Original insights into market moving news

Week in Focus: Highlights include US personal income/spending, PCE; PBoC, RBNZ, BOK; UK jobs data

  • MON: PBoC LPR Setting; Bank of Israel Policy Announcement; German Ifo Survey (Feb); New Zealand Retail Sales (Q4)
  • TUE: UK Employment Report (Dec) and Claimant Count (Jan); EZ CPI Final (Jan)
  • WED: RBNZ Policy Announcement; German GDP (Q4)
  • THU: BoK Policy Announcement; German GfK Consumer Sentiment (Mar); EZ Sentiment Survey (Feb); US Durable Goods (Jan); GDP 2nd Estimate (Q4); Australian capex; New Zealand Trade Balance (Jan)
  • FRI: US PCE (Jan), Adv Goods Trade Balance (Jan)

NOTE: Previews are listed in day-order

PBOC LPR (MON): The PBoC is expected to maintain its benchmark lending rates for the tenth consecutive meeting, with the 1-year Loan Prime Rate (LPR) expected to be held at 3.85% and the 5-year rate at 4.65%. The central bank has refrained from any adjustments to its LPR alongside its closely tied 1-year Medium term Lending Facility (MLF) rate since April, which points to the unlikelihood of any changes to its benchmark rate given that the central bank had previously lowered the MLF rate first on the last three occasions prior to reducing its LPR – with some CNY 200bln of MLF conducted at the maintained rate of 2.95% following the Lunar New Year. The PBoC has instead opted to conduct policy through liquidity operations, although PBoC-affiliated media suggested not to mistake the recent liquidity withdrawal as a policy signal - referring to the unnatural substantial liquidity drains heading into the Spring Festival.

UK EMPLOYMENT REPORT (TUE): The upcoming UK labour market report is set to see the unemployment rate rise modestly to 5.1% from 5.0% in the three months to December with headline wage growth and the ex-bonus metric both set to rise to 4.0% from 3.6%. As has been the case throughout the pandemic, the presence of the UK's furlough scheme has masked the true health of the labour market and as such, will only be of limited use to market participants. Of potentially greater interest, as highlighted by RBC, the ONS noted that as of late January/early February around 20% of the workforce was on furlough; a figure that equate to around 6.4mln people. Therefore, PM Johnson's roadmap for exiting lockdown which is set to be published on Monday ahead of the data could carry greater importance as it will provide some insight into when various sectors of the economy might be able to reopen. Additionally, ahead of the March 3rd budget, reports suggest that Chancellor Sunak could extend the current furlough scheme until the summer; the speed at which the furlough scheme is unwound relative to the reopening of the economy will be vital in determining the damage to the jobs picture in 2021.

US CONSUMER CONFIDENCE (TUE): The consensus looks for a trivial rise from 89.3 to 89.6. The strength of the consumer will be a key factor in how aggressively the US economy rebounds from the pandemic. As a proxy, the University of Michigan's prelim gauge of consumer confidence in February saw the headline fall, with both current sentiment and expectations falling in the month, while near-term inflation expectations also ticked higher; the expectations component provided most of the drag, and this component is usually a function of the performance of the stock market, gas prices, as well as how the pandemic is progressing. Stock markets have seen fresh record highs since the January consumer confidence report, although gas prices have risen on average, and while the COVID metrics (cases, vaccinations, rollouts etc) have been moving in a favourable direction of late, there has been a resurgence in jobless claims as lockdown measures continue. It will be interesting to see whether the spectre of another stimulus check and the positive progress on the virus front can offset the fragile labour market (the January jobs report also noted that participation levels were slipping, which doesn't augur too well) and higher gasoline prices. (NOTE: the final February Michigan sentiment data is due Friday).

RBNZ POLICY ANNOUNCEMENT (WED): The RBNZ is widely expected to keep the Official Cash Rate unchanged at 0.25% in its policy meeting next week with OIS pricing in 99% for no change in rates and the LSAP is also likely to be maintained at NZD 100bln. The central bank has firmly adhered to its guidance throughout last year of keeping the OCR unchanged through to March 2021 although it announced the launch of the Funding for Lending Programme for December and had been working towards having a negative OCR operationally ready by end-2020 if required. Since then, market participants have been repositioning for a less dovish RBNZ whereby New Zealand money markets were no longer pricing in a rate cut for this year and several banks including ANZ, Westpac and Kiwibank have abandoned their calls for further cuts and therefore no longer see the RBNZ implementing NIRP. The shift in expectations regarding the RBNZ’s future policy has partly been spurred by a flurry of better than anticipated domestic data with Q3 GDP Q/Q topping estimates at 14.0% vs. Exp. 13.5% and Y/Y at a surprise expansion of 0.4% vs. Exp. -1.3%, while CPI in Q4 was firmer than expected at 1.4% vs. Exp. 1.0% and there was also a surprise decline in the Unemployment Rate to 4.9% vs. Exp. 5.6% (Prev. 5.3%). These releases showcase an improving economy and suggest less urgency for further policy loosening, while global vaccination progress, a relatively contained domestic virus situation and recent decision to reinstate LVR restrictions from March 1st to curb risks to financial stability from high-risk mortgage lending also support the case for the central bank to keep policy steady.

BOK POLICY ANNOUNCEMENT (THU): The central bank is expected to hold its key rate at 0.50%, according to all analysts surveyed by Reuters. Desks suggest that a concoction of an export-led recovery, rising property prices but subdued inflation mean there is no urgency for the BoK to make a move. However, the central bank is seen upgrading its 2021 GDP forecast in light of the faster-than-expected recovery and little meaningful impacts from COVID variants. Goldman Sachs expects the forecast to the upgraded to +3.8% from the prior of +3.0%, (above the market expectation of +0.4ppts). The MPC is seen maintaining an impartial tone on any near-term policy recalibration. Governor Lee has remained cautious not to pre-emptively signal any policy changes amid tail risks emanating from social distancing measures – reflected in the January jobs report. “It would also be important to see whether and how the governor will respond to a legislative initiative to require a direct purchase of government bonds”, GS says, as it expects policy rates to be maintained through the year.

US DURABLE GOODS (THU): Durable goods orders for January are seen rising 1.4% m/m from 0.5% in December; the ex-transport measure is seen rising +0.7% m/m from 1.1%. If the consensus is realised, it would be the ninth straight rise, and will be another data point that serves to highlight that the manufacturing sector, which is less sensitive to pandemic restrictions, has generally fared well in the pandemic in contrast to the services sectors of the economy. Core capital goods orders, for instance, are now above pre-pandemic levels, and as restrictions ease and vaccines are rolled-out more widely, there is an expectation that business capex will be supported ahead.

AUSTRALIAN CAPEX (THU): Business investment plans are seen improving amid firmer business confidence, less severe conditions and tax incentives. Desks note that business investments in Australia has been softer, even pre-COVID. Albeit the recent quarters have seen strong capital imports alongside a lift in non-residential approvals. RBC however warns that it could still be too early to see a rise in capex and thus see a modest 1% decline in Q4. “We will also get the first cut of FY2021–22 capex plans and we would expect a reasonable lift of around 10%, adjusted by the 5y realisation ratio”, the analysts say.

US PERSONAL SPENDING, CONSUMPTION (FRI): If the stellar January retail sales data is any guide, consumers' income and spending will have been supported in January by the USD 900bln fiscal stimulus package enacted at the end of last year, which included a direct payment of USD 600 for Americans and enhanced unemployment insurance. Analysts will likely write-off the strength as a one-time boost; however, many are optimistic that another round of stimulus (where USD 1400 direct payments for Americans is proposed) will support personal income and consumption in the months ahead, as the economy begins to enter the normalisation phase (subject to the obvious caveats, of course).

US PCE (FRI): Meanwhile, there will be a lot of attention on the PCE measures of inflation, given that is the Fed's primary gauge of assessing price pressures. Many commentators are becoming concerned that an accommodative Fed combined with fiscal largesse -- which is going to see more cash pumped into the economy than the estimated size of the output gap -- is going to stoke unwanted inflation pressures. The Fed's new policy framework allows the central bank to keep the economy running hot to ensure that average inflation over the business cycle comes in at its 2.0% target; market-based gauges of inflation over the course of 10-30 years however (which incorporates more than one business cycle, theoretically) are elevated relative to the Fed's target, although at between 2.10% to 2.20% (they've come in a bit this week), this is unlikely to concern the Fed at this stage. The central bank has always said it expects inflation to rise in the coming months on pandemic base effects, but it is expected to cool in the latter part of the year; and even if there were a spike in inflation in the second half of 2021, former Fed boss, and current Treasury Secretary, Janet Yellen reckons that the Fed has the tools to manage these pressures.