Macroeconomics: The Week Ahead: 27 to 1 October 2021

The new week brings end of month and quarter, a deluge of US and Japanese data, Eurozone inflation readings, as well as the ECB’s Sintra central bank conference, a Fed conference on the implications of its actions in response to the pandemic, the annual US NABE conference, and a regular Senate hearing on the CARES (Coronavirus Aid, Relief, and Economic Security) Act, along with Lagarde testimony to the European parliament – so expect to be deafened by a barrage of central bank speakers. In the Commodities space, volatility looks to be the watch word, due to the combination of continued uncertainty about the global economic outlook, supply chain disruptions and contagion effects from the various power crises on energy and metals, or weather effects in agriculture, with OPEC’s annual World Oil Outlook (WOO) to be published on Tuesday, and also a slew of weekly and monthly EIA and USDA S&D reports likely to prove a little more sensitive than usual. Corporate earnings reports are sparse, while the US dominates the govt bond auction calendar with $183 Bln of 2, 5 & 7-yr, in what will be a relatively light week for UK and Eurozone supply. There will also be the expected indecisive outcome of the German election to contend with. Last but not least, China will be closed as of Friday for a week for the National Day ‘Golden Week’ holidays (ends October 7)

However it is the trifecta of overarching themes – China Evergrande, Europe’s power crisis and the US Debt Ceiling/Spending gridlock – which will probably be the main talking points beyond the pandemic. It is as well to note that while the power crisis may be most acute in Europe, China is battling very similar issues, forcing production cuts in key industries, as are Brazil and to a certain extent the US. While the impact of bad weather and droughts combining with the colossal supply chain disruptions from the pandemic have played decisive roles, the simple point is that years of underinvestment in power grid (and other) infrastructure is being brutally exposed and, along with the asset price inflation engendered by central bank financial repression, is leaving consumers facing inflation pressure in all key non-discretionary spending areas: energy, food and housing. Given the psychological impact on consumers from pandemic related activity restrictions and health security fears, the resultant risk of increasing social unrest should really not be underestimated.

– Statistically, Durable Goods Orders, Consumer Confidence, Personal Income & PCE and Auto Sales will be the headline items on the US schedule, which also sees Goods Trade Balance, CS & FHFA House Prices, Pending Home Sales, Construction Spending and the Dallas & Richmond Fed surveys. Despite all the supply chain disruptions, Durable Goods Orders and indeed Shipments are seen posting a further solid if unspectacular gain (ca 0.5% m/m) on all measures, with a better month for aircaft orders likely to be offset by still major headwinds in the auto sector. But it will be Consumer Confidence that gets rather more attention after a sharp drop in August on the back of the spike in infection rates, which have since eased somewhat, while labour demand remains robust, though the setback in equities may weigh, a marginal bounce to 115.0 from 113.8 is expected. Despite a strong rebound in Retail Sales (notwithstanding the downward revisions to July), above all on core measures, the consensus looks for a modest 0.6% m/m with the rise in infection rates weighing on restaurant and other leisure activities, while the deflators are projected to show no change in headline at 4.2% y/y and a marginal 0.1 ppt dip in core to 3.5% y/y, but with rents and house prices rising sharply, renewed upward pressure is likely in coming months. As for Auto Sales, a modest rebound to a still very weak 13.30 Mln SAAR from 13.06 Mln, breaking a run of four sharp monthly declines, though still very low inventories and high prices suggests that any boost from replacement buyers due to the impact of Hurricane Ida may be modest, and a further small setback remains the risk. Both House Price measures (CS &FHFA) are expected to accelerate to fresh all-time highs (CS consensus 20.0% y/y vs. June 19.1%), primarily due to low inventories, pandemic relocation and despite increasingly sharp headwinds due to affordability.

In the Eurozone, preliminary inflation data will be the focal point with pan-Eurozone CPI seen rising 0.5% m/m to push the y/y rate up to 3.3% from 3.0% and core to 1.9% from 1.6%, with disparate trends in energy prices (above all due to household prices being heavily regulated) tempering the well documented pressures there (though these will show up in coming months, above all in Germany), while travel price pressures may be exacerbated by unseasonal trends due to the pandemic (typically these would drop after the end of the holiday season), the same applies in reverse to clothing, where summer discounting was relatively muted, as evidenced by the upward pressure in August CPI. However it is how much further inflation will rise in Q4 (above all due to energy prices), which will dictate the degree of discomfort being expressed by ECB hawks. In the UK, BRC Shop Prices (last -0.8% y/y) will be very closely watched given the breadth of supply chain disruptions; Consumer Credit will also get plenty of attention after the 2.7% y/y drop in July, with only a modest pick up to £300 Mln from zero expected. The EC’s Confidence surveys and UK Nationwide House Prices are also due.

Manufacturing PMIs from around the world are expected to echo the G7 flash readings and post declines across the board, with particular focus on China NBS PMI readings that are expected to see Manufacturing little changed at 50.2, but a relatively sharp rebound in Non-Manufacturing to 50.8 from August’s lockdown related drop to 47.5, as activity restrictions were lifted, with the Mid-Autumn festival also seen providing a boost. The US Manufacturing ISM is seen little changed at 59.5 vs 59.9, though extensive hurricane related disruptions on top of extant supply chain issues could potentially see the Supplier Deliveries surge (due to lengthening delivery times), imparting some upside risks, but for the wrong reasons. Despite Japan’s lengthy lockdown measures, the Q3 Tankan is expected to be very little changed on any of the Large Business current or outlook DIs or indeed CapEx intentions, though Smaller Business measures are projected to dip on most measures; Retail Sales and Industrial Production are both expected to drop in m/m terms.

– The deluge of ECB, Fed & BoE speakers, either in terms of testimony (Powell & Lagarde) or at the numerous conferences (headed by the ECB’s Central Banking Forum) and other events will more than likely offer nothing fresh in terms of policy outlook insights. They have long been reactive (rather than proactive) policy mode, but are now clearly even wary of being reactive, perhaps unsurprisingly given that the array of inflation pressures and growth / recovery headwinds are precisely the sort of supply side issues, which they can do little to impact, but equally could easily unseat consumer and business inflation expectations. It serves as a reminder that they should have put a lot more pressure on governments to reform during the post-GFC era, and are now left holding what looks increasingly like an unexploded bomb, if handled incorrectly. In the US, House Democrat leader has stated over the weekend that the infrastructure ($550 Bln road & bridges bill) and debt ceiling suspension bill(s) will be passed by Friday’s deadline, but there remains a lot of work to scale down the larger $3.5 Trln package of spending and tax measures, above all to try and appease demands from moderates and progressives.

At the time of writing, the preliminary exit poll indications from Germany’s federal elections indicate an even bigger cliff-hanger with CDU/CSU and SPD neck and neck on 25%, Greens on 15% and FDP on 11%, while the far-left are teetering on failing to make the 5% hurdle. Coalition building will take a very long time, even if voters have (IF polls are correct, which they probably are not given the ca. 40% of postal voting) effectively vote for yet another grand coalition.

As for developments in China, the threat of a collapse of China Evergrande remains a very real one, though the ‘too big to fail’ aspect is even larger than was the case of Japan’s property bust (1992 onwards) or the more recent US meltdown, given that the property sector and its supply chains account for 30% of China’s GDP, and far more importantly 70% of household net worth. To throw oil onto this particular fire, China is now facing an ever widening power crisis with key suppliers to Apple and Tesla (amongst others) being forced to shutter production for a week, and leaving even bigger questions about how China’s economy will perform in H2, with metals and to a lesser extent energy prices likely to be increasingly sensitive to related news flow. While the power crisis is very much Europe wide, the UK is now facing a fuel crisis, in no small part due to irresponsible scaremongering prompting panic buying. There is absolutely no shortage of fuel, this is just an escalation of the HGV (truck) driver crisis, which is both due to post-Brexit regulations as well as a woeful backlog in processing driver licence applications, due to the pandemic. Be that as it may, the auspices for the UK economy are clearly not good.

As noted, it will be another light week for corporate earnings, with Bloomberg News identifying the following as likely to be among the headline makers: Boohoo Group, CarMax, Cintas, Concentrix, Ferguson, Hennes & Mauritz, IHS Markit, Micron Technology, Next, Nine Dragons Paper, Nitori, Novagold Resources, Paychex and Thor Industries.