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Monday January 4, 2016 - 13:02:26 GMT -

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Monday 4 January 2016


     US labour market report and euro area flash CPI start the year off in earnest

     Services PMI is the main focus in the UK

     The divergent monetary policy outlook remains a key focus

US labour market statistics (Fri) will be the focus in the first week of the New Year. We are looking for nonfarm payrolls to rise by around 200k in December, in line with the market consensus, while the unemployment rate is expected to remain at 5.0%. The annual growth rate of average hourly earnings is also forecast to increase to 2.8% from 2.3%. The labour force participation rate has fallen in recent years and is currently at 62.5%, levels last seen in the 1970s. Some of the decline is likely to be cyclical and a key question is whether it picks up in the context of a sustained increase in wage growth. A rise in the participation rate would support the Federal Reserve’s aim to raise interest rates at a ‘gradual’ pace. According to Atlanta Fed President Lockhart, a gradual pace would be consistent with an increase in the policy rate every other meeting, namely four quarter-point increases this year to an upper bound of 1.5% which also tallies with the latest ‘dot plot’ of FOMC members. Markets, however, are pricing in only two further quarter-point hikes in the policy rate this year to 1%. How this gap in expectations of the pace of policy tightening between FOMC members and the markets unfolds will be a key focus for 2016.

Euro area CPI (Tue) to rise on energy price base effects. We look for the flash estimate of euro area CPI inflation to rise to 0.4%y/y in December from 0.2%y/y. This is expected to be driven primarily by the energy price base effect, though the ‘core’ rate, excluding food and energy could also edge up to 1.0%y/y from 0.9%y/y. The base effect reflects the impact of the sharp decline in energy prices in the same month a year earlier. As usual, the euro area flash CPI release will be preceded by preliminary German inflation figures (Mon) which are forecast to show a rise to 0.4%y/y from 0.3%y/y on the EU harmonised measure. More broadly, we expect the energy price base effect to continue to drive euro area headline CPI inflation higher over the course of 2016. As such, the evolution of core inflation will be closely examined as an indicator of underlying price pressures and will therefore have important implications for the ECB policy outlook.

UK PMI surveys (Mon-Wed) will provide a guide to activity at the end of Q4. The Office for National Statistics last month revised down UK GDP growth rates for Q2 and Q3, meaning that the economy has not been growing as strongly as previously thought. The official figures suggest that growth is now estimated to have been only 0.4%q/q in Q3, with domestic demand remaining the key driver of overall activity. Looking to Q4, we expect the manufacturing PMI to edge higher to 53.2 in December from 52.7, pointing to modest recovery in activity in the sector after the contraction in Q3. The services PMI is forecast to move down slightly to 55.5 from 55.9, though it would still be consistent with some improvement in overall GDP growth in Q4 to around 0.6%q/q. Nevertheless, with headline CPI inflation at only 0.1%y/y and forecast to rise only gradually in the months ahead, the MPC is expected to delay the start of policy tightening until the second half of the year.

The US ADP employment (Wed) and ISM (Mon/Wed) reports will provide early indications of Friday’s official nonfarm payrolls and of overall economic activity in Q4. Current indications suggest that the US economy probably expanded by around 2% (annualised) in Q4, which would be a similar pace to Q3. US external trade and FOMC minutes (both Wed) are also due. UK mortgage approvals/consumer credit (Mon) and external trade (Fri) figures will receive some attention. Other key releases include China Caixin services PMI (Wed) and German factory orders (Thu) and industrial production (Fri)


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