UK GDP in the spotlight

Emily Nicol
Chris Scicluna

Overview:
In the wake of Friday’s relatively soft US labour market report (please see the assessment from Daiwa America’s Mike Moran), the S&P500 ended last week in reverse, closing down 0.3% on the day. But while it was a relatively quiet start to the week for economic news, and Japan’s markets were closed for a national holiday, the mood in Asia was largely positive again, e.g. China’s CSI300 and Korea’s KOSPI indices both closed up about 1.0%. Sentiment was supported by Korea’s trade data for the first ten days of January, which – although admittedly not necessarily the most reliable guide given timing issues and innate volatility – added to evidence of a turn for the better in the tech cycle, with semiconductor shipments up 12%Y/Y, the first positive reading in fifteen months, and total exports up a little more than 5%Y/Y. That optimism supported further appreciation of the CNY, which moved below 6.9/$ for the first time since the start of August, while it also gave a boost to the Aussie dollar.

With Japan closed, bond markets were unsurprisingly quiet in Asian time while ACGBs followed Friday’s gains in USTs. But given the better tone in Asian markets, USTs and euro area govvies subsequently opened lower this morning. In contrast, however, Gilts opened higher and sterling depreciated to about $1.30 after the FT reported yesterday that BoE MPC member Vlieghe had followed similar comments last week by Governor Carney and fellow MPC member Tenreyro in stating his readiness to vote for a rate cut if the UK economic data don’t improve soon.

As such, today’s UK GDP figures for November, which are expected to show the economy flatlining, will be closely watched. GDP figures from Germany (for 2019 as a whole, on Wednesday, which will confirm the weakest year since 2013), and China (for Q4, on Friday, which should point to stabilisation towards year-end) are also due this week. Other data highlights this week include US CPI (Wednesday) and retail sales (Thursday), Japanese machine orders and the BoJ regional report (Wednesday) and the account of the ECB’s December policy meeting (also Wednesday). Wednesday, of course, will also bring the signing ceremony for the US-China first-phase trade deal.

UK:
After last week’s dovish talk from two MPC members – BoE Governor Carney and external member Tenreyro, neither of whom have been among the pair to vote for a cut over the past couple of months – the weekend saw external member Vlieghe suggest that surveys due at the end of the month would be central to his near-term policy judgement too. Indeed, he suggested that he would “need to see an imminent and significant improvement in the data to justify waiting a little bit longer” before voting for a cut. In this respect, this morning’s monthly GDP figure for November should be closely watched. After a disappointing start to the fourth quarter, with zero GDP growth in October following consecutive contractions in the prior two months, expectations are for a fourth month without growth in November. This would leave GDP down 0.1%3M/3M, the first negative reading on a three-month basis since June.

The continued weakness in the November data could in part reflect special factors, such as the timing of the Black Friday discounting period, which will not be captured in today’s data. But manufacturing production is also expected to have reversed the modest growth reported in October, while an anticipated slight increase in construction activity will only partly offset the weakness recorded the start of Q4. The latest trade data, however, should report a big drop in the deficit as imports fall back after the extreme surge over the two months ahead of the previous Article 50 deadline of end-October.

December’s retail sales figures (due Friday) will at least receive a boost from the inclusion of the aforementioned Black Friday period. However, these data are likely to remain subdued, adding to evidence that consumption growth moderated over the fourth quarter as a whole. Also of note will be December’s inflation data (Wednesday) – both the headline and core CPI rates are expected to be unchanged at 1.5%Y/Y and 1.7%Y/Y respectively, but we see the risks to the former rate to be skewed to the upside. Other releases include the BoE’s latest credit conditions survey and RICS house price indices (both due Thursday).

Euro area:
Perhaps the most notable new euro area economic release of the week will be the ECB account from its 12 December Governing Council meeting, the first to be chaired by President Lagarde. Of course, on that occasion, policy was left unchanged with the ECB’s interest rates, monthly asset purchases and forward guidance all unamended. So, among other things, the Governing Council left open the door to further rate cuts. The post-meeting press conference also suggested that Lagarde was keen not to preempt the findings of the ECB’s scheduled strategic policy review, which is now underway. Nevertheless, the account will no doubt be closely watched for any insight into the Governing Council’s assessment of the economic outlook and how policy might evolve over coming quarters.

Turning to the data, it’s going to be a quiet start to the week, and the first release of note will be the euro area’s industrial production report on Wednesday, which is expected to show that aggregate output rose by around ½%M/M in November, reversing the decline in October. Indeed, manufacturing output was higher in each of the four large member states. That day will also bring euro area trade data for the same month, expected to show that exports slipped back on the month.

Among other data due, new car registration figures for December will come on Thursday and final euro area inflation numbers are due on Friday. The preliminary estimate showed headline inflation rise 0.3ppt to 1.3%Y/Y, a six-month high, on the back of stronger energy inflation, while core inflation moved sideways at 1.3%Y/Y, still the highest for four years. Final inflation figures from the member states will be released earlier in the week, while a full-year GDP growth figure for 2019 from Germany (Wednesday) will no doubt attract attention too, with the exception of a subdued 0.6%Y/Y, the weakest rate since 2013.

Japan:
When Japanese markets re-open after today’s national holiday, tomorrow will bring the first of the week’s sentiment indicators with the Cabinet Office’s economy watchers survey for December expected to point to modest recovery at the end of last year. Wednesday’s release of January’s Reuters Tankan is similarly expected to report an improvement in conditions at the start of this year too. That day will also bring the BoJ’s latest Regional Economic Report. Not least given the impact from the consumption tax hike and super-typhoon, this might well some regions assess a slightly deterioration over the past three months. Meanwhile, Thursday will bring the latest machinery orders data for November, which is expected to show some recovery following the sharp decline in October. Tertiary activity figures, due the following day and for the same month, are also forecast to post only a modest increase compared with the 4½%M/M decline in October.

US:
In the US, while much focus will be on the signing of the first phase of the US-China trade deal on Wednesday, this week will bring several top-tier economic releases too, kicking off tomorrow with December CPI figures expected to show increases of 0.2%M/M in both the headline and core measures. As such, the annual headline rate is forecast to have shifted slightly higher at the end of last year, by 0.3ppt to 2.3%Y/Y, on the back of energy price movements. Core inflation, however, is expected to move sideways at 2.3%Y/Y. The following day will bring retail sales figures for December, expected to post a pickup following subdued sales in November. But Friday’s IP report for the same month seems likely to disappoint, with manufacturing output forecast to have moved broadly sideways following a jump in November. That day will also bring the University of Michigan’s flash consumer sentiment survey for January. Other releases due include the NFIB business optimism survey (tomorrow), Empire manufacturing survey (Wednesday), Philly Fed business survey (Thursday) and various housing market indicators.

China:
It will be a busy week for economic releases from China. On Wednesday, the latest monthly trade figures for December are expected to report the first annual increase in exports since last March, while imports are also expected to have increased sharply at the end of last year. The end of the week will bring Q4 GDP data alongside December’s monthly activity figures. GDP is expected to have increased by 1.4%Q/Q to leave the annual rate of growth unchanged at 6.0%Y/Y, nevertheless still the joint-weakest since the series began in the early 1990s. And overall, this would leave full-year growth at 6.2% in 2019, down from 6.6%Y/Y in 2018 and the lowest since 1990. Growth rates in IP, retail sales and urban fixed asset investment are all expected to be broadly stable.

Australia:
It should be a relatively quiet week for Aussie data, with just the ANZ Roy Morgan weekly sentiment indicator due for release tomorrow and expected to show a further deterioration in consumer confidence, having dropped to the lowest level since 2015 at the start of the year. Meanwhile, Thursday will bring the latest home loan figures for November.

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