Week in review
Last week, some small downside surprises in US data led to a correction in risky assets. This is not to say that trends in US data demonstrated any sign of a marked deterioration last week but rather that expectations on US data may have risen quite fast and too soon. What is even more interesting, however, is that the EUR traded strong despite equity weakness and despite the fact that the much awaited ECOFIN meeting on Monday/Tuesday did not lead to announcements on policy initiatives to alleviate the crisis. Similarly the visit of China’s President Hu to the US did not lead to any major surprises.
With respect to the EUR/$, markets are starting to focus on the possibility that European leaders may now be more determined to finally agree on more decisive measures to address the debt crisis, even if that decision takes a few more weeks to reach. Moreover, front end Eurozone interest rates shot up following the ECB meeting, after Trichet signalled a shift in focus back to more traditional monetary policy concerns, like growth and inflation. Finally, on Friday, the IFO continued to strengthen to further record highs supporting the EUR upside further.
The week ahead will have interesting GDP prints out of the UK and the US in store. The market has recently shifted to price in a stronger US recovery and a higher probability for BOE hikes – so both prints will be watched closely and will inform investor decisions. Also worth watching are the German and Eurozone PMIs and if they confirm the signs of ongoing strength by the IFO. Against the strong growth back drop in the Eurozone, political events always the potential to increase uncertainty and the prospect of earlier Irish elections than the previously scheduled March date could be a concern.
The US FOMC is expected to acknowledge the improvement in the macro data but not to change its policy stance. President Obama’s state of the Union address will likely focus on budget consolidation and policy to support employment. Hungary’s and Israel’s central banks are both expected to raise base rates on Monday, and so is India’s on Tuesdsay. The minutes from the recent MPC meeting in the UK should continue to indicate that the MPC will likely see through the volatile nature of the commodity price pressures which have led to higher CPI inflation against the drag that fiscal consolidation may pose on domestic demand ahead.
German and Eurozone Flash Manufacturing PMI (Jan). German PMI is expected to stay at very high levels of 60.5 very close to the prior reading and consensus.
Hungary Monetary Policy Meeting (Jan): Rates are expected to rise from 5.75% to 6.00%, in line with consensus.
Israel Monetary Policy Meeting (Jan): As core inflation continues to rise, BOI will continue to normalize policy rates by raising rates to 2.25% from 2.0% as consensus anticipates as well.
BOJ Meeting: BOJ Monetary Policy Board is expected to confirm that it is maintaining an accommodative monetary policy stance.
India Monetary Policy Meeting (Jan): Central bank to raise rates by 25bps.
UK GDP (Q4 Prelim): With the recent elevated inflation prints, market expectations have picked up for a BOE hike in the next few months; GBP has also traded strong on the back of this. Growth, however, is likely to be a decisive factor on that front. Market will therefore keep a close watch on the GDP print; consensus expectations of 0.5%.
US Consumer Confidence: Consensus expects small improvement relative to the last print of 52.5 at 54.2
President Obama’s State of the Union Address: Labour markets and the timing of fiscal consolidation will likely the key issues.
Korea GDP (Q4): We expect Q4 GDP to rise by 0.4% qoq resulting in annual growth of 6.1% for 2010.
UK Minutes of MPC Meeting (Jan). With the recent high headline inflation numbers, the market is focusing on the potential for a policy shift for the UK MPC in the months ahead. Minutes of this last meeting are expected to continue to focus on the volatile nature of commodity prices which have driven inflation higher, the softer trends in core and the impact of fiscal consolidation ahead.
US FOMC Meeting (Jan): The FOMC’s assessment of economic conditions is likely to improve. No changes in policy.
Japan Trade Balance (Dec): Exports appear to have remained firm in December, and we are forecasting a reading of +9.6% yoy (+9.2% in November, consensus +9.3%). Export value liekly increased more sharply than import value, and that as a result the trade surplus widened to ¥448.5 billion from ¥161.1 billion in November (consensus ¥465.0bn).
US Durable Goods Orders (Dec): Durable goods orders have likely risen by 1% in December. Consensus anticipates an increase of 1.5%.
US Weekly Claims
Japanese Labour Market Data (Dec): Employment conditions are improving, but at a slow pace. Expectations for improvements in both the unemployment rate, a lagging economic indicator, to 5.0% in December, better than consensus at 5.1% and from 5.1% in November. The effective ratio of job offers to applicants, a coincident indicator, to 0.58 from 0.57 (same as consensus).
Japanese CPI (Dec): Do not expect any major change in the core-core CPI trend, consensus looking for -0.8% in December (-0.9% in November).
US GDP (Q4 advanced): Consensus expects a 3.5% qoq annualized print (Goldman is at 3%).
via Goldman and Zero Hedge