Global equities fell this week as US foreign policy concerns weighed on risk appetite. A weaker US dollar also hit non-US exportsensitive bourses
All G4 central banks, apart from the European Central Bank (ECB), held their respective February meetings with policy outcomes largely in line with expectations
January’s US employment report was mixed. Although the economy added more jobs than expected (227,000 compared to a consensus of 180,000 and 157,000 previously), average hourly earnings growth dipped to 2.5% yoy from December’s downwardly revised 2.8%
In the coming week, investor focus will shift to central bank meetings in Australia, India and Mexico as well as China trade data
Macro Data fand Key Events
February’s preliminary release of the University of Michigan Index of Consumer Sentimentis expected to tick-down by 1.2 points to 97.5, retreating marginally from its highest level since January 2004. Continued strength in both the current conditions and future expectations are yet to be reflected in a further consumer spending acceleration. A further firming of longer-term consumer inflation expectations (5-10 years) away from the December all-time low would be of interest, as would any continued improvement in household financial position expectations.
German industrial production is expected to register a third consecutive month of expansion in December (+0.3% mom) on the back of supportive global demand conditions, a recovery in regional fixed investment and the lagged effects of euro weakness. This would leave annual growth at 2.5%, the fastest rate of expansion since January 2016.
China’s export growth (in US dollar terms) is expected to have rebounded to 3.0% yoy in January (versus -6.2% in December 2016), partly due to a lower comparison base. External demand is expected to improve, as indicated by a higher PMI export ordersub-index. Import growth is also forecast to accelerate to 9.6% in January from December’s 3.1%, reflecting base effects, higher import price inflation, and broadly stable domestic demand. On balance, the trade surplus probably widened to USD48.9 billion inJanuary from USD40.7 bilion in December.
The Reserve Bank of India (RBI) is expected to cut the repo rate by 25bp to 6.00%. This move should be supported by weak domestic demand and credit growth, a benign inflation trajectory (currently running below the RBI’s target of +5.00% for March 2017), better transmission of monetary policy post-demonetisation, and the government’s prudent budget. However, the decision is not clear cut. The pickup in global oil and commodity prices, bottoming out of headline inflation as favourable base effects fade,sticky core inflation and continued global uncertainty may see the RBI remain on hold.
India’s industrial production growth is forecast to have eased to 1.4% yoy in December from a strong 5.7% in November (boosted by a major rebound in the volatile insulated rubber and cables segment and partly due to base effects). The infrastructure industries index/core-sector output grew 5.6% yoy in December compared 4.9% in November, but auto production dropped and the manufacturing PMI slipped into contractionary territory in December. On balance, industrial production growth likely stayed subdued due to short-term demand disruption following demonetisation.
January’s Brazilian IPCA inflation is expected to slow to 5.5% yoy from 6.3% in December. This represents a near halving from the 10.7% peak seen in January 2016. The most recent Central Bank of Brazil Monetary Policy Committee minutes point to an expectation that inflation will continue to decline, to below 5% by the end of 2017 and towards mid-target (+4.5%) by 2018. This continued inflationary slowdown is likely to provide further room for policy rate cuts; especially given the worsening unemployment situation. The Q4 2016 jobless rate rose to its highest level since Q2 2004 at 11.9% up from 7.4% a year ago.
The January Mexican CPI release is anticipated to see a further acceleration in prices, rising for the seventh straight month. Furthermore, this is the fourth straight month that CPI inflation has been above the central bank’s 3% target. Inflation is likely to see upside pressures from energy price liberalisation, pass-through from depreciation of the Mexican peso and the recent rise in he minimum wage. These pressures are forecast to seeBanxico raise interest rates by 50bps to 6.25%, with the continued aim of halting recent inflationary pressures, and to settle the rise in inflation expectations seen since the election of US President Donald Trump.
WTI oil prices advanced on OPEC deal optimism; gold prices rose
WTI oil prices edged up again this week, with prices supported by a weaker US dollar, a continuing run of robust global economic data and expectations that OPEC members are meeting their production-cut targets. However, this was dampened somewhat by the US Energy Information Administration weekly report showing a bigger than expected increase in crude stockpiles last week (+6.5 million barrels, consensus at +2.6 million). Evidence of higher production from OPEC member states not part of the production deal (Nigeria, Libya and Iran) also weighed on sentiment. Overall, WTI crude rose (+1.3% to USD53.9 per barrel),underperforming Brent (+2.2% to USD56.7 per barrel).
Gold prices rose this week (+2.4% to USD1,220), also supported by dollar weakness and broad-based risk aversion amid Trump related geopolitical uncertainty.
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