Following a very busy week, the calendar becomes lighter this week. The most important releases are Germany’s Ifo survey and preliminary CPIs for February, Japan’s industrial production and retail sales for January, the nation’s Tokyo CPIs for February, as well as the US core PCE index for January. Although some of these indicators may prove market movers, investors are likely to keep most of their attention locked on developments surrounding the coronavirus.
Major EU and US indices finished last week in the red, as the numbers of cases and deaths returned into acceleration mode on Thursday. The negative sentiment rolled over the Asian morning Monday as well, with China’s Shanghai Composite sliding 0.28%, while Hong Kong’s Hang Seng and South Korea’s KOSPI tumbled 1.80% and 3.87% respectively. Japan’s Nikkei was closed today in celebration of the Emperor’s Birthday.
Although cases returned into slowdown mode over the weekend, the deaths continued to accelerate, enhancing our view that a prolonged slowdown in deaths may come with a lag compared to a slowdown in cases. Having said that, fears over the spread of the virus outside China heightened over the weekend as infections in South Korea, Italy and Iran surged. Specifically, in South Korea cases skyrocketed over 600, with 6 people dying. In Italy, cases jumped above 150, while 3 people died. Iran reported 43 cases and 8 deaths.
As for what we believe, we maintain the view that, with scientists saying that the virus may spread more easily than previously believed, and with China announcing that the vaccine will be submitted for clinical trials around late April the fastest, the worst is not behind us yet. Further spreading may raise concerns that the economic wounds may drag into Q2, and thereby prompt investors to reduce even further their risk exposure and seek shelter in safe havens. The exception here may be the Japanese yen and we explain why further below.
As for the data, on Monday, the only release worth mentioning is the German Ifo survey for February. The current assessment index is expected to have ticked down to 99.0 from 99.1, while the expectations one is anticipated to have risen to 93.3 from 92.9. This would drive the business climate index fractionally higher, to 96.0 from 95.9. That said, bearing in mind that both the current conditions and economic sentiment indices of the ZEW survey for the month declined by much more than expected, we see the risks surrounding the Ifo forecasts as tilted to the downside.
The euro rebounded somewhat on Friday due to Eurozone’s better-than-expected PMIs for February, ending the week virtually unchanged against the USD dollar, which continued standing tall against most of the other G10 currencies. That said, a disappointing Ifo survey may result in the resumption of the common currency’s recent steep downtrend, as it would revive concerns over the performance of Eurozone’s growth engine. It could also raise bets with regards to additional stimulus by the ECB.
That said, we stick to our guns that given the Bank’s limited scope for further easing, officials may not rush into doing so. After all, an extension of the euro’s latest tumble may eventually prove somewhat supportive for the bloc’s economy as it may give a helping hand to inflation and exports. Although the ECB has clearly stated several times that it does not target the exchange rate, a lower euro may be a welcome development for policymakers and may alleviate some pressure for additional stimulus, at least in the coming months.
On Tuesday, during the European morning, we get Germany’s final GDP for Q4. Expectations are for the final print to confirm its initial estimate and show that Eurozone’s economic growth engine stagnated in the last three months of 2019. This would confirm that the yoy rate dropped to +0.3% from +1.1% in Q3.
Later in the day, we have the US Conference Board consumer sentiment index for February, but no forecast is available at the time of writing.
On Wednesday, the only noteworthy release is the US new home sale for January, which are expected to have slid 1.5% after falling 0.4% in December.
On Thursday, during the Asian morning, New Zealand’s trade balance and the nation’s ANZ business confidence index for January are due to be released. No forecast is available with regards to the trade data, but the ANZ business confidence index is forecast to have risen, but to have stayed within the negative territory. Specifically, it is expected to have increased to -7.9 from -13.2. However, bearing in mind that the coronavirus was yet to spread to the extent it did this month, we prefer to wait for the February data, in order to get an idea whether businesses in New Zealand, the economy of which is closely linked to the Chinese one, have felt the heat of the virus’s effects.
Later in the day, we get the US durable goods orders for January, and the second estimate of the US GDP for Q4. With regards to durable goods, headline sales are expected to have declined 1.5% mom after rising 2.4% the month before, while the core rate is anticipated to have risen to -0.1% mom from -0.8%.
The second estimate of the US GDP is expected to confirm its initial estimate, namely that the economy grew +2.1% qoq SAAR, the same pace as in Q3. In our view, even if we get a small deviation, the market is unlikely to react massively on this release. After all, we already have models pointing to how the economy has been performing during the first quarter of 2020. The Atlanta fed GDPNow points to a growth rate of 2.6%, while the New York Nowcast suggests that the economy has been growing at a 2.0% pace.
Even if the New York model is closer to the reality, these numbers suggest that, at a time when most economies are expected to have slowed due to the virus’s economic impact, the US appears to have dodged the effects. In any case, we will not dig into much detail on that front as the quarter is not over yet, and those numbers are still subject to revisions.
The US pending home sales for January are also coming out and the forecast points to an increase of +2.0% mom, after a slide of 4.9% in December. With pending home sales increasing in January, the slide in new home sales, which are due to be released the day before, makes absolute sense and may not be that bad. After all the increase in pending sales, was once marked as an increase in new home sales. Indeed, back in June, new home sales surged 20.9%, allowing a slowdown in the months to come, or even a decline, as those new sales got translated into pending sales.
Finally, on Friday, we get the usual end-of-month data dump from Japan. Both the unemployment rate and the jobs-to-applicants ratio for the month of January are expected to have held steady at 2.2% and 1.57 respectively, while both the preliminary industrial production and retail sales for the month are anticipated to have declined at a faster pace than in December. Exactly, industrial production is expected to have tumbled 9.5% yoy after sliding 3.1% in December, while retail sales are forecast to have declined 3.3% yoy after falling 3.0%. The Tokyo CPIs for February are also coming out. The headline rate is expected to have increased to +0.8% yoy from +0.6%, while the core one is anticipated to have remained unchanged at +0.9% yoy. This may raise some speculation the National CPI for the month may also accelerate somewhat, but it is unlikely to ease concerns over the performance of the Japanese economy.
The yen has been in a free fall mode last week, even during risk-off periods, something suggesting that it took off its safe-haven suit. Following last Monday’s data, which showed that the Japanese economy contracted in Q4, investors may be afraid that Japan is heading towards a recession. Let’s not forget that any negative impact of the coronavirus would be reflected in Q1 this year. Combining this with subdued inflation (still well below the BoJ’s target of 2%), market participants may continue to sell the currency. If they do it long enough, they may prove Japan’s saviors as further weakening may help inflation and exports, at least during the last month of Q1.
During the European day, Sweden’s GDP for Q4 is coming out. Expectations are for the qoq rate to have declined to 0.0% from +0.3%, but this would drive the yoy one up to +2.0% from +1.6%. Last Wednesday, the nation’s inflation data for January showed that both the CPI and CPIF rates tumbled to +1.3% yoy and +1.2% yoy, from +1.8% and 1.7% respectively, while the core CPIF rate ticked down to +1.6% from +1.7%.
At its latest meeting the Riksbank acknowledged that falling energy prices are expected to dampen inflation this year, but it expects the headline rate to be close to the 2% target afterwards. Thus, slowing headline prints, combined with a fractional decrease in the core rate, support that view. With that in mind, and also that the yoy rate of GDP will increase, despite the economy stagnating in quarterly terms, we don’t expect Riksbank policymakers to alter their forward guidance of keeping rates at 0% during almost the entire forecast horizon.
From Germany, we have the preliminary inflation data for February, The CPI rate is expected to have held steady at +1.7% yoy, while the HICP one is expected to have ticked down to +1.5% yoy from +1.6%. This may raise speculation that the headline rate of the Eurozone as a whole may also held steady. Although this may not be another set of very weak data, it is unlikely to halt the euro’s tumble, especially if the Ifo indices disappoint as the ZEW ones did.
Later in the day, the US personal income and spending data for January are coming out, alongside the yoy rate of the core PCE index, the Fed’s favorite inflation gauge. Personal income is expected to have accelerated to +0.3% from +0.2%, while no forecast is available for spending. The case for accelerating income is supported by the acceleration in average hourly earnings for the month, while the increase in the retail sales rate may result in a similar move in the spending one.
With regards to the core PCE rate, it is expected to have ticked up to +1.7% yoy from 1.6%. This would be a move in the desired direction and may give another reason for FOMC policymakers to remain sidelined for a while more. That said, a small uptick is unlikely to vanish market expectations with regards to another cut by the Fed. After all, those bets remained well on the table even after the better-than-expected employment and CPI data. Thus, a small rise in the core PCE rate may just encourage participants to push that timing slightly back. According to the Fed funds futures, another quarter-point decrease is now fully priced in for July.
Last, but not least, we have Canada’s GDP data for Q4. The qoq annualized rate is forecast to have fell to +0.2% from +1.3%, but following the recent encouraging data for the month of January, we don’t believe that BoC policymakers will be tempted to push the cut button when they meet next. However, such results may keep the door for a rate decrease open.