Global equity markets fell this week, despite generally robust data, amid investor caution ahead of Donald Trump’s inauguration as President of the United States. The UK’s FTSE 100 Index underperformed as sterling strengthened
In a long-awaited speech, British Prime Minister Theresa May confirmed the UK would seek to exit the European Single Market and that “a new, comprehensive, bold and ambitious Free Trade Agreement” would be sought with the European Union
The January European Central Bank (ECB) meeting saw policy left on hold, as expected. ECB President Mario Draghi struck a dovish tone at the press conference, stating that “there are no signs yet of a convincing upward trend in underlying inflation”
The UK and US’s advance releases of Q4 GDP data are the highlight of next week’s calendar. Central banks in Turkey and South Africa also hold their January policy meetings
December’s existing home sales are expected to fall by 1.4% mom (5,530,000 annualised against 5,610,000 previously). This release has been quite volatile over the last couple of years, but the general trend is one of improvement. The prior release took the series to its strongest level since February 2007. Similarly, December’s new home sales are expected to dip by 1.2%, having risen 5.2% in the prior month (585,000 annualised against 592,000 prior). This series has been trending higher since early 2011, but still sits around half of the pre-crisis peak. Both series continue to see positive underlying momentum as a robust labour market and still historically low mortgage rates remain supportive of housing market activity.
The first estimate of Q4 GDP is forecast to show growth of 2.1% qoq annualised, down from 3.5% qoq annualised in Q3. The consumer is likely to be the main growth driver, in line with recent trends. Strong PMI numbers also support expectations for a continued improvement in business investment, which is anticipated to rise at its strongest rate since Q1 2015. Less positively, higher imports and lower exports should see net exports act as a drag on growth.
January’s final release of the University of Michigan Consumer Sentiment Index is expected to remain at 98.1. Importantly, this is very close to December’s 13-year high, although the recent improvement has yet to translate into an acceleration in consumer spending. The preliminary release saw long-term consumer inflation expectations (over the next five to 10 years) rebound from their all-time low of 2.3% yoy in December to 2.6% yoy, its highest level since July 2016. A further increase may be a cause of concern for the Fed.
The preliminary eurozone PMIs for January are expected to remain broadly stable, with the composite indicator edging slightly higher to 54.5. The eurozone economy remains supported by continued employment growth and low financing costs, while manufacturing is benefiting from euro weakness and improved global demand. However, rising headline inflation has the scope to crimp activity (via lower consumption and reducing firm’s profit margins), and rising political risks in the shape of ongoing Brexit developments and upcoming general elections also pose downside risks to sentiment.
The first estimate of UK Q4 GDP is expected to show growth of 0.5% qoq, representing a 0.1 ppt decline from Q3’s outturn, although still robust. The resilience of the UK economy post-June 2016’s Brexit vote has been predominantly driven by the services sector, in particular household consumption.
Having risen sharply over the course of Q4 2016, Germany’s Ifo Business Climate Index is anticipated to stabilise, gaining just 0.2 points to 111.2, driven mainly by an improvement in the current assessment component, buoyed by recent positive momentum in German economic activity indicators. Amid headwinds to the economic outlook (rising headline inflation and elevated political uncertainty), the expectations component is expected to remain flat.
Japan and emerging markets
In November, Japan’s trade surplus reached its highest level (JPY536.1 billion seasonally adjusted) since July 2010. The surplus for December is expected to decline to JPY222.5 billion as higher commodity prices continue to support import growth (consensus at -0.8% yoy, -8.8% previously). Meanwhile, exports should have remained relatively stable (+1.2% yoy expected versus -0.4% previously), boosted by a weaker yen, with the PMI manufacturing new export order component rising for a fourth month in December.
Japan’s core inflation (CPI ex-fresh food and energy) has been on a slowing trend since the end of 2015, mostly reflecting the absence of momentum in personal consumption despite tight labour market conditions. The depreciation of the yen in the second half of 2016 should, later on this year, increase imported inflation and generate some pickup in core inflation. However, in the near term, core inflation is expected to slow down further, from 0.2% yoy in November to 0.1% in December. Headline inflation is also expected to slow (from +0.5% to +0.2%) as suggested by the leading index for the region of Tokyo (declining from +0.5% to 0.0% in December).
On the back of recent lira weakness, the Central Bank of Turkey (CBT) is anticipated to significantly hike the overnight lending rate at its January policy meeting, to 9.25% from 8.50%. Recently, the Central Bank has cut lira liquidity previously provided by the one-week repos (at 8.00%) and overnight lending (8.50%), channelling banks to the late liquidity window (at 10.00%). Hence, as it waits to see the results of its new unorthodox policy experiment, the CBT may not meet expectations for such a sharp hike.
Oil prices stable amid supportive OPEC comments; gold prices higher for fourth week
Oil prices were little changed this week. Support came from the Saudi Minister of Energy and Industry, who argued that the rebalancing of the global oil market could be completed by the end of June, and the OPEC Secretary General, who suggested that the production deal could be extended if needed. However, sentiment was hit by concerns over rising US production – reflected in comments by the International Energy Agency on Wednesday – as well as the weekly U.S. Energy Information Administration report showing a larger than expected increase in US crude and gasoline inventories last week. Overall, WTI crude rose slightly (+0.1% to USD52.2 per barrel) and Brent remained unchanged (0.0% to USD55.5 per barrel).
Gold prices rose for the fourth consecutive week (+1.1% to USD1,211), supported by continuing uncertainty over US President Trump’s economic policy agenda, although gains were pared following relatively hawkish comments by Fed Chair Janet Yellen on Wednesday.