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Macroeconomics: The Day Ahead for 7 November

  • Heavily frontloaded data run has China Trade, German Production and Indonesia Q3 GDP to digest ahead of US Consumer Credit; plenty of central bank speakers, EU Finance Ministers meeting and COP27
  • China Trade headwinds crystallize; commodity imports the usual mix of price sensitivities and Zero Covid driving weak domestic demand
  • Market risk appetite in defiance of a run of negatives underscores still a high level of excess liquidity
  • Week Ahead: focus on US Mid-terms, CPI, China Trade, inflation and Lending, and busy run of UK GDP and activity data; Energy and Agriculture monthly reports particularly sensitive; a further raft of earnings; UK Budget ‘leaks’ and briefings also in view

EVENTS PREVIEW

As was evident in Friday’s US equity market rally, despite the mid-week bruising from the Fed’s hawkish message, and is again evident today despite weak China trade data and further Covid lockdowns, markets remain loathe to give up on the ‘Fed pivot’ and China easing up on its Zero Covid policy, underlining that there remains a good deal of excess liquidity, as well as a great deal of ‘hope-ium’, borne on the wings of the conditioned market reaction function to the decade plus of QE. Be that as it may, a heavily front-loaded data schedule has those China trade readings, German Industrial Production (net of downward revisions, in line with forecasts) and slightly better than expected Indonesia Q3 GDP to digest, with little else other than generally non-market moving US Consumer Credit ahead. There is a goodly volume of Fed, ECB and BoE speakers, with Villeroy comments that the ECB should not take its foot off the rated hike pedal until core CPI has ‘clearly peaked’ providing a more specific steer on the policy outlook. The COP27 Climate conference continues, while EU Finance Ministers meet and will attempt to work out a way to better co-ordinate measures to curb the impact of energy prices, though divisions remain all too clear, above all given a lot of resentment about Germany’s largely ‘go it alone’ measures. The focus will remain on tomorrow’s US mid-term elections and Thursday’s US CPI. China’s Trade data were weaker than expected, underlining the crystallizing of much anticipated headwinds to Trade, as well as very typical price sensitivities in terms of commodity imports. Thus crude imports picked up on the setback in oil prices and increase quotas, while Soybean imports posted an 8-yr low reflecting persistent weakness in crush margins, while Copper Imports remained weak on a combination of higher domestic output and weak domestic industrial output, as well as the impact of the Golden Week holiday early in the month.

RECAP: The Week Ahead Preview

The new week has a reasonable volume of major data from US, China and UK, but an array of political events and themes, along with a raft of key monthly reports in the commodity and energy sectors, which may prove to be the dominant influences. Key among the latter will be the US Mid-term Elections on Tuesday, which are expected to see the Democrats hold onto their slender majority in the Senate, but lose control of the House; the economy (primarily cost of living pressures) and abortion rights will be among the key factors, and with too many contests too close to call, the thorny issue of ‘democracy denial’ may well prompt a good number of lawsuits in the aftermath. There are also abortion rights votes in a number of states, and thousands of local elections. The outcome of the Congressional elections may also determine whether Trump announces a renewed run for the presidency shortly afterwards. The COP27 Climate summit also gets underway in Egypt, with little in the way of major initiatives expected, but nevertheless the debate around how to balance energy security, given the War in Ukraine and Energy Crisis in Europe (and beyond), against the push towards renewables will have to be closely watched. Speculation around measures to ease China’s Zero Covid will remain a further point of focus, along with any leaks and/or briefings about what measures will be announced in the UK Budget on 17 November. There will be plenty of central bank speakers, along with more Q3 corporate earnings to digest, while the US heads the run of govt bonds auctions with $96 Bln total of 3, 10 & 30-yr, with the UK, Germany, Italy and Netherlands also holding auctions; US bond markets will also be closed for Veterans Day on Friday (though equities will be open).

Statistically, US CPI gets top billing, with China getting the week underway with its October Trade data, with CPI, PPI and monetary and credit aggregates due later in the week. A busy week for the UK has Q3 GDP, a swathe of monthly activity indicators, BRC Retail Sales and RICS House Prices Balance, while Japan has Household Spending, Labour Cash Earnings and Economy Watchers (services) survey, and Germany has Industrial Production.

In terms of US CPI, it is m/m rates that matter more in the short-term than y/y rates, above all given base effects. Headline CPI is forecast to rise 0.6% m/m, which would see the y/y rate dip to 7.9%, while core is seen up 0.5% m/m to edge the y/y rate down 0.1 ppt to 6.5%; in 3-mth annualized terms this would take headline up to 4.0% from September’s 2.0% (though a lot better than the May-July pace of 9.2%), while core would be running at 6.8% (vs. May-July 6.4%). Rising Gasoline prices will add to headline, while core will continue to see pressure from OER (housing), though as previously noted this does not reflect current downward trends in house prices. Services will also continue to exercise upward pressure, but will see some restraint over the next year coming from Medical Insurance costs thanks to the anomalies of the BLS methodology for calculating this, based on Health Insurers’ retained earnings, which should help to start to bring down Services CPI ex-OER from a very high 11.4% y/y. Used vehicle prices should also be a drag, though New Car prices have offset much of this in recent months. The fact is that even with another CPI report before the next FOMC meeting, inflation is unlikely to come down at anything like the sort of pace needed to prompt a genuine volte face from the Fed. Ahead of the CPI report, the NFIB Small Business is expected to dip to 91.4 from 92.1, with the already published Employment indices showing a drop in labour demand, though a sharp rise in Net Compensation plans (32 vs 23, and a 6-mth average of 27). The week finishes with preliminary Michigan Sentiment, with a dip to 59.5 from 59.9 expected, pressured by gasoline prices and rising mortgage rates.

China’s Trade data get the week underway, though forecasts assume that the same factors to remain dominant, i.e. softening external demand impinging on exports (f’cast 4.3% y/y vs. Sept 5.7%) along with adverse base effects, while weak domestic demand and Covid restrictions weigh on Imports (Flat y/y vs Sept 0.3%). Falling Steel Prices (above all due to the property sector crisis) and generally weaker domestic raw materials prices, and base effects (2021 PPI peaked in October at 13.5%) are expected to see PPI fall 1.9% y/y (vs. Sept +0.9%). CPI is also expected to ease to 2.4% y/y from September’s 2.8%, with Food Price pressures set to ease somewhat despite ongoing upward pressure on Pork Price, while core CPI is likely to remain below 1.0% y/y, as Covid restrictions and generally soft consumer demand continue to weigh heavily, as is likely to be evident in this week’s ‘Singles Day’ shopping event.

The week’s run of UK data are expected to confirm that the UK is entering a recessionary period, even if the death of Queen Elizabeth II and period of National Mourning will account for much of the expected 0.4% m/m drop in September monthly GDP, and a forecast of -0.5% for Q3 GDP, despite a positive contribution from Net Exports, in part due to weak demand weighing on imports for a second quarter. The array of September monthly activity data are seen dropping 0.4% to 0.6% m/m across the board. BRC Retail Sales are likely to ease further, while the spill-over from the Gilt Market meltdown into mortgage availability and rates is expected to again weigh heavily on the RICS House Price Balance, with another sharp drop to 19 from 32 seen, and the risks skewed to the downside. All of which has long been discounted, with the focus still squarely on the upcoming Budget.

A busy week for key monthly reports in the commodity will zero in on the USDA’s WASDE report on Wednesday and EIA’s Short-Term Energy Outlook on Tuesday, particularly given disruptions to agricultural exports due to water levels on the Mississippi, crop quality concerns in the US and elsewhere, and low seasonal levels of oil product and gas stocks. China’s CASDE, France’s Agriculture Ministry production estimates, Brazil’s CONAB and Unica S&D reports will also get plenty of attention in this respect too, along with the flood impacts on Australia’s wheat crop. Given rising food security concerns, the UN’s annual Food Outlook will be a further point of focus, along with earnings from Brazilian meat producer JBS, steel producers ArcelorMittal and JSW Steel, and energy providers in Europe: E.On, RWE and the UK’s National Grid.

While the peak for the US Q3 earnings has past, there will certainly be plenty of results to pore over, with Bloomberg News highlighting the following: Activision Blizzard, AstraZeneca, Bayer, BioNTech, Bridgestone, Coupang, Credit Agricole, Deutsche Telekom, DR Horton, DuPont, Hapag-Lloyd, Henkel, Hon Hai, Honda, Manulife, Mitsubishi, National Australia Bank, Nintendo, Nissan, NTT, Occidental Petroleum, PTT, Rivian, Roblox, Singapore Telecommunications, SoftBank, State Bank of India, Walt Disney and Westpac Banking.

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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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