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WEEK AHEAD - ECONOMIC DATA ANALYSIS
Friday 8 January 2016
MPC ON HOLD AS VOLATILITY FLARES
Chinese data could add to renewed market anxiety about extent of slowdown
Fed speakers to flesh out range of views on scope for US hikes in 2016
MPC on hold, with rising chance of McCafferty abandoning rate hike call
China again at the epicentre of global market anxiety. The opening week of 2016 saw marked volatility return to financial markets. The combination of a seemingly-accelerating pace of depreciation of the yuan, haphazard attempts by the Chinese authorities to restore confidence to stock markets, alongside a further sharp slide in oil prices has renewed doubts about the readiness of the global economy for a sustained tightening in US monetary policy. Taken in isolation, the overall solid US employment report provides some relief, adding to the perception that the FOMC may feel sufficiently confident to raise rates again as early as March. But Chinese data on inflation (Sat) and more importantly trade (Wed) could be near-term harbingers of bad news. Downside surprises may add to market volatility by more than the salving effect of stabilising numbers. Indeed, any weakness in exports in particular would be seen as a precursor to further yuan weakening - so helping to export disinflation to the rest of the world.
Fed speakers of more note than US data? Outside of the labour market, the uneven trends in US data still caution against relying on December’s ‘dot plot’ of FOMC members’ individual rate projections at face value. December’s median expectation implied 100bp of tightening in 2016; the slew of Fed speakers in the coming week could provide more timely colour on individual expectations, with New York Fed President Dudley’s comments (Fri) of particular note. Friday’s retail sales will be the week’s key US economic indicator. December’s stalling car sales may depress the headline reading, but reports from high street retailers over the holiday season have also been mixed, suggesting that US consumers are not recycling the savings from lower fuel bills as readily as assumed. The extent to which oil prices recover from recent 12-year lows will determine both the possible boost to spending and how quickly US inflation may move back towards the FOMC’s target.
ECB minutes and data to shed further light on prospects of extra easing. December’s additional stimulus from the ECB fell short of market expectations, and it is not clear whether President Draghi wanted stronger action but was not able to muster sufficient support. The meeting minutes (Thu) should reaffirm that the door is open for further easing. Meanwhile, Eurozone activity trends will be informed by area-wide industrial production data (Wed), and the release of German GDP growth figures for the full year of 2015 (Thu). We expect it to report calendar year growth of 1.7%, consistent with quarterly growth of around 0.4% in Q4. Strength of domestic demand would provide reassurance about the durability of the Eurozone’s recovery.
No change in UK rates expected. Thursday’s MPC policy announcement and meeting minutes seem very unlikely to herald any near-term UK policy tightening. Indeed, the case for an early move has been undermined both by downward revisions to UK growth momentum over 2015, and signs that pay pressures are failing to materialise. On balance, we still expect McCafferty to plump for a vote for an immediate policy tightening. But with Martin Weale - a past ‘hawkish’ voter - remaining unconvinced that the case for a hike has yet been made, McCafferty could abandon his solitary call for an early move, as he did in January of last year. Admittedly, the recent weakening of sterling provides some upside inflation news. But the undershoot against assumptions from November’s Inflation Report is still modest. Overall, while the MPC will weigh the net influence of recent developments in the updated projections of the February Inflation Report, the likelihood of a more gradual uptrend in inflation than previously expected could prompt a more dovish tone overall from the minutes.
UK data to provide colour on Q4 activity trends. The coming week’s UK industrial (Tue) and construction (Fri) data are unlikely to shift the tone of the policy debate. Our expectations of muted outturns are consistent with a recovery of GDP growth to 0.6% in Q4.
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