ECB speak and FOMC minutes focus this week

Chris Scicluna
Emily Nicol

Japanese GDP to rebound in Q4, but inflation likely headed lower at the start of the year
After a quiet start to the week, tomorrow will bring the first estimate of Japan’s Q4 GDP. Having recorded the country’s third contraction of the pandemic in Q3 and with the state of emergency restrictions having come to an end at the start of October, we expect a strong rebound in Japan’s economy last quarter. Our colleagues in Tokyo expect quarterly growth of 1.4%Q/Q, underpinned by strong household expenditure particularly on services. This would leave output just 0.6% lower than the pre-pandemic level, but still almost 3% below the pre-tax hike peak in Q319. December industrial production and tertiary activity figures (tomorrow and Wednesday respectively) will provide greater insight into economic momentum heading into year-end, while January’s goods trade numbers (Thursday) might well flag some initial disruption from the latest pandemic wave sweeping across Asia. The latest machine orders data (Thursday) will offer some guidance to near-term capex growth too.

Of most interest at the end of the week will be January’s inflation data (Friday). But contrasting with the price surge in other G7 countries, headline inflation is forecast to have fallen back slightly to 0.6%Y/Y, with the internationally comparable core measure of inflation (excluding food and energy) forecast to fall to -1.0%Y/Y, the weakest since 2011. But this downwards move will principally reflect the impact of base effects associated with previous pandemic-associated travel incentives falling out of the annual calculation, with a notable drag on inflation from the government’s cut to mobile phone tariffs in April last year still at play too.

Chinese inflation to remained subdued in January too
Like in Japan, the main data focus in China this week will also be on inflation, with the January CPI and PPI reports due on Wednesday. In particular, headline inflation is forecast to have fallen 0.5ppt to 1.0%Y/Y, with downwards pressures on services associated with the surge in coronavirus cases and various lockdowns across the country. But price pressures at the factory gate are also expected to have eased further at the start of the year too, with headline PPI inflation forecast to have fallen to a five-month low of 9.5%Y/Y.

ECB President Lagarde in action today; updated euro area Q4 GDP and employment numbers due tomorrow
With no euro area data of note, focus today will turn to ECB President Lagarde’s address to European Parliament later this afternoon, although she is likely to reiterate the contrasts between the euro area’s economic backdrop from the US and UK and insisting that inflation will fall back over the course of the year, and therefore cautioning against adjusting ECB policy hastily due to the risks it would pose to economic recovery and jobs. Data-wise, updated euro area GDP figures for Q4 are due tomorrow and expected to confirm that growth slowed sharply from Q3 by 2ppts to 0.3%Q/Q reflecting the latest pandemic wave and persisting supply constraints. This notwithstanding, the accompanying preliminary employment numbers for the fourth quarter are likely to report another solid quarter of euro area jobs growth to take the number of people in work back above the pre-pandemic level for the first time.

While the GDP data will not provide an expenditure breakdown, December’s goods trade numbers will also be released that day and are likely to point to a marked decline in the surplus at the end of last year. Wednesday will bring euro area industrial production numbers for December, which will give further insight into manufacturing performance in Q4. National data already published revealed hefty declines in Spain (-2.6%M/M) and Italy (-1.0%M/M), as well as smaller decreases in activity in Germany (-0.3%M/M) and France (-0.2%M/M). But not least given a surge in Irish output, we expect aggregate euro area production to post an increase of around ½%M/M in December, although this would leave it almost ½% lower on the quarter. Meanwhile, Friday’s euro area construction output figures for December are expected to post a drop, reflecting steep declines in both Germany and France, with the sector seemingly disproportionately impaired by supply bottlenecks and labour shortages. Perhaps of greater interest at the end of the week will be the Commission’s preliminary consumer confidence indicator for February, which might well show a modest improvement to reflect the easing in the latest wave of coronavirus across the region. Other releases due in the coming week include the German ZEW investor sentiment survey and final Spanish and French CPI figures (tomorrow and Friday respectively) and aggregate euro area new car registrations data for January (Thursday).

UK labour market, inflation and retail sales reports in focus this week
After Friday’s GDP report suggested a softer decline in output at the end of last year, this week brings a number of data releases with the potential to influence near-term policy making, including the latest labour market report, inflation figures and retail sales numbers. Tomorrow’s jobs data are expected to reveal continued tightness in the market, although there may be some evidence of softer payroll growth as the spread of the Omicron variant accelerated and restrictions remained in place at the start of the year. Meanwhile, underlying wage growth might well have eased further in December, albeit remaining above the pre-pandemic range. But, elevated inflation means that real wage growth will have fallen further into negative territory. Indeed, we expect CPI inflation in January (Wednesday) to remain close to the 30-year high (5.4%Y/Y) reached in December, with core inflation expected to have edged only slightly lower (from 3.4%Y/Y). And the marked increase in the cost of living and dented consumer confidence seems bound to weigh on consumer spending. Indeed, while Friday’s retail sales report is expected to see modest sales growth in January, it is highly unlikely to fully reverse December’s drop of 3.7%M/M. Other data published this week include producer and house price inflation figures (Wednesday).

US retail sales, industrial production and FOMC minutes due this week
It will be a busy week for top-tier US releases. Following last week’s strong CPI report, tomorrow’s PPI figures are likely to report still extremely elevated price pressures at the factory gate at the start of the year. The latest retail sales and industrial production numbers (Wednesday) are expected to point to solid expansion at the start of the year despite the rise in coronavirus cases. In particular, Daiwa America’s Mike Moran forecasts an increase in retail sales of 1.8%M/M, to largely reverse the drop recorded in December, driven by an acceleration in vehicle sales and higher prices. Meanwhile, industrial production is expected to have been supported by utilities reflecting increased demand on the back of below-average temperatures for the time of year, while manufacturing output is also forecast to posted a modest gain. Wednesday will also bring the FOMC minutes from January’s policy-setting meeting, which will be analysed closely for further insights into the likely magnitude – 25 or 50bps – of the initial FFR hike when lift-off likely happens in March. Other releases include housing starts and existing home sales numbers (Thursday and Friday respectively), as well as the Philly Fed business survey and Conference Board’s leading indices (Thursday and Friday). In terms of Fed speak, Kashkari will speak on Wednesday, followed by economic discussions from Bullard and Mester on Thursday and Williams, Evans and Waller on Friday. 

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