The US dollar finished last week lower against all the major and many emerging market currencies, including those, like the Turkish lira, South African rand and Colombian peso, which had been beaten up in recent weeks. Technically, there is scope for additional near-term declines, even if some consolidation is seen at the start of the week.
We identify nine items that should be on your radar screen in the week ahead.
1. China: Over the weekend, China reported a larger than expected rise in yuan loans and aggregate financing. Yuan loans rose to CNY1.32 trillion, a 23% increase year-over-year. The consensus was for a CNY1.1 trillion increase after CNY482.5 bln in December. Aggregate financing rose a record CNY2.56 trillion ($425 bln). This news comes on the heels of the better than expected trade figures and unchanged CPI (2.5%). Together they could help ease concerns about the economic slowdown in the world's second largest economy. On the other hand, the reliance of debt to fuel growth, which has reached a point of diminishing returns (an extra unit of capital/debt is generating less growth than in the past) underscores the lack of sustainability.
We also highlight the seasonality in this time series. Aggregate lending typically goes up in January and new quotas are provided. In fact over the past 10-years, it has only fallen in one January (2012). Reports suggest that lending for have risen even more, but officials encouraged restraint in late January. In terms of seasonality, aggregate lending typically falls in February. In the past nine Februaries, it has only increased once and that was last year. On February 19, HSBC will publish its flash manufacturing PMI. The risk is for another sub-50 reading (49.4 from 49.5). Recall that its flash January reading appeared to help intensify the pressure on emerging markets.
2. Emerging Markets: If flows follow performance, we should expect the liquidation of emerging market funds to slow if not reverse. The MSCI Emerging Equity Index rose a little more than 2% last week and closed at its highest level in three week and technical indicators suggest scope for additional recovery gains in the days ahead. A downtrend line off the late October '13 highs, catching the mid-November high and early January '14 high comes in near 973 at the end of the week ahead and represents a good near-term target. EPFR report that last week another $4.5 bln left emerging market funds to bring the year-to-date liquidation to $29.7 bln, and surpassing last year's total.
We note that the equity markets are bearing the brunt of the liquidation, accounting for almost three quarters of the outflows. Markit reports that short interest in emerging market stocks has increased by around 7% and now accounts for a little more than 2.1% of the total free float. Shorts are reportedly the largest in China and South Africa, accounting for 4.5% and 4.3% of the free float respectively. In the fixed income space, institutional investors have helped developing countries and companies raise around $67 bln though debt sales.
Three emerging market central banks meet in the days ahead. While Chile is expected to cut rates 25 bp, there is some risk that it stands pat. Hungary is widely expected to shave another 10 bp off the base rate and after the recent large move and rate simplification, the central bank of Turkey is likely to stand pat.
3. US: Most of the important economic data in recent weeks is being reported below expectations. The pace of economic slowdown is prompting economists to slash Q1 GDP forecasts in half from earlier estimates to around 1.5%. The Empire State and Philly Fed surveys are expected to confirm the down shift in US growth. There are two main culprits: The first is weather and although it is often ridiculed, the fact of the matter is that the world's largest economy can be impacted by poor weather. The second is that growth is returning to a more sustainable pace after accelerating in the second half of last year.
The real sector data out this week is largely confined to the housing market. Here the weather is playing a significant role and softer data should be expected. Permits have slipped and pending home sales have fallen, both leading indicators for the housing. Consumer prices remain benign, while a new methodology will be introduced for producer prices that make comparisons to the past difficult. After Yellen's testimony last week, the FOMC minutes are unlikely to contain surprises and the impact on the market is likely minimal.
4. UK: Sterling was easily the strongest of the major currencies last week, rising a little more than 2% against the US dollar. It was ostensibly bolstered by the rise short-term yields as the market responded skeptically to the BOE's forward guidance. In the days ahead there may be another influence. Vodafone's (NASDAQ:VOD) sale of its 45% stake in Verizon (NYSE:VZ). Some 133,000 UK shareholders will receive an average of GBP3500 and Verizon shares. February 21 is when the foreign exchange and share prices will be fixed. While UK shareholders are the largest, foreign investors are also substantial. Payouts are slated for March 4. Income and consumption will likely be boosted on the margins by the payout.
Moreover, this involves the transfer of an asset (valued around GBP80 bln) from the FTSE 100 to the S&P 500. This will force indices and tracker funds to re-weight when the new Vodafone shares start to trade (February 24).
Separately, the UK reports CPI and unemployment (Tuesday and Thursday). The risk is the year-over-year rate ticks up from 2.0% in December, while the unemployment rate is likely to be steady at 7.1%. The data, like the minutes from the recent BOE meeting, have likely been superseded by last week's Quarterly Inflation Report, which broadened the central bank's forward guidance, while maintaining the need to low rates for longer.
5. Italy: That the Letta-Alfano government collapsed is mildly surprising, after all PD leader Renzi had previously indicated a reluctance to change governments in a backroom sort of way and especially without elections. What is even more surprising for many is that the Italian capital markets took no notice. The 10-year bond yield fell about 5 bp on the week, including a few basis points before the weekend to bring it within a spitting distance of multi-year low seen earlier in the week. Successful debt auctions were held. Italian shares led the G10 markets higher on Friday with a 1.7% increase of he FTSE MIB and its 3.8% rise on the week is half of this year's pace-setting gain of 7.7%. After Italian markets closed for the week, Moody's lifted its outlook for Italian credit to stable from negative.
While the commentariat mostly seemed to embrace Renzi as a youthful agent of change, his agenda is not new: cut corporate taxes, raise taxes on financial activity, simplify labor laws. Can he succeed where Monti and Letta failed? That is the key question. He will inherit the same alliance and representation in Parliament as Letta had it appears. The PD has a majority in the Chamber of Deputies, but not in the Senate. It appears that President Napolitano's hesitancy over the weekend was to ensure Renzi could cobble together a majority in the Senate. The Northern League, Berlusconi's Forza Italia and Grillo's 5-Star Movement are in opposition. The Left ecology party (SEL) has reportedly also indicated it will not support Renzi. Renzi needs the support of Monti's centrists, and the Alfona's center-right rumps of the PdL, Renzi apparently hopes to draw some defects from the 5-Star Movement. There could be a couple of protest votes/abstentions by some disgruntled PD Senators. Renzi chose the timing of his strike. Last week, while the government was collapsing, ISTAT reported that the economy expanded in Q4 13 for the first time since 2011. There are also hundreds of appointment (patronage) to government agencies and state-owned businesses that have to be made. Renzi had first undercut Letta and struck a deal on electoral reform with Berlusconi, whose allies designed the previous system that was ruled unconstitutional, and then blamed Letta's paralysis for his bloodless putsch. EU Finance Ministers meet at the start of the week and the Sacommanni, the Finance Minister in the Letta government will represent Italy. As they say in France: Plus ca change, plus c'est la meme chose.
6. EMU: At the same moment that the legal basis of OMT has been questioned by the German Constitutional Court, the economic and financial condition of the euro area has improved. Growth in Q4 was stronger than expected. Interest rates in the periphery have continued to trend lower. Portugal sold 10-year bonds last week and non-domestic investors took down the overwhelming majority. EONIA has stabilized. It appears that excess liquidity has as well. The risk is that market sentiment, which is inclined to see further ECB action (small repo rate cut), is again disappointed. The economic highlight of the week is the flash PMI on Thursday. While both French readings may remain below the 50 boom/bust level, economists are expecting a small improvement. France also reports January inflation figures. A fall in energy prices will pressure the headline number, but the year-over-year rate is likely to tick up due to base effects.
7. Japan: Japan will report Q4 GDP first thing Monday in Tokyo. Growth is expected to have accelerated to 2.8% at an annualized pace from 1.1% in Q3. Investment and consumption likely fueled the growth. Japan will report January trade on Thursday. For the last ten years the trade balance has deteriorated in January and a record shortfall is expected. In terms of the current account, which is not reported yet, the investment income surplus typically grows throughout Q1 and this may blunt some for impact of the deteriorating trade balance. The BOJ meets at the start of the week. It is unlikely to take new measures until it sees impact of the retail sales tax increase on April 1. Many observers appear to be in the process of reconsidering forecasts calling for more asset purchases. The US and Japanese delegation failed to make any headway over the weekend on stalled TPP talks. While reports highlight US demands on Japan regarding duties on agricultural trade and autos, the fact is that without Trade Promotion Authority, which Senate leader Reid opposes, the talks are unlikely to go anywhere soon.
8. Dollar-Bloc: The shift from a dovish to neutral bias is helping spark a short covering in the Australian dollar. The RBA minutes will be released Tuesday and will likely point in the same direction. The wage index from the Q4 is too dated to be of much interest to the market, but for the record, it is expected to have slowed to 2.5% pace form 2.7% in Q3. At the end of the week, Canada reports December retail sales and January consumer prices. Retail sales are likely to be soft, with the median forecast of -0.4%.
The Bank of Canada has been placing greater emphasis on the persistently low inflation, but the tick up in the headline to 1.3% (from 1.2%) and matching the core reading is unlikely to impress it. Separately, in terms of commodity prices we note that the CRB index has risen nearly 8% from the mid-January lows, gold prices closed above their 200-day moving average before the weekend for the first time in a year and China reported record imports of some industrial metals, like iron ore.
9. G20: Next weekend will be a G20 meeting in Sydney. The usual smörgåsbord of issues will be on the agenda: fiscal policy, trade liberalization, financial regulations and IMF reform. Little progress if any can be expected. The two big imbalances that had policy makers worried, namely China's current account surplus and the US trade deficit, have narrowed considerably over the past few years. Given the record large Japanese trade deficit, the push against the weakening of the yen may be limited. Similarly, while there may be some discussion of the Federal Reserve's tapering, the criticism will not have much of a sting. Some of the critics were critical of QE in the first place, so it is not clear why ending it, in a transparent and gradual way, should be opposed. Moreover, the inability to present a clear and politically viable alternative undermines the criticism.