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by Charalambos Pissouros

Weekly Outlook: Feb 17 – Feb 21: EZ PMIs in Spotlight; UK, Canada CPIs and AU Jobs Data Also in Focus

Although we don’t have any central bank meetings this week, the agenda appears very busy, with investors probably locking their gaze on Eurozone’s preliminary PMIs, as they may be eager to find out whether and to which extent the coronavirus has affected the Euro area economy. We also get the UK and Canadian CPIs, as well as the Australian employment data, which may well shape expectations on how the respective central banks may decide to move forward.

Monday is likely to be a relatively light day, with no major economic indicators on the European and US agendas. After all, markets in the US and Canada will be closed in celebration of Washington’s Birthday and the Family Day respectively.

The only important data set was already released during the Asian morning and this is Japan’s GDP for Q4. The qoq rate slumped to -1.6% from +0.1%, dragging the yoy one down to -6.3% from +0.5%, marking the biggest fall since 2014. With the uncertainty over the impact of the coronavirus outbreak casting shadows over the nation’s economic performance in Q1, it seems that Japan looks to be headed towards a recession.

Talking about the coronavirus, the number of cases accelerated somewhat on Monday, but this was after two days marked by a slowdown. The number of deaths has also started to slow, as Chinese authorities tightened further restrictions in Hubei with most vehicles banned from the streets, while firms were told to stay closed. On top of that, China’s central bank cut interest rates on its medium-term lending today, a move targeted to ease further the drag to businesses from the virus. Most Asian indices traded in the green following China’s efforts to contain the fast spreading virus, but Japan’s Nikkei was one of the exceptions, falling 0.69% after the slump in Japan’s GDP for the last quarter of 2019.

Virus % change in cases and deaths day to day

On Tuesday, Asian time, we get the minutes from the latest RBA policy meeting, where the Bank decided to keep interest rates unchanged at 0.75% as was widely expected. That said, the statement accompanying the decision was less dovish than anticipated, with officials noting that the bushfires and the coronavirus outbreak will weigh on domestic growth only temporarily. With regards to interest rates, they repeated that the long and variable lags in the transmission of monetary policy allowed them to keep rates steady at this meeting, although they remain prepared to ease further if needed. Having all this in mind, we will scan the minutes to see how comfortable officials are on the sidelines, but what may be more determinant on how the Bank may proceed moving ahead may be the wage price index and the employment report, due out on Wednesday and Thursday respectively.

During the European morning, the UK employment report for December is due to be released. The unemployment rate is forecast to have held steady at its 45-year low of 3.8%, while average weekly earnings including bonuses are expected to have slowed to +3.0% yoy from +3.2%. The excluding bonuses rate is anticipated to have ticked down to +3.3% yoy from 3.4%. According to the IHS Markit/KPMG & REC Report on Jobs for the month, starting salaries for both permanent and temporary staff accelerated somewhat from November’s lows, which suggests that the risks surrounding earnings may be tilted somewhat to the upside.

UK real wage growth

Accelerating wages may be a welcome development for BoE policymakers and may alleviate some pressure for cutting rates, but as we noted in the past, our view is that they may place more emphasis on data pointing how the economy has been performing in the post-election era before deciding how to move forward. After all, they clearly pointed out at the latest meeting that they will wait for data to confirm the positive signals from recent indicators, with inflation taking the 1st place on the list. Thus, we expect Wednesday’s CPIs and Thursday’s retail sales for January to attract much more attention.

From Germany, we have the ZEW survey for February. The current conditions index is expected to have slid slightly further into the negative territory, to -10.0 from -9.5. This would mark the 7th straight month with a negative sign. The economic sentiment index is also expected to have declined to 22.0 from 26.7. This data may reveal how the coronavirus has affected sentiment in Eurozone’s economic powerhouse and may be an early omen with regards to which direction Friday’s PMIs may come in. 

On Wednesday, during the Asian morning, Japan’s trade balance for January and Australia’s wage price index for Q4 are due to be released. Expectations are for Japan’s trade deficit to have widened remarkably, to JPY 1695bn from JPY 154.6bn. This would mark the largest deficit since January 2014. With regards to Australia’s wage price index, it is expected to have held steady at +2.2% yoy. However, with headline inflation ticking up to +1.8% yoy during the quarter from +1.7% in Q3, this means that real wages may have slowed and thus, a steady wage rate may not a so pleasant development for RBA policymakers.

Australia real wage growth

Early in the EU session, Sweden releases its inflation data for January. Both the CPI and CPIF rates are expected to have ticked down to +1.7% and +1.6% yoy from +1.8% and 1.7% respectively. That said, we repeat for the umpteenth time that we will pay more attention to the core CPIF rate, which excludes the volatile items of energy. In December, that rate ticked down to +1.7% yoy from +1.8%.

Sweden inflation data CPIs

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, a modest slowdown in the headline rates is unlikely to tempt officials altering their forward guidance which suggests that the repo rate is expected to remain at 0% during almost the entire forecast period. That said, a notable slide in the core CPIF rate may raise concerns that the weakness in inflation may not be due to falling energy prices. This could raise speculation that officials may start rethinking their current policy stance, and thereby push the Swedish Krona lower.

An hour later, all eyes may be on the UK CPIs for January. The headline rate is expected to have risen to +1.6% yoy from +1.3%, while the core rate is forecast to have ticked up to +1.5% yoy from +1.4%. Having said that though, bearing in mind that the yoy change in Brent oil turned negative in January, if core inflation is set to accelerate, the headline rate may rise by less than anticipated. In any case, a move in the desired direction may allow BoE policymakers to hold their fingers away from the cut button for a while more, especially after the resignation of Sajid Javid as Finance Minister, which sparked hopes of more fiscal support. According to the CME MPC Sonia futures, a 25bps decrease is nearly fully priced in for the November gathering.

UK CPIs inflation

We get more January CPIs later in the day, this time from Canada. The headline CPI is expected to have risen to +2.4% yoy from +2.2%, while the core one is anticipated to have ticked up to +1.8% yoy from +1.7%. Using again the logic that energy prices are somewhat correlated with the spread between the headline and core rates, the fact that the yoy change in WTI turned negative in January may not allow headline inflation to accelerate that much.

Canada CPIs inflation

At its previous gathering, the BoC removed from the statement the part saying that it is appropriate to maintain the current level of interest rates, and instead noted that “In determining the future path for the Bank's policy interest rate, Governing Council will be watching closely to see if the recent slowdown in growth is more persistent than forecast”. This means officials have opened the door to a rate cut, with Governor Poloz confirming that at the press conference following the decision. Even if headline inflation does not accelerate as expected, as long as it stays above 2%, it may allow BoC officials to stay away from the cut button, especially following January’s better-than-expected employment report.

In the US, we have the minutes from the latest FOMC gathering. The message we got from that meeting was that policymakers are not comfortable with inflation persistently under their 2% target, and with the core PCE rate staying below that objective since December 2018, they may start thinking about rate cuts again if this continues for more. At the press conference Fed Chair Powell said that policy is not in a preset course, and also acknowledged the risks the coronavirus poses to the US economy, something he also did when he testified before Congress last week. Although Powell insisted while testifying that rates are appropriate at current levels for now, we will scan the minutes to see whether and how many of his colleagues are on the same page, and how many have already started thinking about lower rates again. According to the Fed funds futures, investors are still pricing in another cut to be delivered in September, despite the December “dot plot” pointing to no action this year, and despite the better-than-expected employment and CPI data for January.

Fed funds futures market vs FOMC interest rate expectations

As for the US data, we get the PPIs, building permits and housing starts, all for January.

On Thursday, Asian time, Australia releases its employment data for January. The unemployment rate is expected to have rebounded back to 5.2% from 5.1%, while the net change in employment is expected to reveal a slowdown in added jobs, to 10k from 28.9k in December. Combined with declining real wage growth, an unemployment rate still well above the 4.5% threshold, which the RBA believes will start generating inflationary pressures, may prompt market participants to bring forth the timing of when they anticipate another rate decrease by the Bank, despite officials signaling at their last meeting that they are comfortable on the sidelines. According to the ASX 30-day interbank cash rate futures implied yield curve, market participants are almost pricing in another quarter-point decrease to be delivered in September.

ASX 30-day interbank cash rate futures yield curve

Later in the day, we get the UK retail sales for January. Headline sales are expected to have increased +0.5% mom after sliding 0.6% in December. That said, this will drive the yoy down to +0.7% from +0.9%. The core rate is also forecast to have rebounded. Specifically, it is expected to have increased to +0.8% mom from -0.8%, but the yoy core rate anticipated to have slid to +0.4% yoy from +0.7%.  The case for lower yoy rates is also supported by the BRC retail sales monitor, the yoy rate of which declined to 0.0% from +1.7%. That said, at this point, we need to note that the BRC monitor is far from a reliable gauge of the official retail sales prints. Taking data from January 2011, the correlation between the BRC and the official headline yoy rate is 0.26. Its correlation with the core one is also low at 0.29. In any case, despite the potential slide in the yoy rates, a rebound in monthly terms could allow investors to push further back the timing of when they expect a rate cut by the BoE.

U retail sales

The minutes of the latest ECB meeting are also coming out. At that meeting, the Bank kept its rates and guidance unchanged. Thus, all the attention fell to the Bank’s strategic review, with President Lagarde noting that that the aim will be reviewed, as well as the Bank’s toolkit and how inflation is measured. “How we measure inflation is clearly something we need to look at,” she noted. This will be key for market participants trying to figure out how the Bank will act moving forward, as it may also result in a change in the target. For example, officials could signal commitment to the 2% rate, as most of the other major central banks, but this would mean more stimulus for hitting that goal, as any undershooting may not be dealt with the same tolerance as in the past. We will dig into the minutes for further clues on that front, but given that the review is expected to be completed in November, we don’t expect market participants to start betting on further easing as early as in the next couple of months, only due to potentially dovish minutes, despite Lagarde adding that the Bank would stick to its current policy for now, which means that policy moves could still occur before a new strategy is adopted. We believe that investors will pay more attention to Friday’s PMIs, as they are eager to find out whether and how much did the coronavirus impact the Euro area economic outlook.

ECB interest rates

Finally, on Friday, Japan releases its National CPIs for January. The headline rate is forecast to have ticked down to +0.7% yoy from +0.8%, while the core one is anticipated to have ticked up to +0.8% yoy from 0.7%. Bearing in mind that both the headline and core Tokyo CPIs for the month slid to +0.6% yoy and +0.7% yoy from +0.9 and +0.8% respectively, we view the risks surrounding the National forecasts as tilted to the downside.

Japan core CPIs infaltion

At its previous meeting, the BoJ kept its ultra-loose policy as well as its guidance unchanged, reiterating that it “expects short- and long-term interest rates to remain at their present or lower levels as long as it is necessary to pay close attention to the possibility that the momentum toward achieving the price stability target will be lost”. A slowdown in inflation combined with today’s disappointing GDP prints may encourage investors to add to bets with regards to additional easing.

However, similarly with the ECB, we believe that with little room for to do so, officials may prefer to wait for the picture to worsen significantly before they eventually decide to act. As for the yen, we don’t expect a major reaction due to the CPIs. Given its safe-haven status, we expect it to stay hostage to developments surrounding the broader market sentiment and especially to headlines surrounding the fast-spreading coronavirus.

During the European morning, the spotlight is likely to turn to the preliminary PMIs from several Eurozone nations and the bloc as a whole. As we already noted, we may get a first taste on how the virus may have affected the bloc from the German ZEW survey on Tuesday, but investors may rely more on what the PMIs will show for the whole Euro area.The manufacturing PMI is forecast to have stayed in contractionary territory for the 13th month in a row, sliding to 47.5 from 47.9. The services index is also forecast to have slid but to still signal expansion. Specifically, it is expected to have decline to 52.2 from 52.5. All this will drive the composite index down to 51.0 from 51.3.

Eurozone PMIs vs GDP

At the press conference following the latest ECB decision, President Lagarde repeated that the risks to the economic outlook are still tilted to the downside but less pronounced, as surveys and data still point to some stabilization. A modest slide in the PMIs is unlikely to make her change that view, but a larger-than-expected decline may raise concerns over the impact of the virus on the bloc’s economy. This could add further pressure to the already wounded euro, as some investors may start betting on more rate cuts by the ECB.

That said, our own view is that given the Bank’s limited scope for further easing, officials may not rush into doing so, even if the PMIs disappoint. After all, an extension of the euro’s latest tumble may eventually prove somewhat supportive for the bloc’s economy as it may be a helping hand for 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.

We also get Eurozone’s final CPIs for January, but as it is always the case, they are expected to confirm their initial estimates, namely that the headline CPI rate ticked up to +1.4% yoy from 1.3% and that the core one slid to 1.1% from 1.3%.

We get preliminary PMIs for February from the UK as well, but no forecasts are currently available.

Later in the day, we get even more PMIs, this time from the US. The preliminary Markit manufacturing index is forecast to have declined to 51.5 from 51.9, while the services one is anticipated to have held steady at 53.4. There is no forecast for the composite index. In any case, market participants tend to pay more attention to the ISM PMIs, which are scheduled to be released on March 2nd and 4th.

From Canada we get retail sales for December, with the headline rate anticipated to have fallen to +0.2% mom from +0.9%, and the core one to have risen to +0.4% mom from +0.2%. Despite a potential slowdown in headline sales, a rising core rate, conditional upon accelerating inflation on Wednesday, may distance further BoC policymakers from the easing button.

Disclaimer:

The content we produce does not constitute investment advice or investment recommendation (should not be considered as such) and does not in any way constitute an invitation to acquire any financial instrument or product. The Group of Companies of JFD, its affiliates, agents, directors, officers or employees are not liable for any damages that may be caused by individual comments or statements by JFD analysts and assumes no liability with respect to the completeness and correctness of the content presented. The investor is solely responsible for the risk of his investment decisions. Accordingly, you should seek, if you consider appropriate, relevant independent professional advice on the investment considered. The analyses and comments presented do not include any consideration of your personal investment objectives, financial circumstances or needs. The content has not been prepared in accordance with the legal requirements for financial analyses and must therefore be viewed by the reader as marketing information. JFD prohibits the duplication or publication without explicit approval.

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