This week, attention is likely to turn back to the US-China sequel, with the “Phase One” deal expected to be signed on Wednesday. Given that most of this may have already been priced in, we believe that focus may fall on possible clues over how the two nations plan to move forward. We also get several UK data, including the monthly GDP for November, were soft numbers could reinforce BoE Governor Carney’s remarks that a cut could be delivered if weakness in the economy persists. The US and Swedish inflation numbers, as well as China’s GDP for Q4 are also on this week’s agenda.
On Monday, focus will fall on several UK data. We get the 3-month rolling monthly GDP for November, which is expected to have contracted 0.1% after stagnating previously. Preliminary data on business investment for Q4 are expected to show a 0.5% slide after stagnating in Q3. Industrial and manufacturing production are both expected to have slid 0.1% mom and 0.3% mom in November, after rising 0.1% and 0.2% respectively. This would drive both the yoy rates further into the negative territory. Specifically, they are expected to have slid to -1.4% and -1.7%, from -1.3% and -1.2%. The nation’s trade balance for November is also due to be released, with the trade deficit expected to have narrowed somewhat. Overall, these releases are expected to come on the soft side. Last week, BoE Governor Mark Carney hinted that a rate cut could be delivered if weakness in the economy persists, and thus, a disappointment in the aforementioned data could enhance the case.
On Tuesday, during the Asian morning, we get China’s trade balance for December, but no forecast is currently available.
Later in the day, focus may turn to the US CPIs for December. The headline rate is forecast to have increased to +2.3% yoy from +2.1%, while the core rate is anticipated to have remained unchanged at +2.3% yoy.
At its last meeting for 2019, the FOMC decided to keep interest rates unchanged, reiterating that “the current stance of monetary policy is appropriate to support sustained expansion of economic activity.” With regards to the “dot plot”, it pointed to no action in 2020, one hike in 2021 and another one in 2022. At the press conference, Chair Powell said that “In order to move rates up, I would want to see inflation that’s persistent and that’s significant”.
Overall, market participants remained unconvinced that officials are done cutting rates, and following Friday’s weaker-than-expected jobs data, they are still fully pricing in another cut to be delivered in November. In our view, accelerating inflation is unlikely to vanish cut expectations, let alone spark hike bets. It could just prompt investors to push the cut timing back, perhaps into next year.
On Wednesday, the spotlight is likely to turn back to the US-China trade saga, with top officials from the two nations expected to sign a “Phase one” trade deal. This could keep the broader market sentiment somewhat supported, but judging by how the market reacted on recent headlines surrounding the event, we believe that most of this is already priced in. Therefore, if indeed the first part of the deal is signed, we believe that focus may fall on any signals with regards to how the world’s two largest economies will move forward. US President Trump has recently said that he will travel to Beijing for talks over the second phase of the deal, and anything suggesting that this may be the case could work in favor of risk assets. However, we remain reluctant to call for a long-lasting recovery, as the road towards a final accord may not be “paved with rose petals”.
Now, the big disappointment on Wednesday would be not signing the interim deal, something that is not a totally unlikely scenario in our view. In the past, we saw things falling apart in the last minute. Remember that back in May, it was reported that the two sides were very close to reaching common ground, but the expected deal was scrapped after China deleted from the draft some of its commitments.
As for Wednesday’s indicators, during the European trading, we get Sweden’s CPIs for December. Both the CPI and CPIF rates are expected to have remained unchanged at +1.7% yoy and +1.8% yoy respectively, but as usually, we prefer to pay more attention to the core CPIF rate, which excludes energy. In November, that rate ticked up to +1.8% yoy from +1.7%.
At its December gathering, the Riksbank hiked rates to 0%, noting that since the prior meeting, developments have been broadly in line with its expectations, and that the rate is expected to remain untouched in the coming years. However, they added that if the economic outlook and inflation prospects were to change, monetary policy may need to be adjusted. If indeed inflation rates stay unchanged as expected, this would confirm officials’ view that rates are likely to stay stable for the foreseeable future.
From Germany, we get the annual GDP for 2019, which is expected to have slowed to 0.60% from 1.60% in 2018, while from the Eurozone as a whole, we have the industrial production for November, which is forecast to have rebounded 0.4% mom from -0.5%, driving the yoy rate up to -1.1% from -2.2%. The bloc’s trade balance is also coming out, with the surplus expected to have declined to EUR 17.0bn from 28.0bn.
The UK CPIs for December are also coming out, with both the headline and core rates expected to have remained unchanged at +1.5% yoy and +1.7% yoy respectively, below the BoE’s target of 2%. Combined with soft data on Monday, inflation below the BoE’s objective may prompt policymakers to bring their hands closer to the cut button.
On Thursday, the ECB releases the minutes from its latest policy meeting. Given that there was no major shift in policy, neither in language, at that meeting, we don’t expect the minutes to result in any fireworks. However, it would be interesting to see whether other members share Lagarde’s view that there are signs of stabilizing in growth slowdown.
As for Thursday’s data, Germany’s final CPI for December is coming out and as it is usually the case, it is expected to confirm its preliminary estimate. Later in the day, we get the US retail sales for the month. Headline sales are expected to have accelerated somewhat, to +0.3% mom from +0.2%, while the core rate is forecast to have risen to +0.5% mom from +0.1% in November.
Finally, on Friday, during the Asian morning, we have China’s GDP for Q4, as well as fixed asset investment, industrial production and retail sales, all for December. The yoy GDP rate is expected to have remained unchanged at 6.0%, while fixed asset investment is forecast to have grown 5.2% yoy, the same pace as in November. Both industrial production and retail sales are expected to have slowed to +5.9% yoy and +7.8% yoy, from 6.2% and 8.0% respectively.
During the European day, we get retail sales for December from the UK as well. The mom rate is expected to have rebounded 0.6% after sliding by the same percentage in November. This would drive the yoy rate up to +2.7% from +1.0%. The case for a higher yoy rate is also supported by the BRC retail sales monitor for the month, the yoy rate of which surged to +1.7% from -4.9%.
From the Eurozone, we get the current account for November, where no forecast is available, and the final CPIs for December, which are expected to match their initial estimates.
In the US, building permits are expected to have slid somewhat in December, while housing starts for the same month are anticipated to have increased somewhat. Industrial and manufacturing production rates are expected to have declined to -0.1% mom and -0.2% mom respectively, after both growing 1.1%. The JOLTs job openings for November are seen slightly lower than October, while the preliminary UoM consumer sentiment index for January is forecast to have held steady at 99.3.
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