It's a quiet week in macro, but that doesn't mean there is nothing going on. Here is a summary of the key events happening in the coming week via GS and SocGen.
The main events of this week, monetary policy meetings at the BoE and the ECB on Thursday, are not expected to bring any meaningful changes. In both cases, banks are expected to keep rates on hold and to hold off on further unconventional policy measures. While significant economic slack still exists in the Euro area, and although the inflation picture has remained relatively benign, targeted non-standard policy measures are more likely than an interest rate cut. As financial conditions are already quite easy in the core countries, where the monetary transmission mechanism remains effective, the ECB’s first objective is to reverse the segmentation of the Euro area’s financial markets to ensure the pass-through of lower rates to the countries with the most need for further stimulus.
The data calendar is similarly light, with German factory orders and industrial production, US Trade data and MPC meetings in Korea, Peru and Poland the main releases to watch. In addition, the week will also bring a number of China data releases, including GDP, Retail Sales, IP and FAI, as well as price and trade indicators.
The Week Ahead:
Monday, January 7
- Interesting: Brazil IGP-DI Inflation, Swiss Foreign Exchange Reserves
Tuesday, January 8
- Chile CPI: We forecast 1.5%yoy, after 2.1% last month, while consensus expects 1.6%.
- Germany Factory Orders (November): Consensus expects a 1.4% decline, after last month’s reading came in at +3.4%.
- US Consumer Credit: Consensus forecasts +$12.7bn, down from the last report at +$14.2bn
- Also Interesting: Euro area Consumer Confidence & Unemployment rate, Hungary IP, Mexico Consumer Confidence, Korea Unemployment rate
Wednesday, January 9
- Poland MPC
- Mexico Inflation: We forecast 3.0%yoy for core, and 3.7%yoy for headline inflation.
- Germany IP (November): Consensus expects an increase of 1.0% after a surprising drop of -2.6% in October.
- Also Interesting: Hungary and UK Trade Balance, Canada Housing Starts, Czech Unemployment and Consumer Prices
Thursday, January 10
- ECB Meeting
- Bank of England MPC
- Bank of Korea MPC: We expect rates to be on hold at 2.75%, in line with consensus expectations.
- US Initial Claims: Consensus expects 365,000, down from last month’s 372,000.
- Brazil IPCA Inflation: We forecast a read of 5.8%yoy, in line with consensus, and up from last month’s read at 5.5%.
- China CPI: Consensus expects and uptick to 2.3% from 2.0% last time.
- Also Interesting: China PPI, Japan Leading Indicators, France IP, Mexico Economic Activity Index
Friday, January 11
- US Trade Balance: Our forecast at -$41.3bn is in line with consensus at -$41.2bn, after -$42.2bn last month.
- US Federal Budget Balance
- Also Interesting: Mexico, Spain, and UK IP, Swiss HCPI, Czech Retail Sales
FRENCH LABOUR MARKET REFORM
The French social partners (trade unions and employers) are due to meet for a final round of negotiations on 10-11 January in a bid to reach compromise on labour market reform. An Ifop opinion poll published over the weekend found 62% of those surveyed do not expect agreement to be reached. Employers want more flexibility on dismissal, wage setting and working-hours. Trade unions want better protection, with measures such as higher costs on temporary employment contracts and better health care protection. Failure to reach agreement between the social partners would force the government to take the lead and set out a labour market reform (by the end of Q1). With already low popularity readings, it is clear that the Hollande administration would prefer to avoid such an outcome and is encouraging the social partners to seek compromise. Pressure on France to reform is coming from three sources; (1) European peers, and notably Germany, (2) rating agencies and markets, and (3) the need to secure the future growth potential of the French economy. Historically, efforts to reform the French labour markets (and pensions - on the reform agenda in 2H13) have been met with strong resistance. MARKET ISSUES: France's ability to agree structural reform marks a key test for both France and the euro area.
BOE ON HOLD
Mixed data since the last MPC meeting offer no obvious trigger for a policy move this week and we look for no change. The MPC will have been encouraged by the significant increase in credit supply indicated by the Q4 Credit Condition surveys. Banks cited the Funding for Lending Scheme (FLS) as a key reason for the improvement. This week we expect to see some rebound in manufacturing output after the October slump. MARKET ISSUES: Gilt yields are caught between international economic optimism of the back of the US Fiscal Cliff compromise and fears domestically that the economy may be heading for a triple-dip recession and a rating downgrade.
COUNTDOWN TO LOWER SAXONY ELECTION
Voters head to the polling booths in the state election in Lower Saxony on 20 January. Whether or not the current CDU/FDP coalition can hold on to power will mark a first test for Chancellor Merkel ahead of the general elections due in the autumn. State elections are also due in this year in Hessen and Bavaria, but not until the autumn. MARKET ISSUES: On the domestic front, the opposition Social Democrats favour more income redistribution (with higher taxes on the rich). On tackling the European debt crisis, however, it is difficult to identify strong alternatives to the strategy adopted by Merkel. No doubt some of Germany's euro partners are hoping that should the opposition come to power, there would be greater appetite for risk sharing with less aggressive conditionality. Given public opinion in Germany, however, we would not expect marked differences in the management of the euro debt crisis. Most likely, the future Chancellor would still seek broad political consensus in the management hereof.
NO MOVE, BUT STILL EASING BIAS IN KOREA
Improving activity data suggest that the BoK will remain on hold this week. The BoK, however, expects the output gap to “persist for a considerable time”, and this combined with low inflation will keep the central bank leaning to an easing bias. Our central scenario currently does not discount further rate cuts, but won strength could tip the balance. MARKET ISSUES: With the new Japanese government pressuring the BoJ to ease more aggressively, the won has already seen appreciation against the yen. While Japanese exporters cheer, Korean exporters could become increasingly vocal on eroding competitiveness.
RATE CUT EXPECTED IN POLAND
Weak economic activity and low inflation should pave the way for a rate cut from the NBP this week to 4.0%, with one or two additional 25bp rate cuts in Q1. MARKET ISSUES: Our rate cut call for this week is in line with market expectations.
Source: GS and SocGen