Weekly Outlook: Jan 27 — Jan 31: Virus Concerns Remain, Fed and BoE Meetings, UK Exits EU
Despite Chinese markets being closed for the largest part of the week, investors are likely to keep their gaze locked on headlines surrounding the coronavirus. We also have two central banks deciding on interest rates this week: The FOMC and the BoE. While the Fed is widely expected to refrain from acting, there is a 50% chance that the BoE will hit the cut button at this meeting. On Friday, the UK officially exits the EU, but market participants have already turned their eyes to the transition period and whether the two sides can eventually strike a trade deal by the end of the year.
On Monday, markets have been closed in Australia in celebration of the Australia Day, while Chinese markets will stay closed until Thursday, due to the Lunar New Year holiday, which started on Friday. Despite Chinese markets being closed, investors around the globe will stay on the edge of their seats, reading news and headlines surrounding the coronavirus, the outbreak of which started in China and is now spreading around the globe. More than 2000 people worldwide have been infected, while 56 in China were killed, with China’s National Health Commission ringing alarm bells that the virus’s transmission ability is getting stronger. With millions of Chinese traveling home and abroad for the holidays, fears over further spreading may keep investors in a risk-averse mood, thereby reducing their risk exposures and seeking shelter in safe havens.
During the European day, we get the German Ifo survey for January. Both the current assessment and business expectations indices are forecast to have risen to 99.2 and 95.0, from 98.8 and 93.8 respectively. This would drive the business climate index up 97.0 from 96.3. Having said that, bearing in mind that the ZEW indices for the month surprised to the upside last week, we see the case for the Ifo prints to beat their estimates as well.
From the US, we get new home sales for December, which are expected to have accelerated to +1.5% mom from +1.3% in November.
On Tuesday, during the Asian morning, we have Australia’s NAB business confidence index for December, which is expected to have ticked up to 1 from 0. The BoJ’s own core CPI for December is also coming out but no forecast is currently available.
Later in the day, from the US, we get durable goods orders for December, as well as the CB consumer confidence index for January. Both headline and core orders are expected to have rebounded 0.5% and 0.2%, after sliding 2.1% and 0.1% respectively. The CB index is anticipated to have risen to 128.0 from 126.5.
On Wednesday, we have the first FOMC decision for this year. At its previous meeting, the Committee decided to keep interest rates unchanged, reiterating that the “current stance of monetary policy is appropriate to support sustained expansion of economic activity”. What’s more, the “dot plot” pointed to no action in 2020, one hike in 2021 and another one in 2022. However, at the press conference, Chair Powell said that “in order to move rates up, I would want to see inflation that’s persistent and that’s significant.”
That said, market participants remained unconvinced that the Committee is done cutting rates. Despite the easing tension between the US and China and the “Phase One” trade deal, weak economic data, like the ISM manufacturing PMI and the jobs report for December, allowed investors to keep bets for another cut by year-end well on the table. That said, with headline inflation rising to +2.3% from 2.1%, and the core rate staying unchanged at 2.3%, we don’t expect Fed officials to start hinting at fresh cuts. However, we don’t expect them to start considering hikes either, despite the CPIs being above their 2% target. After all, their favorite inflation metric is the core PCE index, the yoy of which slid from 1.7% to 1.6% in November. We expect the committee to maintain their neutral stance, reiterating that the current policy remains appropriate.
As for Wednesday’s data, during the Asian morning, we get Australia’s CPIs for Q4. The headline rate is forecast to have remained unchanged at +1.7% yoy, while the trimmed mean one is anticipated to have ticked down to +1.5% yoy from +1.6% in Q3. At its latest meeting, the Bank kept interest rates unchanged at 0.75%, but the statement accompanying the decision may have been less dovish than many may have expected. Officials said that they decided to hold rates steady given the long and variable lags in the transmission of monetary policy. Although they reiterated that they will continue to monitor developments, including in the labor market, and ease policy further if needed, the aforementioned addition suggests that they were more comfortable on the sidelines.
However, following the devastating bushfires, investors raised bets that the fires’ effects on the economy could force the RBA to hit the cut button as soon as at its upcoming gathering. That said, the better-than-expected employment numbers for December prompted participants to push back those bets and, according to the ASX 30-day interbank cash rate implied yield curve, they are fully pricing in a quarter-point rate reduction to be delivered in July. Despite the potential slowdown in the trimmed mean CPI rate, still, both rates will be in line with the RBA’s latest projections and thus, we don’t expect them to drastically alter cut expectations. For investors to bring that timing closer again, a larger than expected slowdown could be needed.
Later in the day, ahead of the FOMC decision, the US pending home sales for December are forecast to have slowed to +0.5% mom from +1.2%.
On Thursday, it’s the turn of the BoE to decide on interest rates. This would be one of the “bigger” meetings, where apart from the decision, the statement and the minutes, we also get the quarterly Inflation Report and a press conference by Governor Mark Carney.
Two weeks ago, economic data disappointed largely, which combined with dovish remarks by several BoE officials, including Governor Carney, raised speculation over a rate cut at this gathering. However, last week, employment data for November, and most importantly, preliminary PMIs for January came in better than expected, leaving investors scratching their heads on how the Bank may act. According to the UK OIS, the probability for a cut lies at 50%. In other words, it’s a coin toss.
That said, bearing in mind that the PMIs were a first sign on how the economy has been performing after the elections, revealing some improvement, we believe that policymakers may refrain from acting this time and perhaps wait for a bit longer to see whether this improvement will be sustained or not. If not, they will probably not hesitate to push the cut button at one of the next meetings.
With regards to the data, we get Germany’s preliminary CPIs for January and the 1 stestimate of the US GDP for Q4. With regards to German inflation, both the CPI and HICP rates are expected to have risen to +1.7% yoy from +1.5%, which may raise speculation that the Eurozone headline CPI, due out the following day, may also accelerate. With regards to the US GDP, it is expected to have grown 2.1% qoq SAAR, the same pace as in Q3. Nonetheless, bearing in mind that the Atlanta fed GDPNow and the New York Fed Nowcast models point to growth rates of +1.8% and 1.2% respectively, we see the risks surrounding the official print as tilted to the downside. Thus, a slowdown may prompt market participants to bring forth their cut bets, despite the Fed potentially sticking to its neutral bias on Wednesday.
On Friday, the UK officially leaves the EU, which, for now, means that the UK will no longer have a say on EU decisions. Given that the UK Parliament has already approved the Withdrawal bill, which was signed by EU officials on Friday, and that the markets have already turned their attention to the transition period, we don’t expect any major market reaction. We believe that the driver behind the pound this week may be the BoE decision, and after that, it will start being hostage of headlines surrounding the transition period again. With UK PM Boris Johnson insisting that any trade agreement with the EU has to be found before December, andEU Commission President Ursula von der Leyen saying that it would be “basically impossible” to agree on everything by then, the risk of a disorderly exit at the end of the year remains well on the table. Adding to the uncertainty, UK finance minister Sajid Javid has recently said that Britain will not commit to sticking to EU rules during the transition period, something that could make the road towards a trade deal even bumpier.
As for Friday’s releases, 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 2.3% in December from 2.2%, while the jobs-to-applications ratio is expected to have ticked down to 1.56 from 1.57. No forecast is available for the headline Tokyo CPI for January, but the core rate is anticipated to have held steady at +0.8% yoy. The preliminary industrial production is expected to have rebounded 0.7% mom in December, after sliding -1.0% in November, while retail sales are forecast to have fallen 1.8% yoy, following a 2.1% decrease. China’s official PMIs for January are also due to be released. The manufacturing index is expected to slide somewhat, to 50.0 from 50.2, but no forecast is currently available for the services and composite ones.
During the European day, Eurozone’s preliminary CPIs for January and the preliminary GDP for Q4 are coming out. The headline CPI rate is expected to have ticked up to +1.4% yoy from +1.3%, bit the core rate is anticipated to have ticked down to +1.2% yoy from +1.3%. The case for a higher headline rate is supported by the German forecasts, which suggest that inflation in the bloc’s economic power engine has accelerated.With regards to the 1 stestimate of Q4 GDP, it is expected to show that the Eurozone economy grew 0.2% qoq, the same pace as in Q3.
We get GDP data from Canada as well. Specifically, we get the monthly rate for November, which is expected to have rebounded 0.1% mom, after sliding by the same percentage in October. From the US, we have personal income and spending, as well as the core PCE index, all for December. Both income and spending are expected to have slowed to +0.3% mom, from +0.5% and +0.4% respectively, while the yoy rate of the core PCE index, the Fed’s favorite inflation gauge is anticipated to have held steady at +1.6% yoy, below the Committee’s objective of 2%. Combined with a more-than-expected slowdown in GDP, a below-target core PCE may allow investors to bring even closer the timing of when they anticipate another Fed cut, despite the CPIs sitting above 2%.
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Originally published at https://www.jfdbank.com on January 27, 2020.