US-China Talks, BoC Meeting, Fed and ECB Minutes

Following the strong US jobs data and the dovish remarks by Fed Chair Jerome Powell on Friday, this week kicks off with investors locking their gaze on the two-day trade negotiations between the US and China, scheduled for Monday and Tuesday. On Wednesday, the BoC holds its first monetary policy meeting for the year, while the Fed publishes the minutes of its December gathering. We get the minutes from the ECB as well, which are due to be released on Thursday. On Friday, we get US inflation data.

On Monday, market participants are likely to be sitting on the edge of their seats in anticipation of the two-day trade negotiations between the US and China. Both nations have shown their willingness to reach consensus on the matter and thus, more headlines pointing to that direction may calm investors’ nerves somewhat. However, bearing in mind that that there are still major issues unresolved and that the talks will not involve top negotiators, like US Trade Representative Robert Lighthizer and China’s Vice Premier Liu He, we doubt that this round of negotiations could result in a final agreement.

As for Monday’s economic data, during the European morning, we get German factory orders and retail sales, both for November. Expectations are for factory orders to have contracted 0.2% mom after rising 0.3% in October, while retail sales are anticipated to have rebounded 0.4% mom after a 0.3% slide the previous month. Eurozone’s retail sales for November are also coming out and they are forecast to have slowed to 0.2% mom from +0.3% mom.

In the US, investors are likely to pay attention to the ISM non-manufacturing PMI for December, which is expected to have declined to 59.6 from 60.7. Following the disappointment in the ISM manufacturing index for the month, which tumbled to its lowest since November 2016, a larger than expected slide in the non-manufacturing print may revive concerns with regards to the health of the US economy. Factory orders for November are scheduled to be released as well, with the forecast suggesting a 0.3% mom rebound after the -2.1% mom decline in October.

On Tuesday, the spotlight is likely to stay on the US-China trade talks. In terms of data releases, we get trade data from Australia, the US and Canada. Australia’s trade surplus is forecast to have declined for the second consecutive month in November, to AUD 2.165bn from AUD 2.316bn, while the US trade deficit is expected to have narrowed to USD 54.00bn from USD 55.50bn. Canada’s trade deficit is anticipated to have widened. We also get the US JOLTs Job Openings for November, which are expected to have risen to 7.170mn from 7.079mn in October.

On Wednesday, we have the first G10 central bank meeting for 2019, and it’s from the BoC. At their previous meeting, Canadian policymakers kept interest rates unchanged at +1.75% as was widely anticipated, but the accompanying statement had a dovish flavor compared to the hawkish one we got in October. The key takeaway was that the economy is not as close to its potential as previously thought, which could mean slower rate increases moving forward. What’s more, officials also noted that the steep slide in oil prices may result in materially weaker-than-expected activity in the energy sector.

This may have prompted market participants to take their January-hike bets off the table. Although Canada’s record employment numbers for November may have revived some hopes on that front, the disappointment in Canada’s inflation prints for the month, combined with the further slide in oil prices may have wiped out any such hopes. Even after the December employment report, which showed that the labor market remained strong, we doubt that the Bank will rush into hiking rates at this meeting. We believe that policymakers may prefer to wait for improvement in other data sets, like inflation, before they decide to raise rates again.

The minutes from the December FOMC meeting are also due to be released. At that meeting, the Committee decided to raise interest rates to the 2.25–2.50% range and revised lower its rate path projections, with the median dot for 2019 pointing to 2 hikes instead of 3 as the September plot suggested. Having in mind that this was one of the “bigger” meetings, where we got updated economic projections as well as a press conference by Fed Chair Powell, we believe that there is not much new information to get from these minutes.

In the aftermath of the meeting, investors continued pricing out their expectations with regards to Fed’s future plans in 2019, with the icing on the cake being the disappointment in the ISM manufacturing PMI for December, which prompted them to price in a 40% of a rate cut by the end of the year. Today, that probability is around 20%. What’s more, on Friday, Fed Chair Jerome Powell said that the Fed would be patient and flexible with regards to future interest rate moves, watching how the economy evolves. He also noted that officials are listening carefully to the messages market participants are sending. So, bearing Powell’s new remarks, especially after the market’s rate-cut pricing, we would treat the minutes as mainly outdated. We also have several Fed speakers throughout the week, including another speech by Powell on Thursday, and therefore, the market may prefer to concentrate more on what officials have to say at this point of time.

As for Wednesday’s data, during the Asian morning, we get Australia’s building approvals for November, which are expected to have slid again, but at a slower pace than in October.

During the European morning, we get Switzerland’s CPI for December and expectations are for the yoy rate to have ticked down to +0.8% from +0.9% in November. At their latest policy meeting, SNB policymakers kept interest rates unchanged, reiterating that they will remain active in the exchange market as necessary, and that the franc remains highly valued. They also downgraded their inflation projections. They do not see inflation hitting their 2% target, even in Q3 2021. In September, they anticipated that this could happen in Q2 2021. Most importantly, the decision was conditional upon interest rates staying at current levels for the whole forecast horizon. Therefore, even if the CPI rises somewhat, it would still be distant from the Bank’s objective and thus, we see it unlikely for SNB policymakers to be tempted to alter their policy stance.

From the Eurozone, we have the bloc’s unemployment rate for November, which is forecast to have held steady at 8.1%, and Germany’s trade data for the month, which is expected to show that the German surplus has increased somewhat.

On Thursday, during the Asian morning, China’s CPI and PPI for December are scheduled to be released. The yoy CPI rate is expected to have ticked down to +2.1% from +2.2%, while the PPI is forecast to have slowed to +1.7% yoy from 2.7%. This would be the lowest growth rate in producers’ prices since October 2016 and may add to concerns over China’s economic performance.

Although this data set was not particularly a market mover in the past, bearing in mind investors’ recent emphasis on the slowdown of the Chinese economy, it could well leave its mark in the financial world. A disappointment would come on top of the slide in the Caixin manufacturing PMI and Apple’s reports on China’s economic deceleration and may serve another round of risk aversion.

During the European morning, we have December inflation data from Norway. The headline CPI rate is expected to have ticked down to +3.4% yoy from +3.5%, while the core one is forecast to have declined to +2.0% yoy from +2.2%. The previous time they gathered, Norwegian policymakers kept interest rates unchanged, after raising them in September, maintaining the guidance that rates are likely to be raised further in Q1 2019, and also noting that this will most likely happen in March. Thus, with both the headline and core inflation rates above the Bank’s objective of 2.0%, as well as above its own projections for December, we doubt that a modest slowdown could tempt policymakers to push their hike timing back. We believe that declines below the Bank’s forecasts are needed for something like that to happen. Currently, the Bank’s December forecasts are +3.1% for the headline rate and +1.9% for the core.

Later in the day, the minutes of the December ECB meeting are set to be published. At that meeting, the Bank formally ended its asset purchasing program, while at the press conference following the decision, President Draghi noted that “The risks surrounding the euro area growth outlook can still be assessed as broadly balanced.” However, he added that the balance of risks is moving to the downside due to the persistence of uncertainties related to geopolitical factors, the threat of protectionism, vulnerabilities in emerging markets and financial market volatility.

Since then, data has kept coming in on the soft side, with Eurozone’s composite PMI hitting its lowest since November 2014, headline inflation slowing by more than anticipated and the core CPI rate staying stubbornly at +1.0% yoy, well below the Bank’s objective of “below, but close to 2%”. This may have raised speculation that Draghi and co. may have to change their language around the economic outlook soon, noting that the risks have shifted to the downside. So, investors may dig into the minutes to find out how close to something like that the Bank is, and whether there were some officials already arguing for such a change to take place at that meeting.

Finally, on Friday, during the Asian session, Japan’s household spending and current account data, both for November are coming out. Household spending is expected to have rebounded 0.2% yoy after sliding 0.3% yoy in October, while the nation’s current account surplus is forecast to have increased. Australia’s retail sales for November are due out as well and the forecast points to a 0.3% increase, the same pace as in October.

During the European morning, the UK industrial and manufacturing production for November are coming out, as well as the monthly GDP for the month. Both industrial and manufacturing production are expected to have rebounded 0.3% mom and 0.4% mom respectively, after sliding 0.6% and 0.9% in October. This would drive both yoy rates slightly higher, but still keep them in negative territory. The case for a slight increase in these yoy rates is supported by the manufacturing PMI for the month, which rose to 53.6 from 51.1.

With regards to the monthly GDP, given the tumble in the services PMI for November, a slowdown would not come as a surprise to us, as the service sector accounts for nearly 80% of the UK GDP. In any case, as we noted several times in the recent past, we expect the pound’s faith to be dictated by UK politics instead of economic data. This week, the focus is likely to stay on the Brexit front as the Parliamentary debate over May’s deal begins, with the vote scheduled to take place next week. The UK trade balance for November is scheduled to be released as well and expectations are for the nation’s trade deficit to have narrowed somewhat.

Later in the day, we have the US CPIs for December. Expectations are for the headline rate to have declined back below the Fed’s objective of 2%, while the core one is anticipated to have held steady. Specifically, headline inflation is forecast to have slowed to +1.9% yoy from +2.2%, while the underlying rate is seen unchanged at +2.2% yoy. In our view, this pattern suggests that the further decline in the headline rate may be mainly owed to the latest decline in oil prices. So, having that in mind, we expect all the attention to be on the core measure, which if stays unchanged, is unlikely to alter much expectations with regards to the Fed’s future plans. Following Friday’s dovish comments by Fed Chair Jerome Powell and the disappointment in the ISM manufacturing PMI they day before, we believe that a decent pick up is needed for the market to start worrying again that the Fed may hike faster than currently thought.


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