Macroeconomics: The Day Ahead for 5 October

A relatively busy schedule of statistics has Korean CPI, Indian Services PMI, German Trade and French Industrial Production to be digested, while ahead lie UK car sales and Construction PMI, US weekly jobless claims, and US & Canadian Trade data. A busy day for central bank speakers finds its main highlight in the panel discussion with ECB’s Lane, BoE’s Broadbent and Riksbank’s Breman at the ECB’s Monetary Policy Conference, with Barkin, Daly and Mester on hand from the  Fed, and the BoE publishes its Decision Maker Panel (DMP) economic survey. In the commodities space, it is the final day of ADIPEC and the first day of the FT Mining Summit. Markets remain in thrall to the combination of the push me/pull you of US labour market data and the renewed impasse in Congress, and the reaction of the US Treasury market thereto. While the ‘high for longer’ Fed narrative (and the threat of more than one rate hike from arch hawk Bowman) is a factor, it is adverse liquidity conditions, as evidenced by a shrinking Fed Balance sheet and the draining effect of the Treasury rebuilding its Cash Balance at the Fed which is perhaps the more important factor, allied with the overall net liquidity withdrawal by G4 central banks (Fed, ECB, BoJ, PBoC), and the natural knock-on effect into credit markets (see charts attached). The question is how much the relentless rise in yields is forcing both banks, and perhaps more importantly insurance companies to liquidate holdings of both govt bonds and credit, above all given the low yields (and often near zero coupons) at which many assets were purchased, per se a classic example of the lagged effects of monetary policy tightening.

From the overnight run of data, both the Korean and Philippines CPI readings were above forecast, underlining that renewed food (above all rice) and energy price rises, allied with Asian currency weakness are in contrast to 2022 seeing faster pass through, and adding to already considerable economic headwinds from weak external demand, and the sluggish China recovery. German Exports and Imports were again weaker than expected, and with September Ifo Exporter Sentiment deteriorating further, Net Exports are likely to be a drag on Q3 GDP. French Industrial Production at -0.3% m/m was marginally better than expected, but worse than forecast net of the downward revisions to July. Tomorrow brings German Factory Orders that are seen posting a dead cat bounce of 1.5% m/m, after tumbling 11.7% m/m in July, and to be down 7.9% in y/y terms. A Eurozone recession in H2 2023 now looks inevitable, even if it may be relatively shallow.

** U.S.A. – Initial Claims **

– Following on from the renewed rebound in JOLTS Job Openings and the weaker than expected ADP Employment reading (with markets ‘conveniently’ deciding to react to a significantly weaker than expected ADP, having ignored much higher than expected prints during the summer), today brings Challenger Job Cuts and an expected marginal uptick in Initial Claims to a still very low 210K from 204K. While tomorrow’s official monthly labour data will be the ultimate arbiter, it will still require a much more significant loosening of the labour market to change the Fed’s tune on the policy outlook.