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Week In Focus: Bank of Canada, Will They Or Won’t They? Just How Strong Was Chinese GDP Growth In 2017?

Key Events






Wednesday: BoC MonPol Decision


Thursday: Chinese GDP (Q4), UK Inflation Data (Dec), Australian Labour Market Report




North America


The US will observe Martin Luther King Day on Monday, which will lead to lower liquidity conditions at the start of the week.


Wednesday will bring the latest Bank of Canada (BoC) decision. Although the quantitative headlines of the BoC’s Q4 Business Survey disappointed, the qualitative details of the survey were positive, and in combination with December’s solid labour market report, helped propel the probability of a hike at the upcoming meeting to the upper-80% level. Businesses’ investment intentions do not seem to have been hindered by NAFTA uncertainty and firms’ hiring intentions increased to the second highest reading in two years. Although inflation expectations are modest, capacity pressures became more intense, hinting at future inflation; most firms are reporting labour shortages and the intensity of shortages has become more severe, again alluding to inflation in the pipeline - in fact, slack now seems confined to the energy producing regions. “Businesses are indicating rising and inflationary capacity pressures that will reinforce the BoC’s bias toward hiking rates next week,” analysts at Scotiabank write, adding that although “the survey doesn't settle many forecasting debates given its spotty trade forecasting and tracking record, but as a source of anecdotes that the BOC references at times, it does indeed support our forecast that the central bank will raise its policy rate by 25bps on January 17th.” Since the release various source reports have suggested that the US is taking a more hard-line approach in NAFTA talks, which has led to some questioning the chances of a BoC hike at its upcoming decision, with odds of a hike easing back to just above 50%, before bouncing to circa 85% at the time of writing. Inflation continues to ebb higher, with the average of the 3 core measures sitting at 1.7% as of November, although this remains shy of the key 2% level and in December Governor Poloz noted that “the downside risk to the inflation forecast is slack in the labour market.” It is worth noting that the hot domestic labour market has started to push wages higher, although Poloz stressed that “we put stock in data showing higher wages but that does not mean there is no slack left,” while he re-iterated his focus on the output gap. The decision will be supplemented by the quarterly Monetary Policy Report (with the prior Report available here). CIBC suggest that “the accompanying statement has to be somewhat hawkish, as its main purpose will be to explain why a hike was necessary. But the BoC might do a better job than it did in September in communicating the message that it can take its time on further hikes. Its growth and inflation outlook should be little changed, but the Bank could add a note of caution on trade issues as a way of cooling the fires of the Canadian dollar.” RBC believe that “the BoC will raise the overnight rate by 25bps at Wednesday’s meeting. Clear signs of diminished labour market slack and an economy operating at full capacity should outweigh rising trade tensions with the US. Risks around a possible US withdrawal from NAFTA will likely once again be the biggest concern weighing on the BoC, but absent an imminent withdrawal notice, they should feel comfortable bumping up the overnight rate to its post-crisis high of 1.25%.”


Other releases of note during the week: Wednesday US Industrial Production (Dec) US Manufacturing Production (Dec) Thursday Philadelphia Fed Manufacturing Index (Jan) Friday University of Michigan Sentiment (Jan, P)




Wednesday’s Eurozone CPI release could come under more scrutiny following the recently released hawkish ECB minutes from the Bank’s December meeting, which stated that “Looking ahead, the view was widely shared among members that the Governing Council’s communication would need to evolve gradually, without a change in sequencing, if the economy continued to expand and inflation converged further towards the Governing Council’s aim. The language pertaining to various dimensions of the monetary policy stance and forward guidance could be revisited early in the coming year.” Although it is worth noting that the release will be December’s final reading.


Other releases of note during the week: N/a




Tuesday will bring December’s inflation data, with analysts looking for headline CPI to ease ever so slightly to 3.0% Y/Y from 3.1% last time out, with the core print expected to moderate to 2.6% from 2.7%. At its December decision the Bank of England opined that “inflation is likely to be close to its peak, and will decline towards the 2% target in the medium term.” Previously the Bank suggested that inflation was to peak in October, however official release put paid to that call. December’s PMI releases revealed that “part of the increase in purchase prices was passed on in the form of higher output charges in December. Selling prices rose for the twentieth successive month.” Whereas the services sector survey revealed that “average prices charged increased at a robust pace across the service sector, although the rate of inflation eased from November’s peak.”


December’s retail sales data, due on Friday, will round off the tier 1 docket, with analysts looking for a headline M/M fall of 0.6% following last month’s 1.1% rise, with the core release expected to fall by 0.8% following last month’s 1.2% gain. The recently released BRC retail sales indicator suggested that nominal consumer spending was higher in December in Y/Y terms.


Other releases of note during the week: N/a




The Chinese docket will be headlined by Thursday’s Q4 GDP release, with analysts looking for growth to come in at 6.7% Y/Y and 1.6% Q/Q against prior readings of 6.8% and 1.7% respectively. Chinese Premier Li took to the wires recently as he told Xinhua that he expects 2017’s growth to come in at 6.9% against an official target of around 6.5%. Westpac note that “Chinese GDP has consistently beaten expectations tspanough 2017, spurred on by external demand as well as a robust pipeline of investment projects that are proceeding to completion. It may again be the case that growth surprises to the upside; however, we and the market believe the more likely outcome is that momentum slows a tick. The basis of this view is partly attributable to the slowdown in investment currently being seen across the economy, in both residential and non-residential construction as well as other investment spending being undertaken by the government and corporates. Also key to the growth story is the consumer. Here we see robust demand, but not enough of an acceleration to more than offset the softening investment pulse.”


In Australia, December’s labour market report, due on Thursday, will headline. Analysts expect 18K jobs to be added, slowing from last month’s impressive 61.6K (with over 40K full-time jobs being added last time out), while the unemployment rate is seen steady at 5.4% and the participation rate expected to slow to 65.1% from 65.5% last time out. ANZ note that “the strong gain in November employment followed a couple of more moderate monthly gains, which were more in keeping with our expectation that jobs growth will slow for a period after a very strong run. Growth in jobs is running well ahead of what other indicators such as ANZ Job Ads suggest is the true pace of employment growth. At some point we think there will be a sustained correction to smaller gains. The uncertainty is about exactly when that will happen.”


Other releases of note during the week: Monday Australian Melbourne Institute Inflation Expectations (Dec) Tuesday New Zealand NZIER Business Confidence (Q4), GDT Dairy Auction Wednesday Australian Westpac Consumer Sentiment (Jan)