Week in Focus; week commencing 20th January 2020
MON: PBoC Loan Prime Rate Setting, Japanese Industrial Output, German PPI, Indonesian Central Bank Monetary Policy Decision, Huawei CFO Extradition Hearing begins, Eurogroup Meeting, Martin Luther King Day
TUE: World Economic Forum in Davos Begins (21st-24th January), BoJ Monetary Policy Decision, UK Labour Market Report, German ZEW, Eurozone Economic Sentiment, Canadian Manufacturing Sales
WED: BoC Monetary Policy Decision, Canadian CPI, South African CPI, Japanese Trade Balance, US House Price Index, Existing Home Sales
THU: ECB & Norges Bank Monetary Policy Decision, Australian Labour Market Report; New Zealand and Japanese CPI; BoJ Minutes (December); CBRT Minutes
FRI: EZ and US Flash PMIs, Canadian Retail Sales, Chinese New Year (Mainland closed 24th-30th January)
WORLD ECONOMIC FORUM (TUE-FRI): The annual confab at Davos will be attended by US President Trump (as well as Treasury Secretary Mnuchin, USTR Lighthizer, and Commerce Secretary Ross), as well as other influential policymakers including EU Commission President Von Der Leyen and ECB chief Lagarde. While the programmes alludes to focus on corporate responsibility and climate change, commentary on global trade will also be eyed. The US focus has now pivoted from China to the EU, following this week’s signing of the 'Phase One' deal. The new EU trade chief Hogan has been in Washington this week seeking to ease tensions between the two sides, who have recently been at odds over France's plans to impose a digital tax on tech firms, which the US has vowed to respond with tariffs on EU goods, including French wine. The EU has also been frustrated with what it thinks is the US paralysing global trade by blocking the appointment of new members to a dispute panel in December, effectively making the panel redundant, as well as sidestepping the body in its trade wars, where it has slapped metal tariffs on Canada, Europe and Japan, as well as other levies on Chinese goods; the US has pointed to the WTO's impotence in addressing China as a reason for trade wars. However, there are some signs that both the EU and US can cooperate; recently, the two along with Japan made a joint statement which pledged to work together to tighten international rules on government subsidies and forced transfer of technology, a jab at China; additionally, Trump recently chose to shelve tariffs on imports of European autos. Nevertheless, the US and EU still remain far apart on reducing tariffs to zero, a sentiment which was expressed when former EC President Juncker met Trump last summer.
BOJ PREVIEW (TUE): The Bank of Japan will publish its first monetary policy report of the year on Tuesday 21st January, at some time during the Tokyo lunch break, between 0230-0330GMT. The Central Bank is expected to keep its monetary policy settings unchanged with the policy rate at -0.1% and 10yr JGB yield target at around 0%. The BoJ is also expected to maintain its forward guidance - “short and long-term interest rates to remain at their present or lower levels as long as it is necessary” to guard against the risk that momentum for hitting the price target may be lost – given that global uncertainties remain high. BoJ members have repeatedly noted that the Central Bank is ready to ease if needed if momentum towards price stability is lost. At the December meeting, the decision on yield curve control was made by 7-2 votes with Kataoka and Harada the dissenters again, with Kataoka repeating his call to cut short-term interest rate target. UBS believes that it is not necessary for the Bank to ease now as 1) market conditions are more favourable and 2) the government’s fiscal package’s support to the economy. Further, the Swiss bank also sees the BoJ dismissing negative impacts of the VAT hike on Q4 GDP, as Board Members seems confident that domestic demands can sustain an uptrend, contingent on no severe overseas shocks. That said, UBS expects the Central Bank to ease in April, with a 20bps cut to the overnight policy rate on their horizon - “We do not think the BoJ’s easing will have a meaningful impact on the economy and inflation, but it is likely important for [Governor] Kuroda to pursue the commitment that the central bank will react, if necessary”, UBS concludes.
UK JOBS DATA (TUE)/PMIs (FRI) – Given the recent slew of lacklustre data points from the UK (GDP, CPI, retail sales) and dovish tones from the BoE, this week’s labour market data could be pivotal in assessing whether or not policymakers will opt to cut the bank rate by 25bps at the January meet. In terms of expectations, headline employment change is forecast to rise to 120k from 24k, headline earning growth is set to fall to 3.1% from 3.2% (ex-bonus Exp. 3.4% vs. Prev. 3.5%) and the unemployment rate is expected to remain at 3.8%. Note, the reason for the expected tick-up in employment is largely due to the -56k print in August dropping out of the 3M rolling average. Ahead of the release, RBC notes, that this will provide more of an insight into the state of the economy ahead of the December general election (potential hiring uncertainty), rather than how the UK is performing at the start of the year (post-election) and therefore, all things equal could have led participants to pay less attention to the release than they otherwise would have. However, given the aforementioned lacklustre hard data and dovish interventions from the BoE, the report will likely be used as another proxy in guiding market expectations over a potential BoE rate reduction this month. Dovish dissenter Saunders recently noted ““The economy still has a slow puncture and this seems to be spreading to the labour market”, therefore, a disappointing jobs report could help sway some voters on the MPC to lean in favour of his view point and move to the “cut” camp on the MPC. For those in the market looking for more timelier data points, Friday will see the latest batch of Markit PMI metrics for January with services, manufacturing and composite readings all due for release. The reports will be of great importance to the market as the survey period will encapsulate the extent (if any) of the post-election bounce in sentiment. If the release fails to support sentiment and highlights concern over the fast-approaching December 2020 deadline for the transition period, the circa 70% chance markets are pricing for a January rate cut will almost certainly see a marked pick-up.
BOC PREVIEW (WED) – The BOC are expected to stand pat with current market pricing showing almost a 100% chance of keeping rates unchanged at 1.75%. However, lots of focus at the confab will be on the Bank’s latest economic projections. The prior rate decision saw rates left unchanged as expected, with the statement was tilted with a hawkish bias; although since then the data has been rather poor. GDP contracted 0.1%, which led Capital Economics to believe the economy stagnated at best in Q4, much lower than the BoC’s 1.3% annualised growth estimate. The desk believes it is likely the MPR will show a cut in 2019 and 2020 GDP forecasts, although the longer-term estimates may be upgraded due to the Phase One US-China and USMCA deals. Moreover, the aforementioned disappointing spate of economic indicators are partly due to one off factors, as Governor Poloz contended in recent remarks citing strikes (Canada Rail) and poor weather. Poloz was also optimistic on trade. CapEco believe GDP should rebound in December as these temporary factors dissipate; the desk also highlights the GM strike and the Keystone pipeline rupture for the GDP contraction in October. Looking ahead, the latest Business outlook survey pointed to a broadly positive business sentiment with firms expecting healthy domestic and foreign sales. Elsewhere, the latest inflation report remained around its 2% target with the BoC's Median/Trim/Common average ticking up slightly to 2.17%. The latest jobs report was strong, seeing a rise in full time workers and a lower unemployment rate. Capital Economics conclude with "downward adjustments [to GDP], combined with the fact that the Bank’s forecasts for the next two years already looked pretty weak, mean that the Bank is likely to sound a cautious note in its policy statement".
CANADIAN CPI (WED): CPI is seen picking up slightly M/M from the previous decline of 0.1%, RBC expect the figure to pare back November’s price fall, which the desk notes would see the Y/Y at 2.3%. The BoC core figures are seen maintaining a 0.2% decline M/M and 1.9% rise Y/Y, according to IFI’s estimates. The BoC-eyed Mean/Trim/Common stood at 2.4%, 1.9% and 2.2%, respectively, taking the average to 2.17% in November, sitting ever so slightly above the mid-point of its 1-3% target range and just above the 1.9-2.1% range seen since February. RBC write “Year-ago comparables suggest little bias this time around, though a small output gap suggests a move back down to the previous range may occur”. The Canadian bank expects the usual seasonal declines to be offset by an increase in airfares and result in a pick-up in December whilst highlighting the Y/Y figure is being driven by rising gas prices, which have rebounded from the September Y/Y decline of 10%, to +6.5% in December. Elsewhere, the recent BoC Survey of Consumer Expectations (Q4) saw consumer expectations of 1yr ahead inflation fall slightly to 2.2% from 2.4%, although most expect inflation remaining within the 1-3% target range.
ECB PREVIEW (THU) - The ECB are expected to stand pat on rates next week, according to surveyed analysts with markets currently pricing in around a 25% chance of a 10bps rate reduction at the first meeting of 2020; note, less than 3bps worth of tightening is currently priced in throughout the year. At the previous meeting, newly-appointed President Lagarde provided a balanced assessment, largely sticking to the ECB's script. However, Lagarde was asked about the reversal rate (the point at which expansionary policy becomes contractionary), and she did not believe that the ECB was near that point yet. Furthermore, the policy chief was also asked about unity on the Governing Council, and said that she was aiming for decisions to be as consensual as possible. Segments of the Q&A also centred around the upcoming strategic policy review; something which will be a key focus of the January meeting. Since the previous meeting, December flash inflation metrics saw headline CPI picking up to 1.3% from 1.0% with the ex-food and energy print remaining at 1.4%; the rise in the headline was largely attributed to energy price effects. From a growth perspective, there has been little in the way of fresh evidence for the Q4 outturn (flash EZ GDP released on 31st Jan) other than the FY 2019 German GDP print which showed growth slowing to 0.6% from 2018’s 1.5%; Pantheon Macro noted that based on the FY reading and allowing for rounding Q4 GDP will print around 0.1-0.2%. Survey data has perhaps been of greater interest with December Markit PMIs showing the Eurozone-wide composite reading ticking higher to 50.9 from 50.6, however, the differing performances of the services and manufacturing sectors remains a key feature of the bloc’s outlook. For the upcoming meeting, little in the way of fireworks are expected with UBS judging the ECB to be in “wait and see” mode and the next round of staff economic forecasts not released until March. The Swiss bank notes that positivity from the US-China phase 1 deal will likely be tempered by the potential for geopolitical tensions to resurface once again, EU-US trade disputes and the uncertainty surrounding the Eurozone’s future trading relationship with the UK. With policy set to remain on hold given the above and as September’s policy package continues to be felt across the Eurozone, next week’s meeting may instead focus more on the technical aspects of the ECB’s policy approach; namely, the upcoming strategic review. This week, reports suggested that President Lagarde has requested that policymakers refrain from making public comments before the upcoming review: targeted to be announced next week. With this in mind, little in the way of details are known about what to expect for the review. However, last year, HSBC speculated that such a review could take 3-6 months and ultimately lead to “fairly minor” tweaks on the basis that limited firepower for the ECB’s monetary policy could see them fall short of any potential new mandate and thus lose credibility. Overall, the upcoming meeting is set to focus less on adjusting current monetary policy settings and instead tackle the framework within which the Bank operates.
NORGES PREVIEW (THU): The Norges Bank are expected to leave rates on-hold at 1.5%; as forecast by all 40 analysts surveyed by Reuters. At the December meeting rates were unanimously left unchanged, as was the repo path which foresees rates at 1.6% until 2022; indicating the Norges Bank are keeping their options open regarding the potential for a hike at some point in the future. Since the December meeting data has largely been uneventful, if slightly downbeat, for the Norwegian economy; with the highlight being inflation. December’s CPI YY missed market expectations at 1.4% vs. Exp. 1.5%; but in isolation is unlikely to generate much cause for deviating from their on-hold stance. More notably, at the previous meeting the MPC noted that a weaker than projected Krone would imply, in isolation at least, an increasing rate path. Since December’s decision the NOK has appreciated vs. the EUR from around 9.97 to a low this month of 9.8154; which may garner some attention at the meeting. Overall, little has occurred domestically to sway the Norges Bank into deviating from their clear intention to remain on-hold for the foreseeable future. Note, this meeting does not include a press conference or monetary policy report.
AUSTRALIAN JOBS DATA (THU): Australia’s December Labour Force report will be released on Thursday - with extra credence given to the numbers amid the RBA’s focus on the sector. Headline employment change is expected to decline to +14.0K from November’s +39.9K, whilst the unemployment rate is forecast to again rise to 5.3% after last month’s surprise dip to 5.2% and participation rate is seen remaining steady at 66.0%. Desks note that the ongoing Australian bush fires should lead to slower jobs growth, which could prompt to RBA to ease in the near-term. Westpac’s forecast lies below market consensus with the bank expecting the Aussie employment change to print at -5k, citing a string of downbeat data (jobs ads, business surveys and consumer sentiment) all pointing to slowing employment growth– the “forecast allows for some statistical correction from the Nov bounce but we temper it due to the Nov incoming rotation group having lower employment to population than the sample as a whole. This fundamental strength cautions against a larger correction in Dec”, Westpac concluded.
NZ CPI (THU): The quarterly CPI figures for Q4 are poised to be released on Thursday, with markets forecasting headline QQ to cool to 0.4%, down from the prior 0.7% whilst the YY figure is seen rising to 1.8% from the prior 1.5%. Analysts at Westpac share the street view, and state that Q4 inflation will be supported by the increase in tobacco excise tax alongside seasonal airfare increases. “On the downside, we’re continuing to see muted growth in the prices of many retail goods” Westpac says, with the core YY figure seen printing at sub-2%. Similarly, CapEco sees inflation remaining “broadly unchanged”, with the release expected to little impact the RBNZ’s upcoming February policy decision.
EZ PMI (FRI)
: Asides from events in Frankfurt, focus from a Eurozone perspective will be placed on Friday’s PMI metrics; manufacturing, services and composite. The December report saw the composite reading tick higher to 50.9 from 50.6, however, Markit noted “the divergence between the performances of the manufacturing and services economies remained noticeable in December”. This time around, the disparity between the two sectors will once again be a key focus with the Eurozone-wide manufacturing reading set to remain in contractionary territory with a reading of 46.8 vs. Prev. 46.3 and the services print moving marginally higher to 52.9 from 52.8, bringing the composite to 51.2 from 50.9. Ahead of the release, Capital Economics notes that January data points are limited thus far, however, the Senitx metric which is usually a decent leading indicator, rose sharply, albeit, it is unlikely to reflect a marked pick-up in the Markit release. The consultancy looks for a consensus 51.2 print for the composite, which they suggest would be reflective of a lacklustre growth rate of 0.1% in Q1. From a policy perspective, the release will take place in the immediate aftermath of the latest ECB policy announcement and with the Bank seemingly in “wait and see” mode, participants will likely want to see further evidence of the Eurozone’s economic performance ahead of the March meeting before altering their views on the current path of action by the central bank.