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by Charalambos Pissouros

Weekly Outlook: Jan 21 – Jan 25: BoJ, Norges Bank and ECB Hold Their First Meetings for 2019

This week, we have three major central banks holding their first policy decisions for the year: the BoJ, the Norges Bank and the ECB. We don’t expect any policy changes from the BoJ, but we see the case for further downward revisions in the Bank’s inflation forecasts. With regards to the Norges Bank, we expect officials to reiterate that interest rates are likely to be raised again in March. Finally, the ECB is forecast to stand pat as well, but focus will be on whether officials will change their language around the economic outlook.

Monday appears a very light day in terms of data releases scheduled for the European and American sessions. We already got China’s GDP for Q4 during the Asian morning, alongside fixed asset investment, industrial production and retail sales for December. The data showed that the world’s second largest economy slowed to +1.5% from +1.6% in quarterly terms, something that dragged the yoy down to 6.4% from 6.5%. This was the slowest pace since the global financial crisis, something which adds pressure on Chinese authorities to proceed with more stimulus in order to support their economy. Fixed asset investment grew +5.9% yoy in December, the same pace as in November, while industrial production accelerated to +5.7% yoy from 5.4%. The retail sales yoy rate ticked up to +8.2% from +8.1%.

As for the rest of the day, we only get Germany’s PPI for December, which is expected to have slowed to +2.9% yoy from 3.3%. Although PPIs are usually not market movers, we use them as gauges of where consumer prices may be headed. That said, given that we already got Germany’s CPIs for the month, we will not place any particular emphasis on this data set.

In the US, markets will be closed in celebration of the Martin Luther King Jr. Day.

On the political front, UK Prime Minister Theresa May will present before Parliament her plan B over Brexit. Although the vote on the new plan is announced for the 29th of January, we will closely monitor the reaction of the MPs in order to understand whether the plan has any chance to pass next week, or not. As for our view, it remains the same as on Friday. We still find it hard for any amendments to be broadly accepted. The EU does not want to deviate much from what was already agreed with May, but Parliament’s vote on the initial deal shows that a lot needs to be changed for a new plan to pass. So even if May agrees with MPs on the changes, she may not find the EU on the same page.

On Tuesday, during the European day, the UK employment data for November is set to be released. The unemployment is forecast to have held steady at 4.1%, while the average weekly earnings, both including and excluding bonuses, are anticipated to have grown +3.3% yoy, the same pace as in October, and the fastest in a decade. According to the IHS Markit/KPMG & REC Report on Jobs for the month, wages for temporary staff increased at the fastest pace since July 2007, while starting salaries for permanent placements rose at one of the sharpest rates seen in the past 3.5 years. In our view, this supports the case for another set of strong wage growth rates.

UK CPI vs average weekly earnings real wage growth

From Germany, we get the ZEW survey for January. Expectations are for the current conditions index to have declined for the 4th consecutive month, to 43.0 from 45.3, while the economic sentiment index is forecast to have slid to -18.3 from -17.5, which will mark the 10th negative print in a row. Although this survey is usually not a major market mover, it comes after data showed that Germany’s annual growth rate hit a five-year low in 2018, and thus, another deterioration in analysts’ morale with regards to Eurozone’s economic powerhouse could increase speculation for a dovish shift by the ECB on Thursday.

Later in the day, we get the US existing home sales for December and Canada’s manufacturing sales for November. US home sales are forecast to have declined 1.0% mom after rising 1.9% in November, while Canada’s manufacturing sales are expected to have shrunk at a faster pace than previously. Specifically, expectations are for a 0.6% mom fall following a 0.1% slide in October.

Apart from the economic releases, in Davos, Switzerland, the 49th Annual meeting of the World Economic Forum begins. It will last until Friday, and the theme is "Globalization 4.0: Shaping a New Architecture in the Age of the Fourth Industrial Revolution." It is worth mentioning that US President Trump will not attend this year due to the political deadlock with Democrats over funding for a border wall, which led to the longest government shutdown in the US history. He also canceled the whole US delegation due to the shutdown, and thus the likelihood for any major market moving news coming out from the event has lessened. Up until a few days ago, US. Treasury Secretary Mnuchin and Secretary of State Mike Pompeo were expected to lead the US delegation and thus, we couldn’t rule out any headlines with regards to the US-China trade sequel. Now, it seems that we have to wait for the 30th and 31st of January, when China’s Vice Premier Liu He will travel to the US to hold talks with Mnuchin and US Trade Representative Robert Lighthizer.

On Wednesday, the BoJ decides on interest rates for the first time in 2019.  At their last meeting for 2018, Japanese policymakers kept their ultra-loose policy unchanged as was broadly anticipated, and despite the disappointing GDP data for Q3, the Bank reiterated that Japan’s economy is expanding moderately and that it will continue to do so.

Latest inflation data showed that consumer prices slowed in both headline and core terms, with the headline rate tumbling to +0.3% yoy in December, and the core one sliding to +0.7% yoy from +0.9%. Thus, with all inflation metrics running well below the BoJ’s 2% objective, we stick to our guns that policymakers still have a long way to go before considering a meaningful step towards normalizing policy.

Japan CPIs inflation

For this meeting, we expect them to maintain short-term interest rates at -0.1% and the target of 10-year JGB yields around 0%. Thus, the attention is likely to fall to the accompanying statement, the updated economic projections, and the press conference held by Governor Kuroda thereafter. We believe that officials may reiterate that the economy is expanding moderately, but taking into account the latest CPI prints, we see the case for another downside revision to the inflation forecasts.

As for Wednesday’s economic releases, during the Asian morning, New Zealand’s inflation data for Q4 is coming out and expectations are for a slowdown to +0.7% qoq from +0.9%. However, this could still drive the yoy rate up as the quarterly print of Q4 2017 that will drop out of the yearly calculation was +0.1% qoq.

New Zealand CPIs inflation

Although Governor Orr removed from the previous statement the part saying that the next move could be up or down, at the press conference he said that he would still consider a cut if GDP falls short of the Bank’s projections. Since then, GDP data showed that the economy slowed to +0.3% qoq in Q3 from +1.0% in Q2, which dragged the yoy rate down to 2.6% from 3.2%. Officials may not be tempted to cut rates when they meet next, as they may prefer to wait for more evidence as to whether this slowdown was temporary or not, but we don’t expect a possible rise in the inflation rate to encourage a hawkish shift either.

From Japan, apart from the BoJ meeting, we also get trade data for December and expectations are for the nation’s deficit to have narrowed.

Later in the day, Canada’s retail sales for November are due to be released. The forecasts suggest that both headline and core sales declined 0.6% mom and 0.5% mom, after a 0.3% rise and a stagnation respectively.

On Thursday, we have two more central banks holding their first gatherings for the year: The Norges Bank and the ECB.

Kicking off with the Norges Bank, expectations are for officials to keep interest rates unchanged at 0.75%. This would be one of the “smaller” meetings that are not accompanied by updated economic projections and thus, all the attention is likely to fall on the statement. At their previous gathering, policymakers maintained the guidance that interest rates are likely to be raised in Q1 2019, noting that this will most likely happen in March. What’s more, they said that the upturn in the economy appears to be continuing, without mentioning anywhere the slowdown in mainland GDP for Q3.

Norway CPIs inflation

Last Thursday, Norway’s inflation data showed that the headline CPI rate held at +3.5% yoy, instead of ticking down to +3.4% yoy as was expected, while the core declined to +2.1% yoy from +2.2%. The core forecast was for a slide to +2.0% yoy. Thus, with both the headline and core inflation rates above the Bank’s objective of 2.0%, as well as above its own projections for December, we doubt that policymakers will be tempted to alter their view over when they expect interest rates to rise again.

Passing the ball to the ECB, no changes in monetary policy are expected from this Bank either. At the previous meeting, the Bank formally ended its asset purchasing program, while at the press conference following the decision, President Draghi noted that “The risks surrounding the euro area growth outlook can still be assessed as broadly balanced.” However, he added that the balance of risks is moving to the downside due to the persistence of uncertainties related to geopolitical factors, the threat of protectionism, vulnerabilities in emerging markets and financial market volatility.

ECB interest rates

Since then, data has kept coming in on the soft side, with Eurozone’s composite PMI for December hitting its lowest since November 2014, headline inflation slowing by more than anticipated during the month and the core CPI rate staying stubbornly at +1.0% yoy, well below the Bank’s objective of “below, but close to 2%”. This may have raised speculation that Draghi and co. may have to change their language around the economic outlook soon, noting that the risks have shifted to the downside. With the minutes of the prior meeting showing that some policymakers argued for such a change to take place then and ECB President Draghi noting last week that “there is no room for complacency”, it will be interesting to see whether this will happen at this meeting.

On the data front, during the Asian morning, Australia’s employment data for December are scheduled to be released. Expectations are for the unemployment rate to have held steady at 5.1%, while the net change in employment is anticipated to show that the economy gained 16.5k jobs, less than November’s 37.0k.

During the European session, ahead of the ECB decision, we get preliminary PMIs for January from several European nations and the Eurozone as a whole. The bloc's manufacturing index is forecast to have remained unchanged at 51.4, while the services one is expected to have risen to 51.5 from 51.2. Something like that is likely to lift the composite index to 51.4 from 51.1. That said, we don’t believe that such a rebound would ease concerns with regards to the health of the Euro area economy. Even if the ECB reiterates that the risks surrounding the economic outlook are broadly balanced, investors may need more evidence that this is the case.

Eurozone PMIs

We get preliminary Markit PMIs for January from the US as well. Both the manufacturing and service-sector indices are forecast to have declined to 53.5 and 54.2 from 53.8 and 54.4 respectively. That said, we have to repeat once again that the market tends to pay more attention to the ISM indices, which are scheduled to be published on the 1st and 5th of February.

Finally, on Friday, Asian time, Japan’s Tokyo CPIs for January are scheduled to be released. No forecast is available for the headline rate at the moment, while the core rate is anticipated to have held steady at +0.9% yoy. With Japan’s inflation metrics showing no signs of a build up in price pressures, we repeat for the umpteenth time that we don’t expect any meaningful normalizing step from the BoJ anytime soon.

From Europe, we have the German Ifo survey for January. Both the current assessment and business expectations indices are expected to have slid to 97.0 and 104.2 from 97.3 and 104.7 respectively, which could drive the business climate index down to 100.7 from 101.0. The case for sliding Ifo indices is supported by the forecasts of the ZEW survey, the indices of which are also expected to decline.

Later, from the US, we get durable goods orders for December. Expectations are for headline orders to have accelerated to +1.8% mom from +0.8% in November, while core orders are anticipated to have rebounded 0.2% mom after falling 0.3%.  That said, bearing in mind that the monthly prints of December 2017 that will drop out of the yearly calculation were 2.6% and 0.7%, we would expect the yoy rates continue drifting lower. The case for sliding yoy rates in durable goods orders is also supported by the New Orders Sub-index of the ISM manufacturing PMI, which plunged 11 points in December, to 51.1 from 62.1.

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