Macroeconomics: The Day Ahead – 3 February 2021

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

  • Services PMIs / ISM and US ADP Employment top schedule, Eurozone and Turkey CPI also on tap; deluge of Fed and ECB speakers; OPEC+ JMMC and EIA Annual Energy Outlook; Treasury refunding announcement and more corporate earnings

  • Eurozone CPI: base effects, tax  and compositional changes seen in France, German and Spanish CPI to drive sharp rebound, but still well below ECB target; ECB to look through

  • Services PMIs to reflect differing lockdown impacts and Brexit shock; US ISM seen signaling solid pace of activity, but sluggish labour demand

  • US ADP Employment: marginal rebound expected as high infection rate and activity restrictions restrain services labour demand

  • US refunding: sharp change of strategy as Yellen takes the reins

     

EVENTS PREVIEW

A much busier day in terms of both data and events awaits, as Services PMIs and US ADP Employment topping the data run, with Eurozone, Italian and Turkish CPI also on tap. On the events front OPEC+’s Joint Ministerial Monitoring Committee meets and the EIA publishes its annual Energy Outlook, there will be a deluge of ECB and Fed speakers, while central banks in Georgia, Iceland and Poland are expected to follow the Bank of Thailand in leaving key policy rates unchanged. A somewhat quieter day for earnings has GSK, Qualcomm and Spotify among the likely headline grabbers, with the UK selling 10-yr and Canada selling 2-yr govt debt. Last but not least the Treasury will announce the details of next week’s quarterly refunding. As was already revealed on Monday, the Treasury has slashed its estimate of Q1 net issuance to $274 Bln from the $1.217 Trln estimate pencilled in for Q1 in November (and actual $597 Bln in Q4 2020). This will be achieved by collapsing its cash balance at the Fed from the current $1.611 Trln to $800 Bln at the end of Q1, and it also expects to run that balance down further to $500 Bln by the end of Q2 (in other words back to what were typical pre-Covid19 peak levels). This marks a very clear shift in operating policy from the Mnuchin to the Yellen Treasury. Obviously Treasury issuance will rebound, above all if a fresh stimulus package is passed. But in the short-term will mean that the Fed’s $80 bln per month of UST QE purchases will absorb most of the Treasury’s net issuance and in principle leave considerably more liquidity floating around the US financial system, looking for a “home”, by extension underpinning the seemingly ephemeral ‘buy the dip’ mentality among investors and speculators.

 

World – Jan Services PMIs

The setback in China’s Caixin PMI echoes the NBS drop and is clearly attributable to localized lockdown measures due to spikes in infection rates in a few cities. As for Europe, Brexit challenges and extended lockdown measures took a hefty toll on the UK flash reading of 38.8, which is seen unrevised; while still contractionary French and German readings held up well given restrictions, by contrast Italy is expected to see a marginal drop to 39.5 from December’s 39.7, while tighter lockdown measures are seen pushing Spain’s reading down to 45.0 from 48.0 – but all of this has been discounted in markets, even if it will likely confirm that Q1 GDP readings will be weaker than Q4. Of perhaps greater interest will be the US Non-manufacturing ISM which is expected to dip to 56.7 from 57.2, reflecting a modest setback due to activity restrictions due to high infection rates, above all weighing on labour demand, but also supported / offset by ongoing strength in residential construction. The contrast between Europe and the US is obviously striking, but wholly due to divergences in activity restrictions.

 

U.S.A. – Jan ADP Employment

While US Services PMI & ISM may signal some strength, high infection rates and activity restrictions are expected to weigh on labour demand, with the ADP measure seen up just 50K after dropping 123K in December. While there has been slightly better alignment with the official Private Payrolls data in the past 2 months, the read across from one to the other remains at best tenuous, and with tentatively positive noise emanating on a further fiscal ‘stimulus’ package doing the rounds in Washington, and indeed in the middle of earnings season, any outliers will probably be garner no more than a passing reaction.

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