Weekly Outlook: Jan 20 — Jan 24: BoJ, BoC, ECB and Norges Bank Decisions; EZ and UK PMIs Also in Focus
This week, we have four central banks holding their first policy meeting for the year: the BoJ, the BoC, the ECB and the Norges Bank. All of them are expected to hold their respective policies unchanged and thus, attention is likely to fall on clues and hints on how they intend to move forward. The Eurozone and UK PMIs may attract special attention as well, with the later data set having the potential to seal the deal for a BoE rate cut, perhaps as early as at the Bank’s upcoming gathering.
On Monday, the day appears light with no major indicators on the agenda. The only noteworthy event may be a speech by ECB President Christine Lagarde. In the US, markets will stay closed in celebration of the Martin Luther King Jr Day.
On Tuesday, during the Asian morning, the BoJ concludes its two-day policy meeting. When they last met, Japanese policymakers kept their ultra-loose policy and guidance unchanged, reiterating that they expect “short- and long-term interest rates to remain at their present or lower levels as long as it is necessary to pay close attention to the possibility that the momentum toward achieving the price stability target will be lost.” That said, following the gathering, Governor Kuroda said that there are limits on how much they could deepen negative rates, enhancing our view that with little space to do so, officials may prefer to wait for a while and perhaps rely on their signals to do the work for now. The following day, both the headline and core National CPI rates improved somewhat, which adds to the case that there is no urgency for extra stimulus at this gathering, although both rates are still well below the Bank’s target of 2%.
During the European session, we get the UK employment report for November. The unemployment rate is expected to have held steady at its 45-year low of 3.8%, while average weekly earnings including bonuses are expected to have slowed to +3.1% yoy from +3.2%. The excluding bonuses rate is forecast to have ticked down as well, to +3.4% yoy from +3.5%. According to the IHS Markit/KPMG & REC Report on Jobs for the month, permanent starting salaries increased at the slowest rate since December 2016, while temp billing eased to a three-year low. This adds to the case for a slowdown in earnings, perhaps even more than the forecasts currently suggest.
From Germany, we get the German ZEW survey for January. The current conditions index is expected to have moved higher, but to have stayed within the negative territory. Specifically, it is expected to have risen to -13.8 from -19.9. The economic sentiment index is also expected to have increased, to 15.0 from 10.7.
In Davos, Switzerland, the 50 thannual meeting of the world economic forum begins and will last until Friday. Business leaders, key politicians and central bankers gather with the aim to improve the state of the world. Among attendees will be US President Donald Trump, US Treasury Secretary Steven Mnuchin, ECB President Christine Lagarde and German Chancellor Angela Merkel. The spotlight could fall on Donald Trump, who skipped the event last year. He will hold a speech on Tuesday.
On Wednesday, the main event is likely to be the BoC interest rate decision. At its last meeting, the Bank kept interest rates unchanged, noting that there is nascent evidence that the global economy is stabilizing and that it is appropriate to maintain the current level of the overnight rate target. The key message was that officials have quickly switched back to neutral after flirting with the idea of easing at the prior gathering.
Since then, employment data for November disappointed, but the inflation numbers for the month came in better than expected overall. On January 9th, BoC Governor Poloz said that the potential downside risks from global trade frictions seem to have eased, but also added that the Bank will be watching closely to see whether the recent slowdown in job creation will continue. The following day, December’s jobs data surprised positively, which may allow policymakers to maintain their neutral stance for a while more.
As for Wednesday’s data, during the Asian morning, we get Australia’s consumer sentiment index for January, while during the European session, we have the UK CBI industrial trends orders for January. That said, no forecast is available for those releases.
Later in the day, ahead of the BoC decision, we get Canada’s CPIs for December. The headline and core rates are anticipated to have held steady at +2.2% yoy and 1.9% yoy respectively, while no forecast is available for the trimmed and median CPIs. In any case, unchanged prints may support further a neutral stance by the BoC in less than two hours after the data are out.
The US existing home sales for December are also coming out and the forecast points to a 1.7% mom increase, after a 1.7% slide in November.
On Thursday, the central bank torch will be passed to the Norges Bank and the ECB. Kicking off with the Norges Bank, last time, Norwegian officials kept their policy and forward guidance unchanged, reiterating that the rate will most likely remain at the current level in the coming period. Since then, both the headline and core CPI rates declined further, to +1.4% yoy and +1.8% yoy, from +1.6% and 2.0% respectively. Both rates are below the Bank’s latest projections of 1.6% and 1.9% and thus, it would be interesting to see whether officials will lean somewhat more dovish at this gathering. However, we don’t expect a policy change, neither a major change in language. Officials may prefer to wait for a while more before they proceed to any bold shifts, as they may want to see whether this inflation weakness persists or not.
Passing the ball to the ECB, at the previous meeting, the first headed by Christine Lagarde, officials decided to keep interest rates untouched, with the statement not deviating much from the previous one. At the press conference, Lagarde reiterated Draghi’s words that officials stand ready to adjust all their instruments as needed, and that the risks to the economic outlook remain tilted to the downside. That said, she added that the risks are less pronounced and that there are some stabilization signs in growth slowdown. In the minutes of that meeting, it was noted that political risks were probably ebbing, inflation pressures seemed to be building and that the manufacturing sector was showing signs of bottoming out, suggesting that other members have been on the same page with their new President.
Since then, preliminary PMIs for December disappointed, but the final readings revealed upside revisions. On the inflation front, the headline CPI rate rose to +1.3% yoy from 1.0%, while the core rate remained unchanged at +1.3% yoy. Combined with the minutes revealing a view somewhat more optimistic than previously, the data may have lessened chances for additional easing by the Bank. Therefore, we don’t expect any major changes in language compared to the previous meeting, especially as this gathering will be accompanied with a strategic review, examining the effectiveness of monetary policy up until now. EUR-traders may pay even more attention to the PMIs for January, due out on Friday, in order to adjust their bets on how the Bank may proceed in the foreseeable future.
As for Thursday’s data, during the Asian morning, we get Australia’s employment report for December. The unemployment rate is expected to have stayed at 5.2%, above the 4.5% mark, which the RBA expects to start generating inflationary pressures. The employment change is expected to show that the economy gained 15.0k jobs, less than November’s 39.9k.
At its latest gathering, the Bank kept interest rates unchanged at 0.75%, but adopted a less dovish stance that many may have expected, especially after the minutes of the previous meeting revealed that the Board discussed easing further back then. That said, they reiterated that they will continue to monitor developments, including in the labor market, and ease policy further if needed. According to the ASX 30-day interbank cash rate futures implied yield curve, investors are nearly fully pricing in another quarter-point cut to be delivered in May, but a soft employment report may prompt them to bring that timing forth.
Finally, on Friday, during the early Asian morning, we get New Zealand’s CPI for Q4, which is expected to have slowed to +0.4% qoq from +0.7% in Q3. That said, this would cause the yoy rate to rise to +1.8% from +1.5%. We also get CPI data from Japan. No forecast is available for the headline National rate, while the core one is forecast to have risen to +0.7% yoy in December from +0.5% in November, something that would enhance the case for Japanese policymakers to hold their hands off the cut button for a while more.
Later, in Europe, we get preliminary PMIs for January from several Eurozone nations, as well as for the bloc as a whole. The manufacturing index is forecast to have risen somewhat, but to have stayed within the contractionary territory. Specifically, it is expected to have risen to 46.8 from 46.3. The services PMI is anticipated to have remained unchanged at 52.8. This could drive the composite index up to 51.2 from 50.9, something that will enhance the ECB’s view with regards to stabilizing signs and could lessen even more the need for extra easing by the Bank.
We will get preliminary PMIs for January from the UK as well. The manufacturing index is expected to have ticked up to 47.6 from 47.5, while the services one is anticipated to have declined to 49.4 from 50.0. Strangely, the composite PMI is forecast to have risen to 50.5 from 49.3. Last week, UK data disappointed largely, which combined with recent dovish remarks by several BoE policymakers, have increased speculation with regards to a rate cut, perhaps as early as at the Bank’s upcoming meeting. In our view, an improvement in the PMIs could ease somewhat the need for a cut to be delivered now, but a disappointment could seal the deal.
From Canada, we have the retail sales for November, while from the US, we get the preliminary Markit PMIs for January. With regards to the Canadian data, both the headline and core retail sales rates are expected to have grown 0.5% mom and 0.4% mom respectively, after sliding 1.2% and 0.5% in October. As for the US PMIs, the manufacturing index is anticipated to have ticked up to 52.5 from 52.4, while the services one is forecast to have ticked down to 52.7 from 52.8. The composite PMI is expected to have slid to 52.5 from 52.7.
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Originally published at https://www.jfdbank.com on January 20, 2020.