Weekly Outlook: Jan 25 — Jan 29: FOMC Meeting, AU CPIs and UK Jobs Data

Following the ECB, BoJ and BoC decisions last week, this week the central bank torch will be passed to the FOMC, which decides on monetary policy on Wednesday. We believe that Fed Chair Powell will downplay once again the idea of QE tapering, with the Committee staying ready to deliver more easing if deemed necessary. We also get several data releases, including the Australian CPIs, the UK employment report, as well as the preliminary GDP prints from the US and Germany.

Monday appears to be a very light day in terms of economic data, with the only release worth mentioning being the German Ifo survey for January. The current assessment index is forecast to have declined to 90.6 from 91.3, while the expectations one is anticipated to have risen to 93.2 from 92.8. This is likely to drive the business climate index fractionally lower, to 91.8 from 92.1. That said, bearing in mind that the ZEW current conditions index for the month stayed nearly unchanged, and that the economic sentiment one rose by more than expected, we would consider the risks surrounding the Ifo indices as tilted to the upside.

Despite the lockdown measures around the Eurozone, on Thursday, ECB President Lagarde said that the downside risks to the economic outlook are now “less pronounced”, making investors skeptical over further easing by the ECB, although the Bank repeated once again that it stands ready to adjust all of its instruments as appropriate. Thus, an improving Ifo survey may reduce even further speculation over more easing by the ECB.

Apart from the Ifo survey, on Monday, the World Economic Forum begins. This time, the event will be held virtually instead of gathering in the Swiss ski resort of Davos, as it is usually the case. With the global economy being hit severely in 2020 by the fast spreading of the coronavirus, it would be interesting to hear discussions on that front.

Tuesday is a light day as well, with the only important data set being the UK employment report for November. The unemployment rate is forecast to have risen to 5.1% from 4.9%, while the net change in employment is expected to show that the economy has lost 100k jobs in the three months to November, compared to a 144k loss in the three months to October. Average weekly earnings, both including and excluding bonuses, are expected to have accelerated to +2.9% yoy and +3.1% yoy from 2.7% and 2.8% respectively.

Last week, both the headline and core UK CPIs rose by more than expected, but still remained well below the BoE’s target of 2%. Thus, combined with this, a rising unemployment rate is likely to keep the prospect of the BoE increasing the pace of its QE purchases on the table. However, as we noted last week, this is something the Bank already noted that its stands ready to do. Thus, it will not come as a major surprise if it happens. Overall, with the Brexit saga now taking the back seat, and BoE Governor playing down the prospect of negative interest rates, the pound has the potential to perform relatively well, at least against the safe havens, like the dollar and the yen, which we expect to stay under selling interest due to a supported overall market sentiment. We understand that talks between the EU and the UK are far from over, as there is still the issue of the UK’s access to the EU’s financial world. However, we will start worrying again as soon as headlines on that front start entering the spotlight.

On Wednesday, the main event may be the FOMC monetary policy decision. According to the minutes, at the latest meeting some members noted that they could consider further adjustments to their QE purchases, such as increasing the pace of purchases, or weighting them towards longer maturities, while others said that once progress towards their goals had been attained, a gradual tapering could begin. However, several officials, including Fed Chair Powell, pushed back the idea of tapering anytime soon. Although speculation on that front may have been revived after US President Joe Biden revealed a USD 1.9 trln spending package, with inflation staying below the Fed’s objective of 2%, we believe that Jerome Powell will stick to his guns and downplay once again the idea of scaling back QE, and we see the case for the Committee to keep the door open for further easing if deemed necessary.

As for Wednesday’s data, during the Asian morning, we have Australia’s CPIs for Q4. Both the headline and trimmed mean yoy rates are expected to have held steady at +0.7% and 1.2% respectively. Although both rates are well below the lower end of the RBA’s target range of 2–3%, unchanged inflation is unlikely to increase speculation for further easing by this Bank. After all, at its latest meeting, it noted that the Australian economic recovery is underway, and that recent data have generally been better than expected. In order for officials to be tempted to add to their stimulative efforts, we believe that a disappointment may be needed.

On Thursday, we get the German preliminary inflation data for January and the 1st estimate of the US GDP for Q4. Both Germany’s CPI and HICP rates are expected to have rebounded to +0.7% yoy and +0.5% yoy from -0.3% and -0.7% respectively. This could raise speculation that Eurozone’s headline inflation may also exit the negative territory. As for the US GDP, following the 31.4% qoq SAAR tumble in Q2, it rebounded 33.4% in Q3, and now it is expected to normalize at around 4.0% in the last quarter of 2020. The US new home sales for December are also coming out and the forecast points to a 1.5% mom rebound after a 11.0% slide in November.

Finally, on Friday, during the Asian morning, we get the usual end of month data dump from Japan. The unemployment rate is forecast to have ticked up to 3.0% form 2.9%, while the Jobs-to-applications ratio is expected to have held steady at 1.06. The Tokyo core CPI is anticipated to have increased to -0.6% yoy from -0.9%, while no forecast is available for the headline print. Japan’s preliminary industrial production for December is expected to have fallen 1.5% mom after sliding 0.5% in November. The summary of opinions from last week’s BoJ monetary policy meeting is also coming out.

During the European morning, Germany’s preliminary GDP for Q4 is coming out and although no forecast is available for the qoq rate, the yoy one is anticipated to have risen somewhat, to -3.4% from-3.9%. In any case, bearing in mind that we already have the ZEW survey for January out, as well as the preliminary PMIs for the month, we doubt that the GDP data for the last three months of 2020 will prove a major market mover. Given that investors have already an idea of how the German economy has entered the new year, they may treat the GDP data as outdated, and perhaps pay more attention to the Ifo survey, due out on Monday.

Later in the day, we get Canada’s monthly GDP for November, while from the US, we have personal income, personal spending, the core PCE index, all for December, and the preliminary UoM consumer sentiment index for January. The Canadian economy is expected to have grown 0.4% mom, the same pace as in October, while in the US, the core PCE index is forecast to have ticked down to +1.3% yoy from +1.4%. Personal income is anticipated to have rebounded 0.1% mom from -1.1%, while personal spending is expected to have slid 0.4% mom, the same pace as in November. As for the preliminary UoM consumer sentiment index, it is expected to have held steady at 79.2.

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