Weekly Outlook: Feb 01 – Feb 05: RBA And BoE Decide On Policy, NFPs Enter The Limelight

Summary

• Following the FOMC decision last week, we have two more central banks deciding on monetary policy this week and those are the RBA and the BoE.
• That said, we don’t expect any action from neither Bank, thus attention may fall on the accompanying statements and the economic projections.
• On the data front, we get Eurozone’s preliminary GDP and CPI numbers, as well as the US and Canadian jobs data.

Original Source

Monday looks to be a relatively light day, with the only releases worth mentioning being the final Markit manufacturing PMIs for January from several Eurozone nations, the Eurozone as a whole, the UK and the US, as well as the US ISM manufacturing PMI for the month. As it is always the case, the final Markit PMIs are forecast to confirm their preliminary estimates, while the ISM index is anticipated to declined fractionally, to 60.0 from 60.5.

On Tuesday, during the Asian morning, the RBA decides on monetary policy. When they last met, policymakers of this Bank kept policy untouched, noting that the Australian economic recovery is underway, and that recent data have generally been better than expected. Since then, the unemployment rate declined by more than anticipated in December, although the employment change revealed a slowdown in added jobs, while headline inflation accelerated more than forecasted in Q4, despite staying well below the lower end of the RBA’s target range of 2-3%. Economic activity also rebounded by more than anticipated. With all that in mind, we don’t expect any action to be delivered at this gathering. We just expect officials to repeat that they stand ready to do more if necessary, but also that the data have continued to be better than expected. Investors may decide to pay more attention to the quarterly Monetary Policy Statement, due out on Friday, in which the Bank presents its economic projections. It would be interesting to see what the Bank’s outlook is now with the rollout of the coronavirus vaccinations.

As for Tuesday’s data, we get Eurozone’s 1^st estimate of GDP for Q4, which is expected to have contracted 1.8% qoq, after rebounding 12.7% qoq in Q3. This is likely to raise concerns with regards to the bloc’s economic activity, especially taking into account the slowdown in the rolling of the coronavirus vaccinations, but we believe that EUR-traders are likely treat this release as outdated, given that we already have data showing how the Euro-area economy has entered the new year, the likes of the PMIs. With the composite PMI staying in contractionary territory, the ECB is likely to remain ready to act again if the situation worsens, but with Lagarde saying that the downside risks are less pronounced, and with inflation expected to have rebounded in January, we don’t see the case for the ECB easing further its policy at its next policy meeting.

On Wednesday, during the early Asian morning, New Zealand’s employment report for Q4 is coming out and the forecast points to an increasing unemployment rate, to 5.6% from 5.3%, while the employment change is expected to show that the economy has lost 0.8% qoq jobs, the same pace of decline as in Q3.

Back in November, the RBNZ decided to keep its official cash rate and its Large-Scale Asset Purchase program unchanged, with Governor Adrian Orr saying that domestic activity since August has been more resilient than previously assumed. Q4 inflation stayed unchanged at +1.4% yoy, within the Bank’s target range of 1-3%, keeping the probability of negative interest rates at very low levels. Although a weak employment report could raise some concerns, and thereby hurt the Kiwi, we doubt that it could drastically alter expectations around the RBNZ’s monetary policy plans. In order for the RBNZ to start considering negative interest rates again, we believe that we need to see more data disappointing.

During the European trading, we have Eurozone’s preliminary CPIs for January. The headline CPI rate is forecast to have rebounded to +0.5% yoy from -0.3%, while the HICP excluding energy and food is forecast to have accelerated to +0.7% yoy from +0.4%. Despite the lockdown measures around the Eurozone, at the latest ECB gathering, President Lagarde said that the downside risks to the economic outlook are now “less pronounced”, making investors skeptical over further easing by the ECB, although the Bank repeated once again that it stands ready to adjust all of its instruments as appropriate. Thus, improving inflation rates may reduce even further speculation over more easing by the ECB, at least at its upcoming gathering.

We also get the final Markit services and composite PMIs for January from the Eurozone, the UK and the US, with the final prints expected to confirm their preliminary estimates. In the US, we also get the ISM non-manufacturing PMI for January, which is expected to have fallen to 55.0 from 60.5, as well as the ADP employment report, which is forecast to show that the private sector has gained 45k jobs after losing 123k in December.

On Thursday, the central bank torch will be passed to the BoE. Its previous meeting proved to be a non-event, with officials reiterating that they stand ready to increase their QE purchases pace should market functioning worsens. However, with the UK CPIs rising by more than expected in December, and the employment report for November coming in better than anticipated, we don’t expect any change in the Bank’s policy settings at this gathering. Therefore, all the attention will fall on the Bank’s economic projections and its findings on the negative interest rates study. Recently, BoE Governor Andrew Bailey played down the prospect of negative interest rates and it remains to be seen whether the findings will be on the same page, namely that interest rates are not as likely as previously though. Diminishing even further such a likelihood may be pleasant news for GBP traders, especially following the Brexit trade accord between the EU and the UK. However, for the pound to extend notably its recent gains, the economic projections would have to be less pessimistic than many believe. The UK entered a full lockdown in January, with the government hinting that this may drag until March, a situation that may weigh notably on the British economy, and thereby hinder any potential recovery.

Finally, on Friday, the main event is likely to be the US employment report for January. Nonfarm payrolls are expected to have rebounded 50k after falling 140k in December, while the unemployment rate is forecast to have held steady at 6.7%. Average hourly earnings are anticipated to have slowed to +0.3% mom from +0.8%, but barring any major deviations to the prior monthly prints, this will leave the yoy rate unchanged at 5.1%.

Last week, the Fed decided to keep its monetary policy settings unchanged, with the only material change in the statement being the part saying that “the pace of the recovery in economic activity and employment has moderated in recent months”. At the press conference following the decision Powell stated that it’s too early to focus on tapering dates, adding that monetary policy should stay highly accommodative. Although an improvement from December, still the aforementioned forecasts suggest that the labor market is far from returning to a road of a healthy recovery. This may allow Fed policymakers to keep the prospect of further action if deemed necessary well on the table.

At the same time with the US employment report, we get jobs data for January from Canada as well. The unemployment rate is forecast to have risen to 8.9% from 8.6%, while the net change in employment is expected to show that the economy has lost 55k jobs after losing 62.6k in December.

At its prior meeting, the BoC decided to keep interest rates and the pace of its QE purchases unchanged, disappointing those expecting a small cut or even a re-increase in QE. Officials also noted that “As the Governing Council gains confidence in the strength of the recovery, the pace of net purchases of Government of Canada bonds will be adjusted as required", which suggests that the next policy step for BoC may be tapering QE. However, another soft employment report is unlikely to suggest that such a move may be on cards in the months to come. It could even push back expectations on that front, something that may prove negative for the Canadian dollar. That said, as we noted several times recently, the broader path of this commodity currency will depend on developments surrounding the broader sentiment. As we already noted, we see risk appetite improving in 2021, at least in the first months, something that could prove supportive for oil prices and thereby for the Loonie.