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we’ll see a new forex weekly analysis.
Global equity indices edged higher last week on upbeat corporate earnings and Trump stimulus hopes, offsetting US and European political uncertainty
US President Donald Trump promised a “phenomenal” tax plan within a few weeks’ time
Defying expectations of a 25bps rate cut, the Reserve Bank of India (RBI) kept its policy repo rate unchanged at 6.25%, in order to further assess the transitory effects of the government’s demonetisation efforts on inflation and growth
In the coming week, US Federal Reserve Chair Janet Yellen’s monetary policy testimony to both the Senate Banking and House Financial Services Committees will be closely scrutinised for any clues on the likely trajectory of US interest rates
In the coming week, the US economy’s health and whether it is sufficiently strong to warrant a near-term rise in interest rates will be the dominant question for financial markets. More light on this matter will be shed on 14 February by Fed Chair Janet Yellen when she delivers her monetary policy testimony to the Senate Banking Committee. The testimony will be repeated, but with an additional Q&A session, in front of the House Financial Services Committee on 15 February. There has been little change in US economic momentum since Yellen last spoke in mid-January, although her concern around a continued lack of momentum in wage growth might persist. The February Federal Open Market Committee (FOMC) meeting’s statement highlighted a balanced assessment of the outlook, combined with a continued firming of sentiment, but this is yet to be materialised in terms of improved activity which is still running at a “moderate” pace. Yellen may also sound cautious about the prospects for a March hike, without ruling it out entirely, reiterating her assertion that every meeting should be considered “live”. Finally, she is expected to provide further insight into her thinking on the Fed’s balance sheet unwinding strategy. This was first discussed by her prdecessor Ben Bernanke in January 2009, not long after the start of Quantitative Easing (QE). Financial markets will be mindful of Bernanke’s 2013 mention of the FOMC’s consideration of slower asset purchases, causing the so-called “taper tantrum”.
January’s CPI inflation release is expected to show that prices rose 2.4% yoy, the highest level since March 2012 and up firmly from 0.8% yoy in July 2016 as energy price base effects edge towards their peak. However, the more stable core measure, excluding food and energy, is forecast to dip slightly (-0.1ppts to 2.1% yoy). Furthermore, the Fed’s preferred measure of inflation – the core Personal Consumption Expenditure (PCE) price index – is currently sitting around 1.6%, somewhat below the Fed’s 2.0% target
January’s headline US retail sales are anticipated to expand by an anaemic 0.1% mom, due to a sharp drop in auto sales in December (-4.4% mom to 17.5 million annualised), partially offsetting higher pump prices during the month. Retail sales ex-autos and gasoline are expected to show a robust start to the year at +0.3% mom, following a flat print in December.
The February release of the NAHB/Wells Fargo Housing Market Index, which measures homebuilder confidence, is expected to rise by one point to 68, from December’s post-crisis high of 69 and reflecting continued strength in the housing market. January’s Housing Starts are expected to see little change after a recent volatile run, increasing by 0.3% mom (annualised 1,230,000), following a sharp 11.3% mom rise in December, 16.5% drop in November and a 25.5% increase in October. The continued strength of the labour market and high levels of affordability are likely to continue to support the housing market going forward. However, this may be dampened somewhat by the recent rise in mortgage interest rates, although they remain historically very low.
January’s UK CPI inflation is expected to accelerate further, by 0.3 ppts to a two-and-a-half-year high of 1.9% yoy. Oil price effects should play a significant role in the acceleration, while weaker sterling is likely to feed into some components, particularly food prices as retailers begin to pass on higher import costs to consumers. Meanwhile, amid continuing signs of UK economic resilience, the ILO unemployment rate for the three months to December is expected to hold firm at 4.8%, with wage growth also anticipated to stay at just below 3% yoy. Any upside surprise in wages could embolden the hawks on the Bank of England’s Monetary Policy Committee, with the last set of minutes showing some members were now “a little closer” to “the limits to the degree to which above-target inflation could be tolerated”. Finally, January retail sales (excluding auto fuel) are expected to increase over the month (+0.7% mom), following December’s unexpected large 2.0% decline. This would leave the annual rate at 3.9% yoy, the lowest rate of expansion since June 2016. Any downside surprise is likely to reflect the adverse impact of rising headline inflation on real spending power and a potential deterioration in consumer confidence, which has thus far weathered Brexit related uncertainty.
The February German ZEW survey of the current situation is forecast to stabilise, having risen unexpectedly sharply in the prior month (+13.8pts to 77.3 to its highest level since July 2011) amid robust activity data and domestic equity markets. However, the expectations component is anticipated to decline (-1.6pts to 15.0), remaining below its long-term average (24.0), weighed on by European political uncertainty (predominantly around Brexit and upcoming elections).
Following Germany’s unexpectedly large drop in December industrial production, the eurozone wide print is also expected to shrink (-1.5% mom). However, given the robustness of sentiment indicators in the sector (including the January Eurozone manufacturing PMI and EC Industrial Confidence indicators at their highest level since 2011), supportive demand conditions and a surge in German factory orders in December, a rebound is likely in the coming months.
Japan’s Q4 GDP growth is expected at 1.1% (qoq annualised), down from 1.3% in Q3, but still stronger than Japan’s trend growth (around 0.5%-0.75% per year), hence consistent with the Bank of Japan’s (BoJ)’s expectation of a gradual closing output gap and a convergence of inflation towards the BoJ target (2%) over the next two years. Fixed investment is expected to be Japan’s main growth engine, supported by the government’s recent fiscal stimulus package and inventory rebuilding by private businesses, after some downward adjustments in the first half of the year. Meanwhile, private consumption is anticipated to have remained flat, mainly due to Q4’s decline in real wages (for the first time since the end of 2015).
India’s CPI inflation in January likely slowed to 3.2% yoy, down from December’s 3.4% as food prices remained fairly weak, especially for pulses and vegetables. However, energy prices, particularly gasoline, rose substantially over the past year (+17% yoy in Mumbai), which may limit the potential for a downside surprise.
China’s CPI inflation for January is expected to increase from 2.1% yoy in December to 2.4%, mostly due to higher food prices on the back of the Lunar New Year celebrations at the end of January. Last year, the celebrations took place in mid-February, suggesting strong positive base effects will play out. Moreover, cost-push inflation has been gaining traction since the end of last year, with the producer price index rising at the fastest pace in five years.