, while China sees plenty more local govt muni issuance and CNY 110 Bln of 1 & 10-yr.  The misalignment of financial markets with “Main Street” remains all too obvious, but the key issue may well prove to be that there is increasing perceptive alignment that central banks are all too aware of the impotence of their monetary toolkits to provide any form of economic boost, and the public at large are both restive about the failure to bring the pandemic under control, and increasingly are questioning the authority of governments, which seem incapable of anything other than reactive fire-fighting measures above all in Europe and North America. Amongst all this China’s recovery and its authoritarian govt, which under the guise of the Communist Party’s Central Committee annual plenum will announce a new 5-year ‘economic development’ plan, stands out – not necessarily as a beacon of light, but rather an uncomfortable truth that the one party state is proving, in the current crisis, to be a good deal more effective, than the “democratic” systems in the ‘West’.

In terms of the week’s data, the advance Q3 GDP readings will likely tell us what is already been evident, the US economy recovered robustly in Q3, but to sustain that in to Q4 and into 2021 will require the elusive fiscal package. By contrast the bounce in Europe has proved to be rather short-lived and the ballooning infection rates, and the thus far seemingly ineffective measures to rein those in, will only serve to stall recovery momentum in Q4. The week’s G7 central bank policy meetings will doubtless emphasize the willingness to “do more” and “whatever is necessary”, but not immediately, and stress that the onus is very much on fiscal policy both to cushion against unemployment and the severe impact on corporate revenues, and as and when the pandemic ebbs to underpin the recovery.

The gravest dangers remain the potential for sharp rises in insolvencies and unemployment, and increasing social unrest, with the reality both of vaccine development timelines, and the challenges of mass immunization and indeed ‘in practice’ efficacy, all potentially undermining markets’ seemingly eternal Panglossian spin.

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