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On Monday, during the European day, we get inflation data for January from Switzerland and expectations are for a tick down to +0.6% yoy after December’s slide to +0.7% from +0.9%. At their last meeting for 2018, SNB officials kept their benchmark rate unchanged at -0.75%, reiterating that they will remain active in the FX market as necessary and repeating that the Swiss franc is highly valued. They also revised down their inflation projections, suggesting that inflation is unlikely to hit their 2% target during their forecast horizon, even with interest rates staying at current levels. Although a +0.6% yoy inflation rate would be above the Bank’s estimates for the first quarter of 2019, which is at +0.5%, it would still be well below the Bank’s objective. Therefore, we see it unlikely for SNB policymakers to be tempted to alter their policy stance soon.
From the UK, we get the 1st estimate of GDP for Q4, industrial and manufacturing production for December, as well as the trade balance for the month. Expectations are for the preliminary GDP estimate to show that economic activity slowed to +0.3% qoq from +0.6% in Q3, something that could push the yoy rate down to +1.4% from +1.5%. Industrial and manufacturing production are expected to have rebounded somewhat in December, after sliding the month before. However, although this would drive both the yoy rates slightly higher, it would still keep them within the negative territory. With regards to the nation’s trade data, the forecast suggests that the UK trade deficit stayed more or less unchanged in December. Having said all that though, bearing in mind that the BoE has already met last week and downgraded its growth projections, we don’t expect these data releases to be major market movers. We expect market attention to stay locked on the Brexit landscape and this week’s new debate in the UK Parliament.
With regards to the US-China trade sequel, a US delegation led by US Tr. Secretary Steven Mnuchin and Trade Representative Robert Lighthizer travelled to China for another round of trade negotiations. Following last week’s headlines that US President Trump and his Chinese counterpart Xi Jinping are unlikely to meet before March 1st, which is the deadline set for the two nations to reach common ground, investors will be sitting on the edge of their seats to see whether an accord can be reached at this gathering.
However, as we noted on Friday, we don’t expect a final deal. We believe that if that happens it will be at a meeting between Trump and Xi. Yes, such a meeting may take place after March 1st, but we assume that Trump could postpone any tariff increases if the chances for a final accord are high in the aftermath of this week’s talks. That said, even if we get another set of “substantial progress” remarks, the big question is whether markets will believe them again or shrug them off. Remember that investors cheered the positive comments just after the previous negotiations but were largely disappointed after White House economic adviser Larry Kudlow said that there is still a “sizable distance” before a final deal can be sealed.
Tuesday appears to be a relatively light day in terms of economic releases. Thus, we expect investors to stay focused on headlines and developments surrounding the US-China trade negotiations, but also keep an eye on speeches by BoE Governor Mark Carney and Fed Chair Jerome Powell.
On Wednesday, during the Asian day, it’s the turn of the RBNZ to decide on interest rates for the first time this year. This would be one of the “bigger” meetings, where apart from the decision and the accompanying statement, we will get updated economic projections and a conference by Governor Adrian Orr. When they last gathered, policymakers decided to keep the official cash rate unchanged at +1.75% as was widely anticipated, while in the statement accompanying the decision, Governor Orr repeated that rates are expected to stay at this level through 2019 and into 2020. What appeared interesting at first glance was that the Governor removed from the statement the part saying that the next move could be up or down. However, at the press conference, he said that a rate cut is not off the table and that he would consider such a move if GDP falls short of the Bank’s projections.
Since then, GDP data showed that the economy slowed to +0.3% qoq in Q3 from +1.0% in Q2, well below the Bank’s own estimate of +0.7%, and although inflation data for Q4 came in somewhat better than expected, the employment data for the quarter disappointed, with the unemployment rate rising to 4.3% from 3.9% and the employment changed slowing to +0.1% qoq from +1.1%. Officials may not be tempted to cut rates at this meeting, as they may prefer to wait for evidence as to whether the softness in the data was temporary or not, but we expect Governor Orr to keep the prospect well on the table. It would also be interesting to see whether policymakers will decide to push back their hike timing. According to the November Monetary Policy Statement, interest rates are expected to start rising in the second half of next year and hit 2.0% during the last quarter.
During the European morning, the central bank torch will be passed to the Riksbank. At its latest policy meeting, the world’s oldest central bank decided to raise rates to -0.25% from -0.50%, which is the first increase since 2011, while in the accompanying statement, officials noted that the next hike is likely to come during the second half of 2019.
Since then, inflation data showed that the headline CPI rate remained unchanged at +2.0% yoy, the CPIF rate ticked up to +2.2% yoy, while the core CPIF rate, which excludes energy, rebounded back to +1.5% yoy from 1.4%. Although the Krona strengthened when these numbers were published, it was quick to give back all the inflation-related gains, which suggests that the prints were not strong enough for investors to raise bets that Riksbank officials may to bring forth the timing of when they expect rates to rise again, something we agree with. We expect the Bank to keep policy on hold at this meeting and to maintain a more or less unchanged narrative in the accompanying statement.
As for Wednesday’s economic releases, during the European morning, we get the UK CPIs for January. Expectations are for the headline rate to have slid further, to +1.9% yoy from + 2.1%, while the core rate is expected to have remained unchanged at +1.9% yoy. At last week’s BoE gathering, policymakers kept interest rates unchanged, downgrading their GDP forecast for 2019 and 2020 and revising somewhat lower their CPI estimate for the end of this year. However, they maintained their position that interest rates could move in either direction post-Brexit, even in case of a no-deal outcome. We agree with that view and we still believe that pre-Brexit inflation numbers are unlikely to attract much attention, as everything could change after the UK departs from the EU. In case of a no-deal outcome, economic growth could get hurt, but a potential slide in the pound could lift inflation up again.
We believe that GBP traders will keep their gaze locked on the Brexit sequel, and the new debate in Parliament. On Wednesday, UK Prime Minister Theresa May will update lawmakers on her progress so far with regards to any changes in her Brexit bill, but she is unlikely to put the deal under a new “meaningful vote”. The following day, MPs will debate on the matter, with a chance of another round of voting on proposed amendments. Last week, PM May agreed with EU officials to resume talks, but to officially review progress at the end of February, which suggests that a deal vote in Parliament is likely to take place after such a meeting.
We get inflation data from the US as well. Expectations are for the headline CPI rate to have declined to +1.6% yoy from +1.9%, further below the Fed’s objective of 2.0%, while the core rate is anticipated to have ticked down to 2.1% yoy from 2.2%. That said, the yoy change of WTI, although still negative, has improved somewhat in January, which suggests that if the core rate slides, the headline rate may decline by less than anticipated. In any case, with the Fed signaling patience with regards to its future moves, such results are unlikely to alter much market expectations on that front. According to the Fed fund futures, market participants are almost certain that the Committee will not push the hiking button this year, while they see a nearly 20% chance for a rate cut. Even if the headline rate falls to +1.6% yoy, we believe that for that percentage to increase notably, the core rate may need to dip below 2% as well.
On Thursday, Brexit will stay in the limelight. As we already noted, the UK Parliament will debate on May’s updates, while amendments may once again be proposed. With less than two months until the official divorce date, approving amendments which include extending Article 50, like the one proposed by Cooper on January 29th, could ease fears that the UK will crash out of the EU without in a chaotic manner. On the other hand, a repeat of the decisions taken on January 29th could add to no-deal Brexit fears.
As for Thursday’s economic data, during the Asian session, Japan’s preliminary GDP for Q4 is coming out and the forecasts suggests that economic activity grew +0.4% qoq in the last three months of 2018 after contracting 0.6% the prior quarter. This would bring the yoy rate back to positive territory, to +1.4% from -2.5%. That said, we doubt that this data set could change market expectations with regards to BoJ’s future policy moves. As we have been repeatedly saying, with all the Japanese inflation metrics, especially the Bank’s own core CPI, well below the 2% price objective, policymakers may still have a long way to go before considering a meaningful step towards normalization. China’s trade balance for January is also coming out. Expectations are for the nation’s surplus to have declined to 32.00bn from 57.06bn in December, while both exports and imports are anticipated to have fallen for the second consecutive month.
During the European morning, Eurozone’s second estimate of Q4 GDP is coming out and is expected to confirm its preliminary print of +0.2% qoq. Later in the day, we may get the US retail sales for December, which were delayed due to the government shutdown. The release is expected to show that the headline rate ticked down to +0.1% mom from +0.2% in November, and that core sales stagnated after rising +0.2% as well. The US PPIs for January are also on the agenda. Both the headline and core rates are expected to have declined, to +2.1% yoy and +2.5% yoy from +2.5% and +2.7% respectively.
Finally, on Friday, during the Asian morning, China’s CPI and PPI data for January are coming out. The CPI rate is expected to have held steady at +1.9% yoy, while the PPI is forecast to have slowed to +0.3% yoy from +0.9%. Japan’s final industrial production for December is also due to be released and it is expected to confirm its preliminary estimate, namely that production slid 0.1% mom.
During the European day, we get the UK retail sales for January. The forecasts suggest that both headline and core sales rose 0.2% mom after sliding 0.9% and 1.3% respectively. This is likely to drive both the yoy rates up, to +3.4% and +3.0%, from 3.0% and 2.6%. The case for rising yoy rates is supported by the BRC retail sales monitor for the month, the yoy rate of which surged to +1.8% from -0.7% previously. Eurozone’s trade balance for December is also coming out, but no forecast is currently available.
In the US, industrial and manufacturing production for January are due out, as well as the preliminary UoM consumer sentiment index for February. Both the industrial and manufacturing monthly rates are expected to have slid to +0.1% mom, from +0.3% and +1.1% respectively, while the UoM index is expected to have risen to 94.0 from 91.2.
With regards to politics, the US government may be heading for another shutdown if the Congress does not agree on a budget plan throughout the week, which could raise concerns over a more serious impact on the US economy, and thereby weigh on the dollar and US equities. The previous 35-day partial shutdown was the result of the divide between President Trump and Democrats over building a wall at the US-Mexico border. Thus, with Trump insisting that a wall should be built, finding common ground and agreeing on a final spending bill appears to be a hard task, in our view.
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