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by Charalambos Pissouros

Weekly Outlook: Feb 04 – Feb 08: RBA and BoE Decide on Monetary Policy

Following the FOMC policy last week, the central bank torch is now passed to the RBA and the BoE. The RBA decides on Tuesday, and while we don’t expect any policy action, we see the case for a dovish shift in the accompanying statement. Investors are also likely to pay attention to the Bank’s quarterly Statement on Monetary Policy, due out on Friday. On Thursday, it’s the BoE’s turn. We don’t expect any major policy change from this Bank either. Thus, the attention is likely to fall on the accompanying statement, the meeting minutes, the quarterly Inflation Report, and the press conference held by Governor Marc Carney.

Monday appears to be a relatively light day in terms of events and economic releases. The only data point worth mentioning is the UK construction PMI for January, which is expected to have declined slightly to 52.6 from 52.8. On Friday, the manufacturing index fell by more than anticipated, to 52.8 from 54.2, which probably tilts the risks surrounding the construction forecast to the downside, perhaps for a larger than anticipated decline. Under normal circumstances, investors tend to focus more on the service-sector PMI, which is released on Tuesday, but given that UK economic data has been overshadowed by developments in the political landscape, once again, we doubt that these PMIs will prove to be game changers with regards to the pound’s forthcoming direction. With the clock ticking towards March 29th, the official date the UK departs from the EU, and no concrete plans by UK officials on how to move forward, the British currency is likely to stay anchored to headlines surrounding the Brexit saga.

In China, markets will be closed for the whole week in celebration of the Chinese New Year and Spring Festival, and thus, we don’t get any economic releases from this nation.

On Tuesday, during the Asian morning, it’s the turn of the RBA to decide on interest rates for the first time this year. The Bank has been stubbornly keeping interest rates at +1.50% since August 2016, and according to its latest Statement on Monetary Policy, the cash rate is expected to increase in 2020.

RBA Reserve Bank of Australia interest rates

Since the previous meeting, when the Bank proceeded with some more optimistic tweaks, data showed that GDP slowed by much more than anticipated in Q3, to 2.8% yoy from 3.4%, which may have raised concerns on whether growth could average around 3.5% in 2018 and 2019 as the Bank’s central scenario suggests. On top of that, although inflation data for Q4 came in somewhat better than expected last week, both the headline and trimmed mean CPI rates are still below the lower end of the RBA’s 2-3% inflation target range, with the headline rate still short of the Bank’s projection for the second half of 2018, which is also at 2%. Combined with the decision of the National Australia Bank to increase mortgage rates, soft inflation and slowing growth could delay further the RBA from hiking. So, having all these in mind, we believe that the meeting statement may have a dovish taste compared to the previous one, while in the new quarterly Statement on Monetary Policy, due out on Friday, the Bank may proceed with downside revisions, at least in the GDP growth forecasts.

Australia’s retail sales for December and Q4, as well as the nation’s trade balance for December are also coming out. Retail sales are expected to have slowed somewhat on a monthly basis, to +0.3% mom from +0.4%, but this would still drive the qoq rate up as the monthly print of September that will drop out of the quarterly calculation was +0.1% mom. With regards to the trade data, the nation’s surplus is expected to have widened to AUD 2.3bn from AUD 1.93bn.

Later, during the European day, we have the final services and composite PMIs for January from several European nations and the Eurozone as a whole, as well as the bloc’s retail sales for December. As it is usually the case, the final PMIs are expected to confirm their preliminary estimates, which showed that the bloc’s composite PMI slid from 51.1 to 50.7, its lowest since July 2013. With regards to retail sales, expectations are for a 1.5% fall after a 0.6% increase in November, something that would drive the yoy rate down to +0.5% from +1.1%.

The UK service-sector index for January is also coming out, but although this is the most important among the three UK PMIs, we don’t expect it to prove a game changer with regards to the pound’s forthcoming direction. As we already noted, Brexit developments have been overshadowing UK economic data lately and thus, the British currency is likely to stay linked to headlines surrounding the political scene.

We get PMIs from the US as well. The final Markit service-sector and composite indices for January are scheduled to be released, as well as the ISM non-manufacturing index for the month. The final Markit prints are expected to confirm their preliminary numbers, while the ISM index is forecast to have slid to 57.5 from 58.0. Canada’s trade balance for December is also due out.

On Wednesday, we are likely to get US releases that were delayed due to the US government shutdown.

Kicking off with the 1st estimate of Q4 GDP, expectations are for a slowdown to +2.6% qoq SAAR from +3.4% in Q3. The Atlanta Fed GDPNow model suggests that the economy slowed to +2.5%, while the New York Fed Nowcast points to a +2.6% growth rate, both supporting the case for a slowdown in the official 1st estimate.

Passing the ball to durable goods orders for December, expectations are for headline orders to have risen 0.8% mom, the same pace as in November, while core orders are anticipated to have rebounded 0.2% mom after sliding 0.3%. That said, such prints would drive both the yoy rates lower as the monthly rates of December 2017 that will drop out of the yearly calculation were +2.6% and +0.7% respectively. The case for declining yoy rates is also supported by the New Orders sub-index of the ISM manufacturing PMI for the month, which tumbled to 51.1 from 62.1.

Retail sales for the month are also due to be released. The headline rate is anticipated to have ticked down to +0.1% mom from +0.2%, while the core rate is expected to drop to 0.0% from +0.2%.

Last week, Fed officials decided to keep interest rates unchanged, removing from the statement the part suggesting that “some further gradual increases” are warranted. Instead, they noted that they will be patient in determining what future adjustments to interest rates may be appropriate. At the time of writing, according to the Fed funds futures, investors are almost certain that the Committee will not push the hiking button this year, and they even see a nearly 10% chance of a rate cut by December. Thus, further weakness and negative surprises in US data could prompt them to increase their cut bets.

In Canada, the Ivey PMI for January is coming out and the forecast suggests that the index rose to 60.2 from 59.7.

On Thursday, the central bank torch will be passed to the Bank of England. Actually, it will be a “Super Thursday” for the Bank, as besides the rate decision and the meeting minutes, we will also get the quarterly Inflation Report, as well as a press conference by Governor Mark Carney.

Since the last time BoE officials met, UK data have been mixed. Although headline inflation slowed, the core rate ticked up. Both headline and core retail sales tumbled in December, but the unemployment rate declined, while average weekly earnings accelerated somewhat. That said, market participants kept their gaze locked on the Brexit sequel, with the latest episode being Parliament’s debate over May’s alternative Brexit plan, and the voting on amendments proposed by lawmakers. Although since the turn of the year investors had become confident that a no-deal Brexit could be avoided, the rejection of a proposal including a nine-month extension to Article 50 and the adamant stance of the EU to not renegotiate may have revived some fears on that front.  Therefore, we don’t expect the BoE to proceed with any major changes at this meeting.

forward curve of UK overnight index swaps market expectations

We believe that policymakers will repeat that an ongoing tightening would be appropriate at a gradual pace and to a limited extent, but also reiterate their concerns over Brexit. We also expect them to maintain the view that whatever form Brexit takes, interest rates could move in either direction, which means that the Bank could raise rates even in the case of a disorderly exit. As we noted in the past, we agree with that view. Yes, a no-deal Brexit could hurt economic growth, but a potential slide in the pound could lift inflation up again. The Bank would have to assess the tradeoff and judge whether bringing inflation back to target is a priority compared to supporting economic activity, in which case it could increase rates. If the opposite is true, it may decide to cut. According to the latest data of the UK forward OIS (overnight index swaps) curve, market participants see only a 30% chance for a rate increase by December, while such a move is fully priced in for the summer of 2021.

As for Thursday’s data, during the early Asian morning, we have New Zealand’s employment data for Q4. Expectations are for the unemployment rate to have rebounded to 4.1% from 3.9%, which was lowest since Q2 2008, while the employment change is anticipated to have slowed to +0.3% qoq from +1.1%. Although the somewhat better than expected inflation data for Q4 may have encouraged some participants to reduce their bets with regards to a rate cut by the RBNZ, the slowdown in Q3 GDP and a potential rebound in the unemployment rate may allow Governor Orr to keep that option well on the table.

New Zealand unemployment rate

Later in the day, Germany’s industrial production is anticipated to have risen +0.8% mom in December, after tumbling 1.9% the month before. The nation’s trade balance for the same month is also due to be released, but no forecast is currently available.

Finally, on Friday, during the European morning, Norway’s GDP data for Q4 is coming out. Expectations are for the Norwegian economy to have grown at the same pace as in Q3 (+0.6% qoq), while mainland growth is anticipated to have accelerated to +0.7% qoq from +0.3%, something that may keep the Norges Bank on course for pushing the hiking button again in March.

Later, we get Canada’s employment report for January. The forecasts suggest that the unemployment rate ticked up to 5.7% from 5.6%, while the net change in employment is forecast to have slowed further, to 6.0k from 9.3k. When they last met, BoC policymakers kept the door open for further rate increases and noted that growth has been running close to its potential rate. However, last week, data showed that economic activity contracted in November, dragging the yoy rate down to +1.7% from +2.2%. Thus, coming on top of that data set, a weak employment report may raise doubts as to whether the BoC could indeed maintain its upbeat view with regards to future rate increases.

Canada unemployment rate


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