Week In Focus: US & UK Inflation Headline, The Riksbank Convenes, While China Goes On Holiday
Tuesday: UK Inflation (Jan)
Wednesday: Japanese GDP (Q4), US CPI (Jan)
Thursday: Riksbank MonPol Decision, Australian Labour Market Report (Jan)
The US docket centres on Wednesday’s releases. January’s headline CPI is expected to moderate to 2.0% Y/Y from 2.1% last time out, with the core metric is seen at 1.7% Y/Y against a prior 1.8%. In terms of the mechanics it may be worth noting that the geographic sample, used car pricing, and cell phone pricing within the release are all being altered. UBS suggest that “given the nature of the changes they should only affect high-frequency, month-to-month CPI volatility, but over the course of a year or two that should wash out.” The bank also believes that “the increased monthly volatility will make it more difficult for the FOMC, and us, to judge the trajectory of inflation. Each monthly print will have less signal for evolution of inflation.”
Wednesday will also bring the release of January’s retail sales data with analysts looking for the headline to print at 0.3% M/M, while the control group is seen at 0.4% against prior readings of 0.4% and 0.3% respectively. As a reminder, focus surrounding December’s release was on swings around consumer preference between the November sales and making purchases heading into Cspanistmas.
The recently released January labour market revealed hotter than expected wage growth. Since then the influential (although outgoing) FOMC member Dudley (Permanent Voter) noted that “as long as inflation is beneath 2%, the Fed can afford to be patient with rate hikes.” Although he did state that “3 rate hikes in 2018 still seems very reasonable, 4 hikes are possible if the economic outlook improves.” Another of the voters, San Francisco Fed President Williams, noted that he expects inflation to pick up this year and next, as wage growth is slowly picking up and he expects this to intensify.
Whereas, Philadelphia Fed President Harker (Non-Voter) said that the inflation outlook is still an open question, it may firm, or it may not, while noted dove and President of the Chicago Fed Evans (Non-Voter) said that the risks seem to be moving towards additional inflation. Dallas Fed President Kaplan (Non-Voter) says he is less convinced that higher wages will translate into higher prices.
Another of the doves, Minneapolis Fed President Fed's Kashkari (non-voter) noted that he wants to see inflation and wages rise before supporting another rate hike
Other releases of note: Thursday: US PPI (Jan), Philadelphia Fed Manufacturing Survey (Feb), Industrial Production (Jan), Manufacturing Production (Jan) Friday: Building Permits (Jan), Housing Starts (Jan), University of Michigan Consumer Confidence Survey (Feb, F)
Sweden’s Riksbank will issue its first monetary policy decision of 2018 on Thursday. Analysts expect the Riksbank will hold rates at -50bps, however, focus will be on the interest rate path given uncertainties around inflation. “The risks to our forecast ahead of next week's announcement from the Riksbank are strongly tilted towards a downward adjustment of the interest rate path,” Nordea writes, arguing that the central bank’s inflation forecast is higher than its own, and significantly higher than the forecast of the Swedish National Institute of Research.
Additionally, the outcome of the recent wages data will have been disappointing for the Riskbank, with hourly pay rising only 2.5% Y/Y in the latest data, while the prior month’s prints were revised lower. “The deviation from the Riksbank's forecast for 2017 of 2.7% may seem marginal, but the central bank is probably concerned as wage growth doesn't seem to accelerate,” Nordea says, “consequently, the outcome for wages should also feed tspanough to the wage forecast for 2018.”
Nordea, therefore, argues that the Riksbank will lower its inflation forecast, and that will likely have an impact on its rate path for Q3 and Q4, which may be cut to signal a postponement of the first rate hike.
Other releases of note: Wednesday: Eurozone GDP (Q4, Secondary)
The bulk of the focus will fall on the inflation data which is expected to show a moderation in the headline Y/Y CPI rate to 2.9% from 3.0%, which would add further credence to suggestions that UK inflation may have peaked. A reading of 2.9% would be below the BoE’s forecast of 3.0% (as stated in February’s QIR), and as a result would be welcomed by the Bank as Governor Carney et al look for inflation to converge back towards their 2% target; however, RBC note that it now seems more likely that CPI inflation will be relatively slow to fall in 2018 even though the impact of previous exchange rate depreciation starts to fade.
Elsewhere, traders will also be eyeing Friday’s retail sales report with all 4 major readings expected to show an uptick in January from the prior month. As a reminder, during the previous report a bulk of the analysis focused on the squeeze in real incomes on the back of firmer inflation, as well as swings around consumer preference between the November sales and making purchases heading into Cspanistmas.
Other releases of note: N/a
The region will be subject to thinner liquidity conditions for most of the week, as Japan observes a market holiday on Monday and the Chinese Lunar New Year observance commences on Thursday.
Wednesday will bring the first estimate of Japan’s Q4 GDP release, consensus looks for 0.2% Q/Q from a prior 0.6%. in terms of the breakdown, capital expenditure is expected to come in at a steady 1.1% Q/Q, while private consumption is expected to rise by 0.4% Q/Q. Barclays suggest that the projected slowing of the headline reading will be a result of import strength, a negative contribution from private inventory investment and a decrease in public investment. The bank notes that this would still “represent growth near the upside of estimated potential (0.5-0.8% annualized) and an eighth consecutive quarter in positive territory, the longest since the 12-quarter run from Q2 1986 to Q1 1989.”
Focus in Australia will fall on January’s labour market report, due on Thursday. Analysts expect the headline employment change to slow to 9.0K from the prior 34.7K, with the participation rate expected to ease to 65.4% from 6.7%, and as a result the unemployment rate is expected to moderate to 5.4% from 5.5%. In its recently released Statement on Monetary Policy (SoMP) the Reserve Bank of Australia noted that “the domestic labour market has been particularly strong. Forward indicators of labour demand suggest that employment will continue to expand in coming months, though not at quite as rapid a rate as seen recently.” Although the Reserve Bank did concede that “Wage growth remains subdued and is forecast to increase gradually.” This lead to the Bank projecting inflation levels of 1.75% at the end of 2018, 2.0% at the end of 2019 and 2.25% in mid-2020. The would have fed into a pre-SoMP address, where RBA Governor Philip Lowe noted that the bank “does not see a strong case for raising interest rates in the near term.
Other releases of note: Tuesday: Australian NAB Business Survey (Jan) Wednesday: Australian Westpac Consumer Sentiment (Feb) RBNZ Survey Of Inflation Expectations (Q1)