The Week In Review And Key Global Macro Events In The Coming Week

Via Goldman Sachs

Week in Review: BoJ Provides Some Excitement

The main event last week was the BoJ meeting where the bank surprised the market by both expanding its asset purchase program and firming up its policy communication, from an 'understanding' on where long term inflation should lie to a 'policy goal'. This helped propel USD/JPY higher, past 79 to spot rates last seen in July 2011. What is interesting about the move in USD/JPY over the past month, is that it is once again co-moving with interest rate differentials after a notable breakdown in this relationship between mid-September last year to late January this. If the interest rate differential continues to widen, then USD/JPY may continue to move higher. However, FX is relative and we need to contemplate the prospect of QE3 from the FOMC likely in Q2. With the front ends of the curves in both Japan and the US likely to be anchored by indications that the respective central banks will keep rates on hold for years rather than months, there isn't much scope for interest rate differentials to widen significantly and support a much higher level for USD/JPY. The other recent relevant announcement for USD/JPY, was confirmation of so called 'stealth' intervention by MoF in early November after the significant intervention in spot on October 31. Ongoing fears of intervention may well also influence USD/JPY in the near term and the likelihood of a large Japanese trade deficit in January will keep potential Japanese policy measures on the radar screen.

The other central bank surprise was delivered on Saturday, when the PBOC announced a RRR cut of 50bps, taking the RRR for large banks and small and medium banks to 20.5% and 18.5% respectively. The move is likely to alleviate the tightness in the interbank market and is consistent with Premier Wen's recent commentary that policy fine tuning will start at some point this quarter. Going forward, we expect policy to be generally supportive of growth. Further cuts to the RRR and benchmark interest rates can be expected though quantitative controls will continue to be the key as they have been in the past. We expect new lending in 1H2012 to be at least broadly on par with 1H2011. Other constraints on liquidity supply, such as the loan-to-deposit ratio requirement, can be relaxed partially as well if they become a hurdle to providing sufficient liquidity.

Otherwise, the week provided a slew of activity data, which on the whole was decent. Euroland Q4 GDP contracted less than expected at -0.3%qoq and despite some misses in US data, US Q1 GDP is tracking at 2.5%qoqann. After the Philadelphia Fed survey last Thursday, we released the advanced reading of our Global Leading Indicator for February which showed a further pick up in momentum to 0.32%mom.
From a purely FX perspective, the US TIC data were a key piece of information last week. Foreign investors - both private and official - were net sellers of US assets in December. On the other had, US investors repatriated record amounts of foreign assets in December. Summing these flows up indicates still small inflows into the US, which leaves the US external balance negative for the Dollar.

Finally, Greece remained in focus as the relevant parties continued to discuss the necessary conditions for providing a second package for Greece. Q4 GDP starkly reminded us of the challenges facing the Greek economy, recording a 7%yoy drop.

Week Ahead: Gauges of Global Activity

The week ahead is fairly light on big ticket data releases, but what is released will provide more evidence of the strength of global activity. The most important of these will be the flash PMIs for China and the Euro area and the German IFO reading . There is no consensus expectation for the China print, however the Euro area indices are both expected to rise slightly, as is the German IFO. If the flashes do indeed continue to rise, it will reinforce the signal from our advanced reading of our GLI for February. Consumer confidence in Italy and France are also worth a watching for the same reasons. In terms of cyclical hard data, Taiwan export orders and IP for Singapore and Taiwan, Euro area industrial orders and trade data from Japan and Thailand will be notable. Admittedly the data from Asia is likely to be complicated by Chinese New Year which fell in the third week of January, and presumably this is why the consensus expects such a sharp drop in Taiwan IP, however the data are still worth watching for indications of the strength in global activity. Generally, consensus expectations for these prints are not particularly encouraging and any 'beats' would be a positive surprise.

It goes without saying that ongoing negotiations towards signing off on Greece's second package will also remain on the radar screen. As we write, Reuters has posted suggestions that the debt swap will be open by March 8 and complete by March 11.

Monday 20 February

• Japan Trade data (Jan): We expect a large trade deficit of JPY1.7trn in January largely due to (1) a regular tendency toward trade deficits in January; (2) the impact of the Lunar New Year falling in January this year rather than February; and (3) higher raw material import prices and volume. Consensus expects a deficit of JPY1.4trn.
• Taiwan Export Orders (Jan): We forecast January export orders to register another decline of 6.2%yoy, after falling 0.7%yoy in December, affected by the Lunar New Year effects and weak external demand. Bloomberg consensus forecasts a fall of 5.9% yoy.
• Thailand Q4 GDP: We expect 4Q2011 GDP growth to come in at -4.4% yoy versus consensus expectations of -5.1 % yoy.
  The sharp contraction due to the flood-related disruptions in 4Q2011. Previously, 3Q2011 GDP growth came in at 3.5% yoy. Our full-year estimate for 2011 growth is at 1.2%.
• Eurogroup meeting
• Also of note: Hong Kong CPI (Jan), Philippines BoP (Jan), Thailand trade (Jan).

Tuesday 21 February

• RBA Minutes: Despite the statement that accompanied the February rate decision being quite hawkish relative to our own views, we still see a strong chance that the key phrase “Members considered whether the recent information warranted further policy tightening” will be included in the Minutes, indicating that the decision to hold steady was a close run call. We expect the key issue will be the RBA’s views on the net impact on inflation and growth of the two offsetting (but related) forces – the boost from the mining boom vs. the drag from the strong A$.
• Korea 20-day trade data (Feb): After the weak January data, it will be important to gauge the trends indicated in the February statistics.
• Also of note: Swiss Trade data (Jan), UK public finances,

Wednesday 22 February

• China HSBC Flash PMI (Feb). The data are set to be released between 22-25 February, the previous print was 48.8.
• Malaysia CPI (Jan): We expect January CPI inflation to moderate to 2.8%yoy from 3.0%yoy previously. Bloomberg consensus is expecting 2.7%yoy.
• Euroland Flash PMI (Feb): Consensus expects the Manufacturing reading to rise to 49.4 from 48.8 and the services reading to rise a smidgeon to 50.6 from 50.4.
• UK BoE Minutes: We continue to expect the Bank to increase QE by a further £50bn in May, although this week’s Report suggests that the risks around that forecast are skewed towards less easing than our central forecast implies.
• US Existing Home Sales (Jan): we expect a rise of 2.0%, consensus only 0.9% after 5% the previous month.
• Also of note: Euro area industrial orders (Jan).

Thursday 23 February

• Taiwan IP (Jan): Consensus expects Taiwan IP to drop by 17.85%yoy after a decline of 8.15%yoy previously.
• Singapore CPI (Jan): We expect January CPI inflation to moderate to 4.7% yoy from 5.5% yoy previously, partly on base effects. The consensus expectation is at 4.9% yoy.
• Also of note: German IFO, Italy consumer confidence, US Claims,

Friday 24 February

• RBA Parliamentary Testimony: As with the minutes, we expect the key issue will be the RBA’s views on the net impact on inflation and growth of the two offsetting (but related) forces – the boost from the mining boom vs. the drag from the strong A$.
• US New Home Sales (Jan): We expect a rise of 1%mom, consensus expects a rise of 2.6% after a drop of 202% on the last reading.
• Singapore IP (Jan). Consensus expects a fall of 1.5%yoy after 12.6%yoy previously.
• US Uni. Mich Consumer Sentiment Final (Feb): Consensus expects a reading of 72.8 after 72.5 previously.
• Also of note: German Q4 GDP breakdown, French consumer confidence, Korea Consumer confidence, particularly the inflation expectations component, UK Q4 GDP (P).