Macroeconomics: The Day Ahead for 20 December

  • Overarching themes of Omicron variant, Fed / G7 central bank policy outlooks, China property woes and political risks dominate in holiday thinned week for data; Scholz-Draghi meeting in focus

  • US Consumer Confidence, PCE Deflators, Durables and Home Sales the only data highlights for the week, RBA minutes also due

  • Confluence of political reaction to Omicron, Fed tightening signals with politics and longer-standing headwinds heighten risk of very spikey volatility in holiday thinned trading conditions

EVENTS PREVIEW

As the holiday season commences, the run of scheduled data and events is light both today and for the rest of the week, as is seasonally typical. It is any case likely to be little more than roadkill given the rapid spread of the Omicron variant and governments’ increasingly drastic actions to try and stem the spread, and how this then plays into markets are waking up to the fact that major central banks have mostly turned 180 degrees about inflation risks, above all the Fed, with Friday’s Fed speakers (Daly and Waller) now hinting strongly at a March rate hike. This allied with the seasonally very thin liquidity conditions, particularly following Friday’s quadruple witching in equity markets, looks to be a recipe for a lot of spikey volatility over the holiday season. Markets continue to lag central bank rhetoric on rate expectations, in what can only be described as a Pavlovian conditioned response due to numerous prior episodes of central banks shifting their narrative to being less accommodative, only for them to turn tail in the face of tightening financial conditions (which are a metric of financial sector rather than real economy ‘financing conditions’ as per the ECB’s description). As with everything related to the pandemic, it is the cocktail of immediate policymaker (political and monetary) actions and its confluence with a long list of legacy issues that is potentially explosive, above all in chain reaction terms. One also has to throw in the now seemingly high probability of a cold northern hemisphere winter, as well as potential social unrest in response to more drastic activity restrictions. China’s salami slice 5 bps cut to 3.80% for its 1-yr LPR rate, while leaving its 5-yr at 4.65%  really only reflects a post hoc adjustment after the RRR cut, which does nothing to change the ongoing property sector woes, which continue to send ever wider ripples.

Politics will be the other discussion point for the day, as Senator Manchin effectively torpedoed the social spending bill part of Biden’s Build Back Better legislative agenda, while UK PM Johnson continues to flail after last week’s unexpected North Shropshire by-election defeat and a mire of sleaze; Turkish President Erdogan continues to engineer a further collapse in the local currency with his interest rate comments,; and the Polish govt attempts to bulldoze through further media censorship with its media ownership bill. The Eurozone and EU’s long-standing reform gridlock comes into focus today, as German Chancellor Scholz meets with Italian PM Draghi with a permanent relaxation of Maastricht treaty limits (not actually observed in practice) on debt and budget to GDP ratios at the top of the agenda, in what many will see as a litmus test of whether the new German government is genuinely open to easing the country’s long-standing rejection of looser budgetary policy.

In terms of the week ahead, the only data items that are likely to get much attention are US Consumer Confidence and the PCE deflators, with Durable Goods and Home Sales metrics also due, and a limited number of central bank speakers and tomorrow’s RBA December policy meeting minutes heading the events schedule. Government bond supply is seasonally low with USD 20 Bln of US 20-yr & USD 17 Bln of 5-yr TIPS and a pick-up in T-Bill issuance after the debt ceiling was raised, while General Mills tops the modest run of US corporate earnings.

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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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