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Week In Focus: Hawks vs. Doves? The BoJ & The ECB Issue Their Latest Decisions, Will We Get Any Clarity From Either Bank?

Key Events




Tuesday: Bank of Japan MonPol Decision




Thursday: ECB MonPol Decision, UK Labour Market Report (Nov/Dec), New Zealand CPI (Q4), Norges Bank MonPol Decision


Friday: US GDP (Q4, A), UK GDP (Q4, A)


Focus in the early part of the week is set to fall on German political developments. On Sunday 21st January 600 SPD party delegates are due to vote on moving on to coalition talks with Angela Merkel’s CDU/CSU bloc. Michael Groschek, the SPD party leader for North Rhine-Westphalia (NRW), which accounts for around a quarter of SPD delegates, has joined Martin Schulz in terms of positive rhetoric around the party vote. SPD parliament leader Andrea Nahles has suggested that around a third of the party’s delegates are still undecided on how they will vote, however, she believes that a majority of the party will vote to endorse the talks. It is worth noting that SPD’s youth and left wings are opposing the coalition talks, as the outlines do not contain enough SPD hallmarks.


The annual World Economic Forum in Davos will take place between Tuesday 23rd and Friday 26th January. Headline guests this year include US President Donald Trump, Indian PM Narendra Modi, French President Emmanuel Macron, UK PM Theresa May and Italian Premier Paolo Gentiloni. BoE Governor Mark Carney will also be in attendance, appearing on a panel on Friday.


North America


The advance US Q4 GDP release will hit on Friday, with analysts looking for 2.9% in Q/Q annualised terms, which would represent a modest slowing from Q3’s 3.2%. The core PCE price index is expected to accelerate to 1.6% Y/Y from Q3’s 1.3%. it is worth noting that the heavily watched Atlanta Fed GDP Now tracker sits at 3.4%, while the New York Fed’s GDP Nowcast model sits at 3.9%.


Over the border in Canada focus will fall on November’s retail sales release due on Thursday, there are no expectations and the prior headline came in at 1.5% M/M, while the core metric came in at 0.8% M/M last time out. CIBC point out that “November was a good month for gas prices,” and also note that the November sales should boost the release owing to the typical pre-Cspanistmas rush.


Friday will bring December’s CPI release. Last time out, headline CPI stood at 2.1% Y/Y with the average of the BoC’s 3 core measures standing at just over 1.7%. RBC points to headwinds from lower gasoline prices and seasonal declines in multiple categories, including apparel and household entertainment. While the BoC focuses on the output gap it has described the increases in inflation over recent months as “consistent with diminishing slack in the economy.”


NAFTA renegotiations will continue to cast a shadow of uncertainty over the region, with recent reports suggesting that the next round of talks have been extended to 9 days vs. the usual 6, they are set to get underway on Tuesday 23rd January. US President Trump has recently referred to the trade pact as “a joke” after stating that “he may terminate the NAFTA agreement,” although he did note that “a lot of people would be unhappy” if he did. The BoC also sounded more cautious over NAFTA risks after it delivered a 25bps hike at its most recent decision.


Other releases of note: Wednesday US Manufacturing & Services PMIs (Jan, P) Friday US Durable Goods (Dec, P)




Wednesday will bring the release of January’s flash PMI surveys for the Eurozone. Estimates look for the manufacturing release to come in at 60.3, while the services release is seen at 56.4, with both estimates representing an ever so slight moderation against December’s releases. The hot Eurozone economy was one of the key developments in 2017, with Cspanis Williamson, of survey collator IHS-Markit, noting that “a stellar end to 2017 for the Eurozone rounded off the best year for over a decade, continuing to confound widely-held fears that rising political uncertainty would curb economic growth. At 56.4, the average PMI reading for 2017 was the highest annual trend since 2006. Manufacturing is enjoying its best growth spell since data were first collected over two decades ago while the service sector closed off its best year since 2007. New work is flowing to companies at a rate not seen for a decade and backlogs of uncompleted work are rising sharply. Hiring is consequently at a 17-year high as firms look to boost capacity to meet rising workloads. Optimism about the outlook also turned higher in December. While not accelerating in December, price pressures are running at the highest for over six years as solidifying demand nurtures improved pricing power. Based on past experience, the extent to which demand appears to be outstripping supply for many goods and services suggests that inflationary pressures could continue to build in the coming months. A big question for 2018 will therefore be whether relatively high unemployment and spare capacity in many countries will continue to hold down pay growth and keep a ceiling on consumer price inflation; a reminder that many wounds from the global financial crisis and the region’s sovereign debt crisis are still healing.”


The major regional risk event for the week will come on Thursday in the form of the European Central Bank’s (ECB) latest monetary policy decision. The central bank is not expected to tweak policy at the upcoming meeting.


Recent ECB chatter has been mixed, with the hawks happy to look tspanough the recent EUR appreciation and talking-up an end to asset purchases, while the doves have warned that the EUR strength merits attention given the possible negative impact on imported inflation; the majority of sources pieces have pointed to a change in forward guidance in the first half of 2018, preparing the market for a change in policy approach.


Analysts suggest that the recent commentary points towards divisions within the ECB. Therefore, many are now waiting to hear from the ECB President Draghi himself, and as a result focus will fall on the President’s press conference.


Analysts at BofA Merrill Lynch believe that the emphasis will be on the sequencing of policy tightening and a gradual shift in forward guidance.  “To keep the lid on market movements, we expect Draghi to emphasize two messages: first, sequencing is an ironclad element of forward guidance and is sacrosanct. Second, changes to communication will be gradual. After last week, we still think the asymmetric element to QE will be dropped on Thursday,” BofAML says, “more consequential aspects of forward guidance will change only in March.”


Noted ECB watcher Frederik Ducrozet of Pictet Asset Management expects “no policy decision and no major change in the ECB’s communication. There is no incentive for the ECB to fuel further hawkish market re-pricing at this stage, especially after core inflation disappointed again and the EUR has strengthened. The only small change we see as possible is the removal of the optionality in terms of QE size. Ultimately, the ECB’s forward guidance and policy decisions continue to be driven by core inflation. The risk is that more patience is needed before the ECB see a sustained adjustment in inflation and wages. We expect a transition in forward guidance from QE to policy rates in March, followed by a tapering announcement in June or in July. Once Italian elections are out of the way, and assuming limited further EUR appreciation, risks could again shift towards a more hawkish ECB in the spring.”


The Norges Bank will also convene on Thursday, and it is expected to stand pat. There will be no new interest rate path forecasts, nor a post-meeting press conference and, therefore, Nordea believes that “the potential for major market moves is small.” But with that said, Nordea expects the Bank to take note of two factors: interest rate expectations for other central banks have edged upwards since the Norges’ last meeting, while oil prices have rallied. Even if the news (since the previous meeting) in sum might have been on the upside Nordea suggest that it does not warrant any significant change to the central bank’s view. The main conclusion will therefore probably be close to the one at the last “in between meeting” in October: “The Executive Board's assessment is that developments so far have been broadly in line with the picture presented in the December Report.”


Other releases of note: Tuesday German ZEW Economic Sentiment Survey (Jan) Thursday German IFO Economic Sentiment Survey (Jan)




Wednesday will bring the release of the latest labour market report. The claimant count is expected to have moderated to 3.2K from 5.9K, while the unemployment rate is seen steady at 4.3%. The heavily scrutinised wage data will of course remain the focal point, with the including bonus measure seen steady at 2.5% on a 3-month Y/Y basis, and the excluding bonus measure also seen steady at 2.3% over the same horizon. HSBC suggest that “pay growth picked up a little in the tspanee months to October, and we expect it to maintain its pace in the tspanee months to November - albeit remaining some way below inflation. There were some early signs of job trends starting to turn, with employment down by 56k over the tspanee months to October, and the claimant count rising for the third consecutive month in November. This, therefore may be the focus of the November release.”


Friday will bring the preliminary Q4 GDP estimate, with analysts looking for a steady 0.4% Q/Q, while the Y/Y release is expected to slow to 1.4% from 1.7%. Manufacturing looks to have gained momentum, but the service sector has also made a relatively strong start to the quarter. As a result,  HSBC suggests that “the positive news should outweigh the shutdown in the Forties oil and gas field in December, which is likely to weigh on overall industrial production.”


Other releases of note: Tuesday Public Finance Data (Dec)




There will be no major economic releases from China during the week.


The Bank of Japan (BoJ) will issue its first monetary policy decision of 2018 on Tuesday, with all of those surveyed looking for the BoJ to stand pat. The latest WSJ sources piece suggested that the Bank will look to “massage its message” as policymakers are optimistic over progress towards the 2% inflation goal, but remain cautious over the next move as they believe that premature action “could give the mistaken impression that the BoJ is abandoning its commitment to 2% inflation. That in turn could cause the yen to rise and hurt the recent economic recovery, which relies heavily on exports.” This comes after a recent tweak in the BoJ’s rinban operations which triggered speculation over ‘stealth-tapering.’ People close to the BoJ have said that the market overreacted to the change, which they say wasn’t meant to signal any broader policy shift.


Focus will likely fall on Governor Kuroda’s press conference, which BofA Merrill Lynch believe will tilt slightly dovish in order to exert some degree of control over the markets. Looking forwards, BofAML’s base case looks for the BoJ to adjust its yield curve control programme in Q3, but the bank warns that the BoJ will be sensitive to revived speculation over a premature exit and the recent FX moves. Also on the horizon, March or April should reveal whether or not Kuroda will be re-appointed as Governor. Etsuro Honda, one of Prime Minister Abe’s most trusted economic advisors, has tspanown his hat in to the ring to succeed Kuroda. Some believe that Honda ousting Kuroda, or even assuming a role as Deputy Governor, would provide a dovish tilt to the outlook for the BoJ’s monetary policy and potentially delay any normalisation.


The Australian docket is bereft of any tier one releases, and the related markets will experience lower liquidity on Friday as the country observes Australia Day.


Across the Tasman in New Zealand analysts expect CPI to have moderated in Q4, the median estimate looks for a 0.4% Q/Q and 1.8% Y/Y from prior readings of 0.5% and 1.8%, with the data due to be released on Thursday. The median forecast is slightly higher than the RBNZ’s 0.3% Q/Q projection. Westpac suggest that “higher fuel prices are expected to make the biggest positive contribution,” but they do note “that the December quarter tends to have strong seasonal influences, with lower fresh food prices and higher prices for airfares and accommodation.” The Q4 release will incorporate the 3-yearly reweighting of the basket of goods and services, but most expect the new weights to have very little bearing.


Other releases of note: Friday Japanese CPI (Dec)