The week ahead, w/c 28 January

Chris Scicluna
Emily Nicol
Mantas Vanagas

Overview:
While it failed to get an extra boost from news that President Trump had agreed to end the shutdown and support a deal to fund the government through 15 February, the S&P500 nevertheless closed on Friday up for a third consecutive day and by a decent 0.85%. UST yields were also higher, with 10Y yields rising above 2.75% while the dollar weakened. On a relatively quiet day for macroeconomic news from the region, there was no particular positive follow through in Asia, however, with most major bourses ending today little changed (China’s CSI300 and Korea’s KOSPI closed down just 0.02%) or in the red (the TOPIX closed down 0.68%). In forex markets, the yen strengthened to ¥109.4/$, but sterling is now easing back slightly having risen above $1.32 for the first time since October on increased expectations that the Brexit article 50 deadline will be extended. And while JGBs were perhaps inevitably little changed, this morning European government bonds are a touch weaker despite a weaker tone to equity futures markets.

Global market sentiment this week could pivot on Fed Chair Powell’s post-FOMC press conference on Wednesday. And a busy week of data includes US and Japanese labour market reports (Friday), which should be satisfactory, but flash euro area inflation (also Friday) and GDP (Thursday) figures seem likely to be soft. Despite the temporary end to the shutdown, the US GDP figures (scheduled for Wednesday) might not yet see the light of day. Beyond the economic data, meanwhile, tomorrow’s votes in the UK House of Commons could see MPs make further strides towards taking control of the Brexit process away from PM Theresa May.

Japan:
A quiet start to the week in Japan brought just the BoJ’s services PPI figures for December. Overall, this showed prices declining for the first month in seven and by 0.1%M/M, to leave annual inflation on this measure down 0.1ppt to 1.1%Y/Y. Within the detail, the largest downward pressure emanated from prices in the advertising sector, which are often particularly volatile and were down 2.2%M/M to leave them up just 0.1%Y/Y in December, after rising 2.7%Y/Y in November. Meanwhile, inflation in the transportation sector and price rising of other services were also softer in December, with the latter driven by lower prices for temporary employment services, hotels and civil engineering.

Looking ahead to the rest of the week, Wednesday brings the first of the top-tier data releases with December’s retail sales figures to be accompanied by January’s consumer confidence survey. The most noteworthy release on Thursday will be the December industrial production report, with expectations for solid growth that month. That day will also bring housing starts and construction orders figures for the same month, as well as the Summary of Opinions from the BoJ’s latest Policy Board meeting. Focus on Friday will turn to the labour market, with the unemployment rate and job-to-applicant ratio expected to signal ongoing tightness. In the bond market, the MoF will auction 40-year JGBs tomorrow and 2-year JGBs on Thursday.

Euro area:
It should be a busy week for new economic data releases in the euro area bringing the first estimates of Q4 GDP. The figures for the euro area are due on Thursday, with the headline growth rate expected to be unchanged from the previous quarter, at 0.2%Q/Q. We will get an early preview of these data on Wednesday, when France and certain other member states announce their figures. With the Gilets Jaunes protests having rattled business and consumer sentiment at the end of the year, we expect French growth to have eased by 0.1ppt to 0.2%Q/Q. And the equivalent Spanish and Italian data, due on the following day, are also unlikely to bring any good news. We expect that in the former the rate of economic expansion eased slightly to 0.5%Q/Q, which would be the lowest reading in four and a half years, while in the latter a second consecutive reading of -0.1%Q/Q is possible, which would trigger headlines that Italy dipped into a recession in the second half of last year and would raise further questions about the feasibility of the populist government’s fiscal targets.

Besides GDP, we will also receive preliminary euro area inflation data for January (Friday). With energy CPI set to have remained on a downward trend, the headline rate will probably take another hit – we expect to see a 0.3ppt drop to 1.3%Y/Y, a rate last seen in April before energy inflation took off. Nevertheless, core inflation is likely to remain unchanged at 1.0%Y/Y, which is bang in line with its average in recent years. With the exception of the euro area unemployment figures, which are due on Thursday, other most notable data releases will be economic sentiment surveys. The European Commission survey is out on Tuesday – echoing the preliminary PMIs, this will probably be consistent with a further weakening in economic momentum. And at the end of the week, the final manufacturing PMIs will be watched too. Today will bring bank lending data for December. In the bond market, Italy will issue new government bonds on today and tomorrow, while auctions of 2Y and 10Y Bunds are scheduled for tomorrow and Wednesday respectively. 

UK:
All eyes in the UK this week will be on tomorrow’s scheduled Brexit debate in the House of Commons. While the motion to be submitted today by the Government is likely to be bland and neutral, attention will be focused on votes on various amendments proposed by MPs, including one (tabled by Labour’s Yvette Cooper and the Conservative Nick Boles, with cross-party support) that would demand that the Government requests the EU27 for an extension to the article 50 deadline if Parliament has not voted in favour of a negotiated deal by the end of the month, and another (from the senior Tory backbencher Sir Graham Brady) that seeks to endorse Theresa May’s deal conditional upon a firm deadline being applied to the Irish backstop in the Withdrawal Agreement – something that the EU still seems unlikely to countenance.

On the data front, of most interest will be several economic sentiment indicators. The GfK consumer confidence survey, due on Thursday, will probably confirm that, at the start of the year, consumers remained downbeat about UK economic prospects. The Lloyds Business Barometer, due the same day, is followed on Friday by the January manufacturing PMI survey. The headline manufacturing PMI increased slightly in December, to 54.2, as inventory accumulation helped to lift momentum, but a decline is expected this month. In addition, the BoE’s latest lending figures are out on Wednesday.

US:
In the US, the main event this week will be the conclusion of the FOMC’s latest two-day meeting on Wednesday, accompanied by Chair Powell’s post-meeting press conference. While no change to policy is expected, Powell will likely adopt a more dovish tone than in December recognising heightened economic uncertainties around the turn of the year, not least given the disruption from the government shutdown. There will be plenty of economic reports due this week too, with Friday’s release of January’s labour market report and the manufacturing ISM arguably the most noteworthy. While January’s non-farm payrolls will not be directly affected by the government shutdown, expectations are for a moderate increase this month, rising at roughly half the 312k rate in December. The unemployment rate, however, is expected to remain unchanged although methodological changes could cloud the picture. Friday will also bring the monthly vehicle sales figures for January. Other releases definitely due this week include the Chicago Fed manufacturing activity index (today), the Conference Board’s consumer confidence survey and S&P Case Shiller home price indices (tomorrow) and the ADP employment report (Wednesday) and the Employment Cost Index for Q4 (Thursday).

Of course, with the federal government reopening this week, at some point we could well receive a deluge of data postponed during the shutdown. But the first estimate of Q4 GDP, which was due for release on Wednesday, might well still be delayed as the statisticians might not yet have sufficient information. In the event it is released, we expect growth to have slowed to around 2½%Q/Q annualised, from an average pace of 3.2%Q/Q ann, in the first three quarters of the year. In the bond market, the Treasury will auction 2Y and 5Y notes today, followed tomorrow by 7Y notes and 2Y floating-rate notes.

China:
Ahead of the Lunar New Year celebrations, focus this week in China will be on January PMIs, with the government’s official manufacturing and non-manufacturing surveys due on Thursday and the Caixin manufacturing PMI of private sector firms to be published on Friday, all of which are likely to point to economic growth at a similar pace to the end of last year. The week got underway today on a soft note with December’s industrial profits figures, which showed a second successive negative reading, down 1.9%Y/Y, the weakest rate since end-2015.

Australia:
After a quiet start to the week in Australia with markets shut for the Australia Day holiday, the data focus this week will be Wednesday’s Q4 CPI report. Despite the relatively solid performance of the economy, Bloomberg’s survey suggests that the market expects headline inflation to drop a further 0.2ppt to 1.7%Y/Y, which would be a two-year low. Meanwhile, the average of the RBA’s favoured core measures – the trimmed mean and weighted median – are expected to remain steady at 1.7%Y/Y and 1.8%Y/Y respectively, i.e. still below the bottom of the RBA’s 2-3% target range for annual inflation.

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