Macro For The Week Ahead And How Oil Is Abetting Inflation Expectations

Sometimes officials call for the foreign exchange market to reflect fundamentals, as if they can do anything but. As businesses and investors, we are more interested in which fundamentals are driving prices than some academic debate over what fundamental considerations participants ought to emphasize.

Data from Q4 may be dated and may not move anyone's needle. That includes the eurozone industrial production figures due out at the end of the week. We know that the manufacturing sector is faring better than services and that the December manufacturing PMI was strong at 55.2, its best level since mid-2018. While manufacturing continued to show resilience last month, the PMI eased.

Clearly, the risk is that the euro area economy contracts in Q1 21 and by more than the 0.7% seen in Q4 20. Much depends on the contagion and the vaccine rollout, but a contraction around the magnitude seen in Q1 20 (-3.7%) seems reasonable at this juncture.

Germany's December trade figures will not have much market impact, but they may be notable for insight into broader issues. In the first 11 months of 2020, Germany reported a trade surplus of 165 billion euros, down 21% from the same period in 2019 and about 23% lower than the comparable 2018 period.

Yet, the eurozone as a whole experienced a larger trade surplus; 208 billion euros in the January-November period last year, up from 200 billion euros from the same period in 2019, and 32 billion euros higher than the first 11-months of 2018. The December eurozone aggregate figures are due Feb. 15.

Merkel's chief of staff, and an MP in his own right, wrote an op-ed recently that controversially called for the acknowledgment that a return to the black zero (Schwarze Null), the constitutional provision that limits the size of the deficit to 0.35% of GDP, will not be possible for several years. As one would expect, there was an immediate pushback, which included Laschet, the new head of the CDU party and the leading candidate to run for Chancellor in September. Even Merkel's office offered no support.

The debt brake was suspended due to the pandemic. Germany plans on boosting its net debt issuance to 180 billion euros this year from 130 billion last year. After running modest budget surpluses in recent years (an average of about 1.2% for the five years before 2020), Germany recorded a deficit of nearly 6.5% of GDP last year, and this year's deficit is projected to fall to about 4.5%. The key is the 2022 budget. Even with some conservative assumptions, it is hard to see much below 2% of GDP. Perhaps it is instructive to note that the one voice that was even mildly supportive was the current SPD finance minister Scholz, his party's candidate for Chancellor. 

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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