- The overarching themes are unlikely to change in the week ahead: global economy concerns (above all China and Eurozone) and how central banks will respond (if they can), US / China trade, US tariffs on autos, Brexit and the broader EU political malaise. The statistical schedule features a deluge of surveys, including PMIs, Ifo, ZEW and national surveys; the US has a slew of housing data and catches up with Durable Goods Orders; the Eurozone has final January CPI and the UK looks to labour data and PSNB; over in Japan there are Orders, Trade and CPI, Australia has Q4 Wages and January Unemployment, while Canada features Retail Sales. In central bank terms, it will be all eyes on the January Fed minutes and a raft of Fed speakers. Politically Brexit will remain front and centre, though it seems unlikely that the current gridlock will be resolved, while the US and China are set to continue trade talks, and potentially as sensitive the US Commerce Dept will publish its report on what security risk Auto Imports might pose. Corporate Earnings will remain plentiful (see daily highlights below), while the govt bond auction schedule should not prove to be particularly burdensome, featuring a mix of shorter dated French OATs along with OATeis, Italian CTZ and BTPei (which has a Fitch ratings review due on Friday), UK 2057 Gilt, while the US sells 2-yr FRN and 30-yr TIPS. The week will get off to a slow start with holidays in USA and Canada.
For markets, the key challenge remains balancing the ostensibly positive aspect of central banks stepping back from, or pushing back on policy tightening narratives, given the obviously negative implications for the global growth outlook, as well as considering a less the encouraging profile to many corporate earnings, while at the same time trying to escape the claws of financial repression, which the array of negative or low yielding govt bonds, and still tight credit risk spreads.
- The US data schedule is none too onerous, even if there will be a degree of wariness following the Retail Sales 'outlier' given that Durable Goods and Housing sector statistics are even more prone to major month to month volatility. Durable Orders are expected to get a boost from aircraft with the headline seen at 1.7% m/m, while core measures are anticipated to post a tepid rebound (0.3% ex-Aircraft, 0.2% Non-defence Capital Goods ex-Aircraft 0.2%) following November's falls. The Philly Fed manufacturing survey is expected to edge down to a still very respectable 14.5, while the flash PMIs are seen almost unchanged vs final January readings, and projections for the NAHB survey (59) and Existing Home Sales (5.00 mln +0.2% m/m) also assume little change, which probably indicates an elevated level of agnosticism about the current direction of travel of the US economy.
UK labour data are projected to see Average Weekly Earnings tick up by 0.1 ppt to a fresh post-GFC highs of 3.4% y/y headline and 3.5% y/y, with Q4 Employment expected to sustain its recent strength with a 165K rise (prior +141K), and the Unemployment Rate seen unchanged at 4.0%. But with the BoE seeing sluggish 2019 GDP, inflation well contained and above all the Brexit related uncertainty, this is unlikely to have any immediate policy impact, and to a large extent amounts to little more than statistical roadkill. Rightmove House Prices and PSNB budget data are also due.
'Flash PMIs for the Eurozone are again seen subdued (Mfg 50.3, Services 51.5), though at a country level it will be interesting to note whether France (Mfg OK, Services weak due to 'Gilets Jaunes') and Germany (Mfg weak, Services solid) continue to diverge, and indeed how this plays out against national surveys (e.g. Ifo) that will also be published. Final Eurozone CPI and detailed Q4 GDP for Germany is also due.
Over in Japan, the week kicks off with key Private Machinery Orders, that are seen down 1.1% mm following a disappointing flat m/m reading in December, with the focus on foreign orders, given an array of anecdotal evidence suggesting Chinese demand 'fell off a cliff' during Q4. Trade date for January will be views through the same lens, with forecasters looking for the export drop to accelerate to -5.7% vs. December's -3.8%, and Imports to drop -3.2% y/y (vs. Dec +1.9%), though the latter will owe much to energy price falls. Friday brings January National CPI, which will likely mirror Tokyo readings with a headline dip to 0.2% from 0.3% y/y, though ‘core core; CPI is projected to edge up to a still very lowly 0.4% from 0.3%.
Elsewhere Canada' Retail Sales are likely to underline that ex-Autos spending remains weak (f'cast -0.5% m/m following November's -0.6%), while Australian Q4 Wages are projected to be steady at 0.6% q/q and a very subdued 2.4% y/y, with South African CPI seen around the SARB's target of 4.5% y/y on both headline and core.
- On the central banking front, it will be a very busy week for Fed and ECB speakers, with a speech by BoC's Poloz and semi-annual testimony from RBA governor Lowe also scheduled. But with January FOMC minutes and a couple of major conferences on Fed policy, it is what Fed speakers opine on the Fed's balance sheet, as much as rates, which will be front and centre. As noted on Friday the key signal change over last week was about the balance sheet reduction (QT) programme with Mester noting that a decision would be reached in the next few meetings. Meanwhile Brainard staked out a call for the balance sheet reduction programme to be concluded by the end of 2019, and highlighting the 'messy' Retail Sales data. The question then becomes: what pace of 'taper' might be applied, and when the process would be got under way. A consensus on this is still being formed, with Dallas Fed's Kaplan opining he did not think that the QT programme was a primary factor behind the Q4 equity market sell-off. But that does not actually preclude him from supporting an end to QT, though he would clearly want a cogent economy related, rather than marketm rationale for such a move. It also implies that it was probably debated quite actively at January meeting, the minutes of which are due Wednesday next week, (recalling that the Dec minutes suggested that the current strategy would need to debated and probably reformulated in H1 2019, thus signalling the end of 'auto-pilot'). In those minutes, there should also be some clues offered as to how this might be interfaced with its rate policy, particularly any hints that that rates could still go up, even if QT is being wound down, which would be less 'dovish'. There is a further issue related to whether it would want to change the composition of its balance sheet, i.e. perhaps using the opportunity to 'unload' the majority of its MBS holdings in favour of a much higher proportion of US Treasuries, which would in turn have significant implications for the pricing of 'spread products'. So these are the other key speeches: next Friday 22nd - Clarida, Williams, NY Fed no. Simon Potter, Quarles, Bullard and Harker all speak at conferences on: a) the Fed's balance sheet and b) quantitative tools for monitoring the economy. The week after, Powell testifies on the economy and monetary policy to House and Senate committees ("Humphrey-Hawkins") on 26 & 27 February. It should be added that a look at the attached chart of the Fed's balance sheet, just how modest in proportionate terms the reduction has been, once again begging the question whether G3 central banks will actually be able to escape the shackles of their post-GFC unconventional monetary policy measures. See also:
In the EM space, there are monetary policy meetings in Colombia, Guatemala, Indonesia, Jamaica, Mauritius and Sri Lanka, which are generally expected to see key rates left on hold.
On the political front in Europe, there is a meeting to assess the current state of Brexit negotiations, as well as the 2019 EU budget and the agenda for the March EU Council summit.
The US returns to the financial market fray, but it is debatable whether there will be much impact from the macro schedule, though corporate earnings from the likes of Danone, HSBC, Noble Energy and above all Walmart will spawn some headlines. The statistical schedule has the downbeat Japan monthly Tankan to digest ahead of UK labour data, the vacuous German ZEW survey (Expectations to remain negative but marginally higher than January mirroring the Dax, Current Situation projected to fall for a fifth consecutive month and down for 13 of past 14 months) and the US NAHB Housing Market Index (seen marginally higher at 59 vs. Jan 58), while tonight brings Japan's Trade Balance. The RBA minutes were unsurprisingly 'dovish', but had been pre-empted by the SOMP and Lowe's recent speech, ahead lies ECB and Fed speak from de Guindos, Costa, Praet and Mester. So with a limited schedule of data and events, it will inevitably be US/China Trade news (with another round of talks due to kick off today in Washington), and Brexit that will continue to be the focal points. Thus the EEF warning overnight about the impact of no deal Brexit on UK manufacturing following hot foot from the Honda plant closure announcement, which is not specifically Brexit related, the run of negative headlines escalates. In respect of the Honda plant closure, it should be noted that Honda will also be closing a plant in Turkey (which is in the EU Customs Union), underlining that this is not Brexit related, given that with the EU/Japan Free Trade agreement signed they will be able to export cars from Japan. The lesson is a very simple one, countries like doing deals with big trade blocs, because it allows wide scale access, and the more of these that they have, the less likely that such countries will be interested in pursuing bilateral agreement with individual countries; this will be the post Brexit reality. It was indeed the lesson that the UK had to learn the hard way post World War II, when it did not join the original 'common market', and found out that the US was far more interested in deepening its trade ties with the new 'common market' than it was in trading with the UK, purely on the basis that the continental bloc was that much larger in terms of population and potential business. In terms of the other overnight news, the February RBA minutes served to underline that the RBA is now very concerned about the Australian housing market downturn, and that a rate cut (not immediate) is increasingly probable, if prices were to follow further (down 8.0% from their highs in 2017).
** U.K. Dec/Jan Labour data
- The consensus for Average Weekly Earnings looks for a modest 0.1 ppt tick higher to fresh post-GFC highs of 3.4% y/y headline and 3.5% y/y ex-Bonus, with Q4 Employment expected to sustain its recent strength with a 165K rise (prior +141K), and the Unemployment Rate seen unchanged at 4.0%. But with the BoE seeing sluggish 2019 GDP, CPI well contained and above all the Brexit related uncertainty, this is unlikely to have any immediate policy impact, and to a large extent amounts to little more than statistical roadkill.