Quiet start to the week in the Asia-Pacific region but sizeable rallies in some equity markets
Despite considerable upside surprises in the US PMIs and existing home sales, the S&P500 closed down 0.3% on Friday, paring its advance during the holiday-shortened week to a still impressive 1.9%. Treasury yields nudged lower and the greenback strengthened slightly as the European PMIs confirmed a growing negative impact in the region from a strain of coronavirus that may be more deadly than those that have circulated previously, as well as more contagious. As we write, US equity futures are up modestly from Friday’s close, while Treasury yields are a touch higher and the dollar slightly weaker. (10Y UST yields are about 1.5bps higher at 1.10%).
Against that background, it has mostly been a quiet start to the week in the Asia-Pacific region with very little in the way of local economic news and this week’s key risk-drivers all scheduled for later in the week, starting with Wednesday’s FOMC meeting. A short time ago the TOPIX closed up just 0.3%, while the ASX200 posted a similar gain. A gain of over 2% was seen in Hong Kong – which discontinued the weekend’s lockdown in Kowloon – with Tencent stock rallying more than 9%. In South Korea the BoK Governor’s comments about frothy asset prices appear to have been forgotten, with the KOSPI rallying 2.3% to set a new record high. Meanwhile, China’s CSI300 rallied 1.0% to a new 13-year high as investors awaited a keynote address by President Xi at today’s online Davos gathering of the World Economic Forum – one that may give clues as to how China will approach the new Biden administration.
Quiet start in Japan with week’s key economic reports all released on Friday
It was a quiet start to the week in Japan today with no major economic reports released. Moreover, it will remain quiet over the next couple of days too, with the only reports of passing interest being tomorrow’s services PPI and BoJ underlying inflation measures for December (as usual, the final Monthly Labour Survey for November, also released tomorrow, should contain only minor revisions). On Thursday, the retail sales report for December is very likely to be soft given the deteriorating coronavirus situation through the month (data last week revealed that department store sales fell 13.7%Y/Y).
Thereafter, the data flow picks up considerably with a large number of key economic reports due on Friday. As far as activity is concerned, most interest will centre on the IP report for December, with polls suggesting that analysts expect a 1.5%M/M decline in production during the month. While disappointing, such a result would still leave output up around 6%Q/Q in Q4 given the strong advance seen in September and October. Perhaps of greater interest will be firms’ forecast of how output is likely to evolve over the first two months of the current quarter.
Meanwhile, unsurprisingly, analysts also expect the December household employment survey to reveal some slippage following a very solid improvement in November, while data on housing starts and construction orders for December will cast light on the resurgence of coronavirus is impacting fortunes in the construction sector. Friday will also bring the release of the Cabinet Office consumer confidence index for January, which will very likely weaken further from the 4-month low in December. Finally, the advance Tokyo CPI for January will likely be dominated by the temporary suspension of the ‘Go To Travel’ campaign, with the consequent normalization of accommodation prices likely to add around 0.4ppt to annual inflation – sufficient to lift the BoJ’s preferred core measure (i.e. ex fresh food and energy) from deflation to 0.0%Y/Y.
Quiet week ahead in China with most interest centred on Sunday’s PMIs
Following President Xi’s address at today’s World Economic Forum online event – due in just a few hours – this week’s Chinese economic diary is largely bare, with Wednesday’s corporate profit report for December the only notable release scheduled during regular market hours. However, Sunday will bring the release of China’s key official PMI reports for January, which could set the tone for how global markets re-open the following day. Bloomberg’s survey suggests that analysts expect both the manufacturing PMI and the non-manufacturing PMI to have declined during the month, yet at 51.6 and 54.7 respectively remain consistent with a relatively solid pace of expansion.
German ifo survey and Lagarde-speak are today’s euro area focus
Like Friday’s flash PMIs, the German ifo business survey, out later this morning, will likely highlight the further weakening in the services sector at the start of the year while also signaling continued broad resilience of manufacturing in the euro area’s largest member state. Also of note today will be the latest ECB-speak, with Christine Lagarde this morning giving a keynote speech on ‘Green Banking and Green Central Banking’ and speaking later today on ‘Restoring Growth’ to the 2021 Davos World Economic Forum. Further ECB speakers will be in action as the week goes on, including Philip Lane on Wednesday, who might comment on last week’s reminder from Lagarde that the central bank is not targeting yields or spreads, and might well not purchase the full PEPP envelope of bonds either – comments that pushed 10Y BTP spreads over Bunds some 10bps wider to close to 125bps at the end of last week.
1st set of Q4 GDP and January data due from large member states this week: while GDP was very soft, watch for sharp jump in German inflation
The most noteworthy data releases this week will be the first estimates of Q4 GDP and January inflation from some of the largest member states. In particular, Friday will bring German, French and Spanish Q4 GDP figures. Following stronger-than-expected growth in Q3, the second wave of the pandemic and consequent re-imposition of lockdown measures resulted in a weak fourth quarter. Given the solid contribution from industrial production, however, German GDP looks to have just about avoided negative growth in Q4. In contrast, French GDP likely fell by about 4%Q/Q in Q4, while in Spain we forecast a contraction of 2.5%Q/Q. Meanwhile, German inflation data for January will be published on Thursday, followed by Spanish numbers on Friday. Most significantly, German inflation is set for a big step up, following the reversal of the temporary VAT tax cut and introduction of a new carbon tax from the start of the year. The median forecast on the Bloomberg survey is for a jump of 1.2ppts in the EU-harmonised measure to 0.5%Y/Y in January.
Labour market in focus tomorrow in the UK with unemployment rate to rise to a five-year high
The most notable data release out of the UK this week will be tomorrow’s labour market report, which is likely to show that redundancies remained elevated after rising to a record high in the three months to October. The ILO unemployment rate is expected to rise 0.2ppt in the three months to November to 5.1%, which would be the highest level since March 2016. And ongoing job cuts will likely be reflected in a further monthly drop in payrolls and a rise in the claimant count rate from 7.4% in November. Tomorrow’s CBI distributive trades survey for January will also be of some interest. With Covid containment restrictions in place and consumer confidence deteriorating, retail sales are expected to have fallen at the start of the year. Other January data to be published in the coming week include the BRC shop price index on Wednesday and Nationwide house price indices, possibly on Thursday.
FOMC meeting likely to maintain the status quo; US GDP and inflation data due later this week
This week brings the first FOMC meeting of the year, with the post-meeting announcement and press conference scheduled for Wednesday. Given the absence of significant new information, the Fed will likely once again indicate that it is content with current policy settings. During the press conference, Chair Powell will likely continue to express concern about recent developments in coronavirus case numbers and the risks this poses to the near-term outlook for activity, and continue to plea for the significant assistance that the fiscal stimulus currently proposed by the Biden Administration – but is facing push-back from Republican senators – would provide.
Turning to this week’s considerable US data flow, following today’s Dallas Fed manufacturing survey, tomorrow will bring the Conference Board’s consumer survey for January, the Richmond Fed’s manufacturing survey for January and the FHFA and S&P home price indices for November. As far as the consumer survey is concerned, this month Daiwa America’s Mike Moran expects that worrying the developments in coronavirus cases will likely dominate the positive impact of rising asset prices, leading to a modest decline in the headline confidence index.
On Wednesday, most attention beyond the Fed will be centred on the advance durable goods orders report for December, which will also cast some further light ahead of the following day’s advance GDP report. Despite the loss of momentum seen in a number of indicators of late, given a strong start to the quarter, Mike expects Thursday’s national accounts to reveal a further 3.0%AR lift in GDP in Q4. Robust business, housing and inventory investment, together with moderate growth in consumer spending, should readily more than offset downward contributions from net exports and public spending. Thursday will also bring the advance merchandise trade report, new home sales and Conference Board leading indicator (all for December), as well as the weekly jobless claims report. The week concludes on Friday with the personal income and spending report for December, the Employment Cost Index for Q4, the Chicago PMI for January, pending home sales for December and the final results of the University of Michigan’s consumer sentiment survey for January.
Australian goods trade surplus widens; CPI and NAB Business Survey the highlights this week
The only economic report released in Australia today was the preliminary merchandise trade report for December. According to the ABS, merchandise exports jumped an unadjusted 16%M/M to be up 3%Y/Y. Non-rural goods, which make up more than three-quarters of all merchandise exports, also increased 16%M/M but were essentially unchanged from a year earlier. A largely seasonal 38%M/M lift in rural exports boosted annual growth to 3%Y/Y. Exports of non-monetary gold were little changed in the month but were up 29%Y/Y, accounting for about three-quarters of the annual lift in exports. Meanwhile, imports fell 9%M/M in December and so were almost unchanged from a year earlier. This was mostly due to a 19%M/M decline in imports of capital goods, which had been boosted in November by the arrival of a number of aircraft. Imports of consumption goods fell 4%M/M but were up a very strong 19%Y/Y, whereas imports of intermediate goods fell 5%M/M and 15%Y/Y. Together these point to an unadjusted merchandise trade surplus of A$9.0bn in December – about A$0.9bn larger than a year earlier. Taken together with likely developments in services trade, this suggests that next week’s full trade report will report a seasonally-adjusted surplus of more than A$7bn, up from around A$5bn last month.
Looking ahead, following tomorrow’s Australia Day holiday, Wednesday will bring the release of both the CPI for Q4 and the NAB Business Survey for December. As far as CPI is concerned, with the imposition or removal of various state and federal support measures likely to cancel out, Bloomberg’s survey indicates that analysts expect a 0.7%Q/Q lift in the headline index, boosted by the further pass-through of the annual lift in excise tax on tobacco. Even so, this would leave annual inflation steady at a lowly 0.7%Y/Y. The closely-watched trimmed mean measure of inflation is expected to increase just 0.4%Q/Q – the same as last quarter – but given base effects this should lower annual trimmed mean inflation to a new record low of 1.1%Y/Y. A print in line with market expectations would be consistent with the RBA maintaining the cash rate on hold for a considerable period – at least until sometime in 2023 – especially with the unemployment rate remaining well above the Bank’s estimate of the full employment rate (notwithstanding a much faster-than-expected recovery in the labour market).
Turning to the NAB survey, given the worries that surrounded a small community outbreak of coronavirus in Sydney at the end of last year, it would not be surprising to see the key business confidence and conditions indices decline from the above-average readings reached in November. The suite of quarterly ABS price measures will conclude with the release of the Q4 trade price indices on Thursday and the Q4 PPI on Friday, while the RBA will also release its monthly credit aggregates or December on Friday.
Merchandise trade and sentiment reports ahead in NZ this week
This week’s first economic release in New Zealand is tomorrow’s service sector PMI reading for December, which printed surprisingly soft at 46.7 last month. The merchandise trade report for December follows on Thursday, and with the seasonal lift in dairy exports getting underway – at very good prices – a sizeable trade surplus appears to be in the offing. The week will end with the release of the ANZ Consumer Confidence Index for January, which ended last year at its highest level since February but still a little below the survey’s long-term average.