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Macroeconomics: The Day Ahead for 14 October

  • Busier day for data, digesting China CPI and PPI (Trade data delayed), Singapore GDP and German WPI jump; awaiting US Retail Sales, Import Prices, Michigan Sentiment and Business Inventories; UK mini-budget U-turn speculation, further raft of central bank speakers and major US bank Q3 corporate earnings the other themes for the day
  • China CPI & PPI: pork and drought hit to vegetables pressure food CPI, but core CPI and PPI underline weakness of demand keeping underlying inflation very well contained
  • US Retail Sales: autos likely to offset some further drag from gasoline prices; inflation adjusted picture likely to remain subdued
  • US Import Prices: further fall expected on strong USD, lower energy and commodity prices, ebbing goods demand
  • US Michigan Sentiment: expected to be little changed; sky rocketing mortgage rates and modest rebound in gasoline prices impart downside risk

EVENTS PREVIEW

Another roller-coaster week, ends with a bumper run of major data from China (CPI, PPI, Trade) and the US (Retail Sales, Import Prices, Michigan Sentiment and Business Inventories), with Singapore’s advance Q3 GDP and final CPI data from France and Spain.

There are some Fed and ECB speakers, as the formal part of the IMF/World Bank meetings draws to a close, but it will be the first batch of US major banks Q3 earnings features JPMorgan Chase, Citi, Morgan Stanley, US BanCorp and Wells Fargo which perhaps attracts more attention, particularly credit and mortgage availability, loan loss provisioning, and fee and trading income from investment bank arms.

Speculation around the fate of the UK mini-budget, after finance minister Kwarteng rushed back early from the IMF/World Bank meetings, and what will happen to Gilt yields once the BoE’s Gilt purchase programme ends today will inevitably be the other theme. For the time being, the markets’ assumption is that PM Truss & Kwarteng are in the process of performing a spectacular u-turn, the question is whether what emerges is in fact credible. As for the sharp reversal in equities, this looks to be a combination of generally positive seasonal cash flows and short covering, but as prior rebounds this year have shown, this may well still turn out to be one of those vicious bear market rallies, unless the economic news and geopolitical situation take a to be hoped for ‘turn for the better’. In that vein, it should be noted that the impact of the Fed’s QT liquidity withdrawal has previously only started to significantly impact markets 3-6 months after it hits its maximum pace (which was only last month).

While there is a goodly volume of economic data next week, it will be China’s People’s Party Congress and any signals on changes to its Zero Covid policy and measures to resolve its property sector woes, along with the energy crisis in Europe, the political crisis in the UK and the war in Ukraine and a very adverse geopolitical backdrop which are likely to be the dominant themes, along with hawkish central bank rhetoric.

** China – September CPI, PPI & Trade **
While headline CPI picked up to 2.8% y/y, this was wholly due to food prices, with base effects in part dictating a further sharp rise in Pork Prices to 36.0% y/y from 22.4%, though these also rose sharply on the month due to continued supply constraints, while drought effects powered vegetable prices up to 12.2% from 6.0%. But with Non-Food CPI very subdued at 1.5% y/y and core CPI up a mere 0.6% y/y, the fact remains that demand weakness continues to contain underlying inflation. The weakness in underlying demand and base effects was also evident in the -0.1% m/m and slightly than expected -0.9% y/y (vs. forecast 1.0%) for PPI, which in the breakdown also saw Manufacturing Goods PPI drop to -1.9% y/y from -0.7%, while Consumer Durables PPI was unchanged at -0.6%, while Raw Materials PPI fell to 5.8% y/y, having been as high as 15.2% at the end of Q2. While this certainly gives the PBOC room to cut rates further, the fact remains that it remains more focussed on ensuring that widening rate differentials with Asia and the rest of the world does not put further downward pressure on the CNY, and that credit stimulus is targeted at trying to stimulate its weak economy.

** U.S.A. – Sep Retail Sales, Import Prices & Oct prov. Michigan Sentiment **
After yesterday’s upside surprise on CPI, the focus shifts to activity and sentiment data, given that the expected fall in Import Prices will again be a function of lower commodity and energy prices, a strong USD and softer goods demand, which has all been well documented. Retail Sales are expected to post a headline gain of 0.2% m/m, with a drag from gasoline prices (-4.9% m/m) on sales, expected to be offset by a boost from Auto Sales (up 2.4% m/m), as evidenced by a forecast of -0.1% m/m for the ex-Autos metric, with the core ‘Control Group’ measure also seen up 0.2%. As the attached chart attests, the nominal changes in Retail Sales offer a deceptive picture, with inflation-adjusted sales increasing at a modest pace in 2022, as consumers switch back to increased spending on Services, which are not captured in Retail Sales outside of Restaurant sales. Michigan Sentiment is expected to remain very depressed and barely changed at 58.8 (Sep 68.6) for a second month, after recovering somewhat from the record lows of June and July. The risks are somewhat skewed to the downside of the consensus given the pick-up in gasoline prices and sky-rocketing mortgage rates.

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© 2022 ADM Investor Services International Limited.

Risk Warning: Investments in Equities, Contracts for Difference (CFDs) in any instrument, Futures, Options, Derivatives and Foreign Exchange can fluctuate in value. Investors should therefore be aware that they may not realise the initial amount invested and may incur additional liabilities. These investments may be subject to above average financial risk of loss. Investors should consider their financial circumstances, investment experience and if it is appropriate to invest. If necessary, seek independent financial advice.

ADM Investor Services International Limited, registered in England No. 2547805, is authorised and regulated by the Financial Conduct Authority [FRN 148474] and is a member of the London Stock Exchange. Registered office: 3rd Floor, The Minster Building, 21 Mincing Lane, London EC3R 7AG.                  

A subsidiary of Archer Daniels Midland Company.

© 2021 ADM Investor Services International Limited.

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