Macroeconomics: The Day Ahead – 28 September 2020

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

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

  • Quiet start to a very busy week for data and events; Dallas Fed Manufacturing survey and Lagarde testimony in focus; Fed and ECB speakers
  • Week Ahead: politics to the fore – Brexit, US elections; PMIs and many other surveys, US & German labour data; ECB and Treasury conferences; EU Summit and ‘final’ week of Brexit talks
  • Week Ahead: quarter end leaves investors facing dilemma of easy policy and financial repression vs. economic reality and uncertainty piling pressure for corporate restructuring
  • Credit spread charts: USD, EUR and GBP High Yield, Asia USD denominate High Yield

EVENTS PREVIEW

The Day & Week Ahead

The week ahead is very heavy on both data and events, though today’s data run is very light by comparison with the rest of the week, with the US Dallas Fed Manufacturing survey the only item of any note. By contrast the events run has Lagarde making regular quarterly testimony to the EU parliament, and other Fed and ECB speakers (plentiful all week along with BoE). It also sees the start of a ‘final’ week of UK/EU Brexit negotiations that coincides with further UK parliamentary debate on the provocative “Internal Markets Bill”, with brinkmanship and incessant ‘source’ media briefings likely to create a cacophony of optimism and pessimism, and providing a good deal of often very contradictory headlines which will sustain heightened GBP volatility.

Politics will continue to be the perhaps critical influence, with the NY Times article on Trump’s tax returns thrown into the election run-up, which also sees the first of the presidential TV debates take place on Wednesday, with little hope now of a fiscal stimulus package ahead of the November vote. The latter will be among the discussion points at this week’s US Treasury Market Conference (Wednesday), at which Fed vice chair Clarida will moderate a panel discussion on ‘Future Considerations for Treasury Market Resilience’, that will obviously address the Fed’s role in the market, given its QE programme. The ECB also hosts two major conferences this week (‘ECB and its Watchers’ and ‘Central Bank Research Association), at which all the key ECB governors will be speaking (Largarde, Lane, Schnabel, Weidmann), and while the policy message is unlikely to change, the tensions on the longer-term policy direction are likely to resurface, and perhaps unsettle markets. However the primary concern in Europe remains the rising infection rates in many countries, and associated targeted lockdown measures that threaten to stall already stuttering and patchy recoveries, there is also an EU Summit which inevitably discuss Brexit, but also the tensions in the Eastern Mediterranean (Greece/Turkey and Cyprus). China

The week’s statistical run is busy across the globe. For the US Consumer Confidence will be very closely watched, a bounce from August’s cyclical low is expected, and while there are US Auto Sales, Goods Trade balance, Personal Income and PCE, the focus will inevitably fall on Friday’s labour data, with Payrolls growth seen slowing to 800K, and the Unemployment Rate posting a smaller drop to 8.2% from 8.4%. Surveys will be plentiful with Japan’s Q3 Tankan and Manufacturing PMIs topping the schedule, amid signs that the sector recovery is plateauing. The Eurozone looks to CPI and German and Spanish Unemployment, while the UK has Credit and Mortgage aggregates, the final reading on Q2 GDP, Lloyds Business Barometer and BRC Shop Prices. Aside from the the Q3 Tankan, Japan has its usual month end logjam of monthly data: CPI, Industrial Production, Retail Sales and Unemployment, while July GDP will be the focal point in Canada. But with uncertainty on the economic outlook remaining very high, it has to be observed that where data beats expectations, it will be a case of being ‘less bad’ than expected or feared, but is unlikely to suggest strong underlying momentum in economic activity.

The week also see quarter end, and after a very choppy September in markets, and investors will have to consider how best to place themselves. The primary challenge being that while central banks continue to pump prime liquidity to ensure financial stability and are committed to maintaining ultra-easy policy for years to come, their actions are neither spurring growth nor inflation, but rather ‘plugging holes in the dyke’, and fiscal policy remains key to any recovery. Central banks can neither create jobs, nor stop insolvency. The longer the virus continues to restrain activity, the greater the pressure on companies, above all in the service sector, to address profitability, borrowing at cheap rates to cover current (rather than CapEx) costs has a very short shelf life. From that aspect, the recent (still modest) widening of credit spreads, above all in High Yield (see charts) perhaps offers a signal that economic reality, rather than reach for yield and FOMO (fear of missing out) is coming home to roost.

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