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by Charalambos Pissouros

Weekly Outlook: Feb 25 – Mar 01: UK Parliament Debates, Fed’s Powell Testifies, US GDP in Focus

We have a busy week ahead of us, with Brexit set to take center stage once again. UK PM May will address Parliament on Tuesday and as she confirmed yesterday, no “meaningful vote” will take place. Thus, the spotlight will turn to Parliament’s vote on proposed amendments on Wednesday. In the US, Fed Chair Jerome Powell delivers his semiannual testimony before Congress on Tuesday and Wednesday. On the data front, we get the 1st estimate of the Q4 GDP, which was delayed due to the effects of the partial government shutdown. Canada’s and Eurozone’s CPIs are also coming out.

On Monday, the calendar is almost empty with no top-tier indicators due to be released.

On Tuesday, focus is likely to fall on Jerome Powell’s semiannual testimony to the US Congress. The Fed Chief will testify before the Senate Banking Committee, while he will deliver the same speech on Wednesday before the House Financial Services Committee. At the January FOMC meeting, the Committee switched to a patient stance with regards to future rate increase, also announcing that they are prepared to alter the size and composition of their balance sheet if needed. The minutes of that meeting revealed that all members prefer to announce soon plans to halt the balance-sheet normalization this year, while with regards to interest rates the views were split. Several members suggested that a hike would be necessary only if inflation accelerates higher than their baseline outlook, while several others argued that they see the case of raising rates later this year as appropriate, even if the economy evolves as expected.

US fed fund futures market vs fed rate expectations

So, having all this in mind, we believe that there is little new information we can get from Powell’s testimony. That said, we will look for clues as to which camp the Fed Chief belongs, namely whether he supports any rate increase later this year or not. In our view, he could emphasize again that any future rate moves will depend on the data as well as the global financial conditions, but we doubt that he will close the door to any future hikes. Even Philadelphia Fed President Patrick Harker, who is considered a dove, said recently that one hike in 2019 and another in 2020 are appropriate.

Moving to the Brexit land, UK PM Theresa May will update the Parliament over her progress in seeking changes to the existing Brexit bill. She also promised lawmakers that they will have another chance to vote on legally-binding amendments on Wednesday, if she fails to deliver the desired changes by Tuesday.

Last week, reports noted that the UK government is unlikely to secure any changes from the EU ahead of the parliamentary debate and although according to EU diplomats the two sides are moving towards a “parallel declaration” on the Irish backstop, any official text is unlikely to come ahead of February 28th. This suggests that a “meaningful vote” is unlikely this week, something confirmed by May herself on Sunday, when she said a deal-vote will not take place this week and that she will put it off until as late as March 12th. Thus, the spotlight is likely to fall on Wednesday’s vote on proposed amendments.

With regards to the data, the only worth mentioning are the US building permits and housing starts for December, as well as the Conference Board consumer confidence index for February. Both building permits and housing starts are expected to have slowed somewhat, while the CB index is anticipated to have risen to 125.0 from 120.2, after sliding for four consecutive months.

On Wednesday, as we already noted, investors are likely to keep their gaze locked on the potential votes in the UK Parliament over proposed amendments. With just a month until March 29th, the official divorce date, the approval of amendments which force the government to request a Brexit extension could ease fears of a disorderly withdrawal and thereby, the pound is likely to gain. On the other hand, a repeat of the decisions taken on January 29th is likely to add to fears of a no-deal Brexit and thereby, the British currency could come under selling interest again.

As far as Wednesday’s data are concerned, the main one is likely to be Canada’s CPIs for January. Expectations are for the headline rate to have declined to +1.4% yoy from +2.0% in December, while no forecast is available for the core metric, which rose to +1.7% yoy in December, from +1.5%.  At its latest policy meeting, the BoC left interest rates unchanged and kept the door open for more rate increases, at a time when the core CPI rate was at +1.5% yoy. Thus, even if headline inflation slows down, bearing in mind that Governor Poloz repeated last week that the Bank’s plan is for rates to move up towards neutral over time, an unchanged core CPI rate may allow officials to maintain their forward guidance when they meet next. That said, the Governor also noted that the timing of future rate increases remains “highly uncertain”. Thus, following November’s negative growth rate, we believe that a decent GDP report on Friday is needed before investors place bets that the Bank could hike this year.

Canada CPIs inflation

As for the rest of the releases, during the early Asian morning, New Zealand’s trade balance for January is coming out, but no forecast is currently available. Later in the day, US pending home sales and durable goods orders, both for January are due out. Pending home sales are expected to have slid again, but at a slower pace than in December, while headline durable goods orders are expected to have slowed to +0.2% mom from +1.2%. The core rate, which strips out transportation items, is anticipated to have risen to +0.3% mom from +0.1%.

On Thursday, during the Asian day, we get China’s manufacturing and non-manufacturing PMIs for February. No forecast is currently available for the non-manufacturing index, but the manufacturing one is expected to have stayed within contraction territory for the third month in a row. Specifically, it is expected to have ticked up to 49.6 from 49.5. Another month of shrinking manufacturing activity is likely to add to concerns with regards to an economic slowdown in the world’s second largest economy. From Japan, we have the preliminary industrial production and retail sales, both for January. IP is expected to have declined 2.5% mom after sliding just 0.1% in December, while retail sales are anticipated to have slowed to +1.1% yoy from +1.3%.

During the European morning, we get Switzerland’s and Sweden’s GDP data for Q4. The Swiss economy is expected to have rebounded 0.4% qoq after contracting 0.2% in Q3. That said, with inflation running well below the SNB’s objective of 2%, and with the Bank itself not seeing that target being hit even in Q3 2021, we doubt that a potential rebound in GDP could alter market expectations with regards to the SNB’s policy plans. Moving to Sweden, no forecast is currently available. Following the disappointing inflation prints for January, another soft GDP rate may raise more concerns with regards to the Riksbank’s plans to increase rates again during the second half of the year. However, we believe that it is too early to start examining whether the world’s oldest central bank will alter its hiking plans. Its upcoming gathering is scheduled for April 25th, and up until then, we have the February and March inflation data. Thus, we prefer to wait for these numbers before we start examining whether officials will decide to delay lifting interest rates to zero.

From Germany, we have the preliminary CPIs for February. Both the CPI and HICP rates are forecast to have ticked up to +1.5% yoy and +1.8% yoy, from +1.4% yoy and +1.7% respectively, which could raise speculation that Eurozone’s headline inflation rate, due out on Friday, may rebound slightly as well.

From the US, we get the 1st estimate of the Q4 GDP, which was delayed due to the effects of the partial government shutdown, and the forecast suggests a slowdown to +2.6% qoq SAAR from +3.4% in Q3. That said, the surprisingly weak retail sales for December led to downside revisions in GDP estimates for the last three months of 2018, with the Atlanta Fed GDPNow model suggesting a +1.4% qoq SAAR growth rate. The New York Nowcast points to a higher rate (+2.35%), but still below the market consensus. Thus, we see the risks surrounding the +2.6% forecast as tilted to the downside. Although according to its December forecasts the Fed itself anticipates growth to slow throughout its forecast horizon, it still expects it to average at around 2.3% in 2019. Thus, a slowdown closer to the Atlanta Fed estimate rather than the New York one could raise more concerns with regards to the health of the world’s largest economy and may add to expectations of no Fed hikes this year, even if Powell does not discard the option when he testifies before Congress. It could even prompt some participant to add to their rate-cut bets. According to the Fed funds futures, investors are 80% confident that the Fed will hold off from acting this year, while there is a nearly 14% chance for a rate cut. The probability for a hike stands at a mere 6%. The US goods trade balance for December is also coming out, but no forecast is currently available.

US GDP qoq annualized

On Friday, during the Asian morning, we get Japan’s employment data for January. Expectations are both the unemployment rate and the jobs/applications ratio to have remained unchanged at +2.4% and 1.63 respectively. We get the Tokyo CPIs for February as well. The headline rate is expected to have remained unchanged at +0.4% yoy, while the core one is expected to have ticked down to +1.0% yoy from +1.1%. China’s Caixin manufacturing PMI for February is also due out and is expected to have risen somewhat, but to have stayed below 50 (48.5 from 48.3). The case for a modest rise, but no exit from the contractionary territory, is supported by the forecast of the official manufacturing index, due out on Thursday.

In Europe, we get final manufacturing PMIs for February, but given that they are once again expected to confirm the preliminary estimates, we expect EUR-traders to focus more on Eurozone’s preliminary CPIs for February. The consensus is for the headline CPI rate to have ticked up to +1.5% yoy from +1.4%, something supported by the German CPI forecast, but the core rate is anticipated to have held steady at +1.1% yoy.

Eurozone vs German CPI inflation

At the latest ECB meeting, policymakers reiterated that interest rates are likely to remain unchanged “at least through the summer of 2019”, but at the conference following the decision, ECB President Mario Draghi noted that the risks surrounding the bloc’s economic outlook have “moved to the downside”. What’s more, he said that the markets place the first hike in 2020 and this shows that they understood the Bank's reaction function, something that was mentioned in the minutes of that meeting as well. Although last week’s PMIs were overall better than expected, with the composite index slightly rising after six consecutive slides, they are far from suggesting a rebound in the bloc’s economic activity. Thus, even if the headline CPI rate ticks up, an unchanged core print would still be well below the Bank’s objective of “below, but close to 2%” and may allow market participants to keep on the table their bets with regards to no action by the ECB this year.

We get the February manufacturing PMI from the UK as well and expectations are for the index to have slid again, to 52.0 from 52.8. Given that this index comes out after Parliament’s debate over Brexit, where lawmakers are likely to vote on proposed amendments, we don’t expect it to be a game changer with regards to the pound’s forthcoming direction. We believe that the main driver this week will be the outcome of the voting in Parliament.

In the US, personal income and spending for December, as well as the core PCE rate for the month are due to be released. Expectations are for income to have accelerated somewhat, to +0.3% mom from +0.2%, while spending is expected to have slid 0.2% mom after rising 0.4%. The case for accelerating income is supported by the increase in the average hourly earnings monthly rate for the month while the 1.2% mom slump in retail sales suggests that the risks surrounding the spending forecast may be tilted to the downside, perhaps for a larger-than-expected decline. As far as the core PCE rate is concerned, it is expected to have stayed unchanged at +1.9% yoy, which is supported by the core CPI rate for the month, which also held steady. The final Markit manufacturing PMI for February, as well as the ISM manufacturing index for the month are also coming out. No forecast is currently available for the Markit print, but the ISM index is expected to have slid to 55.9 from 56.6.

Canada’s GDP prints for December and Q4 are coming out as well. The monthly rate is forecast to have remained unchanged at -0.1% mom, something that is likely to drive the qoq annualized rate for Q4 down to +1.3% from +2.0%. As we already noted, we believe that following November’s negative rate, a decent rebound is needed for CAD-traders to start examining whether the next BoC hike can occur this year. But according to the forecasts, even with the Governor reiterating that the Bank’s plans are for more rate increases over time, we doubt that they will get confident on that front.

Canada GDP qoq annualized

Friday was also the initial deadline for China and the US to reach a final deal with regards to trade. However, after last week’s round of talks, which was extended by two days through Sunday, US President Trump tweeted that he would push back the deadline in order to meet soon with his Chinese counterpart Xi Jinping and finalize a deal.

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