Friday January 29, 2016 - 18:16:14 GMT
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WEEK AHEAD; Economic Data Analysis
US LABOUR MARKET REMAINS KEY TO FOMC MARCH DECISION
Global PMI weakness could usher in a renewed bout of market volatility
BoE February Inflation Report to downgrade near-term inflation and growth forecasts
US employment report to show job gains easing to post-crisis average
Risk sentiment remains vulnerable. The firming of the recovery in developed market equity prices, which began towards the end of last week, has been boosted further by the surprising policy rate cut by the Bank of Japan. This rally has also extended to oil prices with Brent crude rising from its mid-January low of $26/bbl to over $33, partly on speculation over Russian-OPEC collaboration on supply cuts. However, Chinese equities have continued to slide over the past week amid elevated anxieties about the potential downside impact of financial market gyrations on broader economic activity, and vice versa. Against this backdrop, disappointing news from the upcoming global activity indices for January, in particular the Chinese PMIs and US ISMs (Mon, Weds), could trigger a renewed bout market volatility.
BoE Inflation Report to downgrade near-term growth and inflation forecasts. Recent speeches from BoE Governor Carney and other MPC members, as well as the minutes of the January policy meeting, have emphasised the accumulation of downside risks to domestic activity and inflation since the November Inflation Report (IR). Some of this reflects international developments. The preliminary estimate of Q4 GDP puts growth at a near-trend 0.5% q/q, while annual headline inflation remains close to zero as energy base effects soften against the backdrop of the nearly 40% fall in oil prices since the November IR. But there have also been concerns about the unexpected slowdown in the pace of wage growth despite the continuing robustness of employment and a stronger-than-anticipated dip in headline unemployment. Despite the upward impacts of a 4% weakening in trade-weighted sterling since the November report, further downgrades to projections for GDP growth and inflation over 2016 and 2017 are expected. Nonetheless, concerns about the supply-side capacity of the economy, possibly stemming from a decline in average working hours over the last year, could see November’s expectation of an inflation overshoot at the end of the two-year policy horizon remain intact. This would suggest that the current market forecast that the first increase in the Bank Rate will not take place until 2018 is overdone. Nonetheless, we do not expect Governor Carney to provide a strong steer on the timing at his press conference.
Softer January nonfarm payrolls unlikely to worry FOMC. Not surprisingly, the FOMC statement which accompanied this week’s decision to keep monetary policy unchanged acknowledged the potential downside risks from the weaker external environment. This uncertainty over the impact on the US economy may have underpinned the absence of any guidance on the prospects of a hike in March. However, speeches by the Kansas Fed’s George (Tue) and especially Fed Vice-Chair Fischer (Mon) provide an opportunity for further guidance. As in the run-up to December’s lift-off, the health of the domestic labour market will be a key policy driver. The strong run of monthly gains in payrolls during Q4, which averaged 251k, partly reflected a weather-related boost to construction hiring. The subsequent normalisation of temperatures in January lead us to anticipate a 185k print in Friday’s employment report. However, the FOMC will be reassured by the fact that this is close to the post-crisis average. Despite an easing in pay growth from 2.5% in December to 2.2%, unemployment is expected to fall to 4.9% which would be the lowest reading since February 2008.
Draghi and RBA to hold firm. The initial reading for January euro area annual inflation is forecast to see a second successive monthly rise . While oil prices fell in January, they dropped by even more at the same point last year. That should allow the headline rate to move up to 0.4% (from 0.2%), still well below the ECB’s inflation target. The ‘core’ rate is expected to be unchanged at 0.9%. Such an outturn is unlikely to reduce the odds of the ECB introducing further stimulus measures potentially as early as its next meeting in March. The ECB would have been expecting an even larger pickup in January inflation before the latest oil price fall. It will also be aware that inflation could start to decline once again over the next few months unless the oil price rebounds.
Other central banks may look to ease. ECB President Draghi is expected to reiterate his readiness to counter adverse growth and inflationary pressures in his address to the European parliament (Mon). After 50bp worth of cuts in 2015, the RBA is expected to leave the cash rate at 2.0% on Tuesday. However, it may leave the door open for another cut later in the year.
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