Next week’s market movers
- In the US, all eyes will be on President Trump’s address to a joint session of Congress. Markets will be looking for any specifics on tax reform and other policies.
- In Canada, we expect the BoC to take the sidelines amid gradually improving economic data.
- We also get a plethora of key economic data from the US, Australia, the UK, Germany, the Eurozone, Canada, and Japan.
On Monday, in the US, durable goods orders for January are due to be released. The forecast is for the headline rate to have rebounded from previously, while the core figure is expected to have risen for the 5th consecutive month, indicating that despite some softness in civilian aircraft orders, the underlying trend in durable goods continues to be to the upside. The case for solid durable goods orders is supported by the nation’s ISM manufacturing PMI for the month, where the new orders sub-index, already at an elevated level, rose for the 5th straight month as well.
On Tuesday, the highlight of the day will be US President Trump’s address to a joint session of Congress. Following Trump’s recent pledge that he is going to announce a "phenomenal" plan on tax reform within the next weeks, market participants will be on the edge of their seats for any details regarding the new administration’s fiscal plans. If he announces proposals that are more or less in line with what he has pledged pre-election, such as reducing corporate tax to 15% – 20%, the USD could gain back some of its lost glamour as the theme of fiscal expansion comes back into play. On the other hand, a percentage markedly higher than the aforementioned could extend the latest slide in the USD triggered by the Fed meeting minutes. Another point of interest for investors, may be any specifics regarding the prospect of a one-time repatriation of corporate cash held abroad at a discounted 10% tax rate, a central theme of the President’s campaign. A confirmation of that could help the dollar as well.
As for the US data, we get the 2nd estimate of Q4 GDP. Expectations are for economic growth to have been revised upwards, albeit slightly. This would likely be encouraging news for FOMC policymakers, who in their February policy statement noted that economic activity continued to expand at a moderate pace. Although continued strength in economic data could revive somewhat market expectations with regards to a March hike, we will stick to our guns that something like that is very unlikely.
On Wednesday, the highlight of the day will the Bank of Canada rate decision. At its latest gathering, the BoC maintained a neutral bias with regards to policy in the meeting statement. However, Governor Poloz was quick to backpedal on that stance in the press conference following the decision. He said that another rate cut remains on the table should downside risks materialize, leading investors to price in a higher probability for further easing. Since that meeting, economic data and developments have been encouraging, on balance. The labor market tightened notably in January and GDP growth rebounded in November, on a monthly basis. What’s more, oil prices have remained elevated in the aftermath of the OPEC consensus, while inflation data for February came in on a solid footing. The headline rate surged to 2.1% yoy from 1.5% yoy, while the core rate rose to 1.7% yoy from 1.6% yoy. Perhaps something worrisome for the Bank is that its signals for further easing did not manage to materially weaken the CAD, which has remained strong against most of its major counterparts. Bear in mind that when they last met, BoC officials expressed their discontent about the appreciation of the currency following the US election. Taking all these into account, we expect the Bank to remain sidelined. In such a case, market focus will quickly turn to the statement accompanying the decision, as there is no press conference. Given the progress in economic data, we expect the tone of the statement to remain neutral. However, there is the possibility for another warning about the strength of CAD, considering that the currency has traded sideways against most of its major peers since then.
In Australia, GDP data for Q4 are due to be released, though no forecast is available. Following the unexpected tumble in Q3, we see the case for a rebound in Q4, a view shared by the latest RBA policy statement. We base our expectations on the fact that iron ore prices skyrocketed throughout the quarter, and that retail sales for Q4 also rebounded.
From the UK, we get the manufacturing PMI for February. Then on Thursday, we get the nation’s construction PMI for the month and subsequently on Friday, the services index. Considering that economic growth has remained robust in the UK ever since the referendum, we think that investors will monitor these surveys primarily as gauges of how fast inflation is rising and thereby, of whether or not the BoE is likely to tighten its policy in the foreseeable future. Following comments from BoE policymakers on Tuesday, such a scenario appears rather unlikely. Even Ian McCafferty, a notorious hawk among the Committee, signaled that there is "some hope" that interest rates could start to normalize in two or three years. Even though that depends on how inflation evolves over the coming months, the fact that presently there seems to be very little appetite for rate hikes even by the most hawkish MPC members is important in our view.
From Germany, we get the preliminary CPI for February. In January, the yearly CPI rate rose even further to 1.9%, which is in line with the "below, but close to 2%" ECB’s inflation target for the bloc. Without any forecast available for February, we see the case for the rate to have risen again and perhaps overshoot 2%. Our view is supported by the nation’s composite PMI survey, which showed that prices charged by firms accelerated to a 68-month high in February. Something like that could raise speculation that the bloc’s overall CPI, due to be released the following day, may follow suit and accelerate further.
From the US, we get a plethora of economic data. Let’s kick off with personal income and spending data, both for January. The forecast is for income to have risen at the same pace as previously, while spending is expected to have slowed, but to have still grown at a healthy rate. We see the risks surrounding the income forecast as skewed to the downside, considering the disappointing average hourly earnings print for the month. At the same time, a slowdown in spending is supported by a similar reaction in January’s retail sales.
We also get the ISM manufacturing PMI for February and on Friday, we get the non-manufacturing index for the same month. Both figures are expected to tick down, but to still remain well above the key 50 barrier that separates expansion from contraction. Despite the potential declines, given that these indices are expected to remain at healthy levels, we doubt that they will have a material effect on market pricing regarding the next Fed rate hike.
Finally, we get the core PCE price index for January, though no forecast is available yet. Nonetheless, given that this is the Fed’s favorite inflation measure, and that this rate has been range-bound since February 2016, we expect it to attract a lot of attention as investors try to gauge the timing of the next increase in borrowing costs. A potential increase in this rate could spark new hopes with regards to a March hike, as it could confirm that underlying inflationary pressures have begun to accelerate, something already indicated by the acceleration in the core CPI of the same month.
Overall, we maintain our view that the FOMC is unlikely to rush into a March hike amid lackluster wage growth and heightened uncertainty around fiscal policy, which in our view is supported by the Fed minutes on Wednesday. Our model which is based on the yields of the Fed funds futures now shows a 28% probability for a March hike, but we see even that number as somewhat optimistic if we take into account that the Committee has turned more dovish this year through the rotation of voting rights. Therefore, we still expect the next rate hike to come in June. Alongside a potential uptick in the core PCE price index rate, we would like to see some acceleration in wage growth and some clarity around fiscal reform, before we reconsider this view.
On Thursday, we get Eurozone’s preliminary CPI data for February, though no forecast is available. Our own view is that the headline rate may have risen further, but we remain mindful on whether the core rate will follow suit. The bloc’s composite PMI survey for February showed that the rate of inflation in the euro area was the steepest since July 2011, supporting our view for a higher headline CPI rate. However, the report also found that part of the progress was owed to higher commodity prices, something that may be filtered out of the core CPI. ECB President Draghi placed a lot of emphasis on the core rate at the latest policy gathering. He said that although the headline rate has risen, that reflects primarily transitory effects. He made it clear that until there are convincing signs of an upward trend in core inflation, the Bank is likely to keep its dovish policy stance unchanged. Given these signals, we expect the core CPI to be closely watched, as a noticeable upturn in this rate in coming months is needed to fuel market speculation regarding the prospect of "ECB tapering" in the foreseeable future.
From Canada, we get GDP data for Q4. In the absence of a forecast, we see the case for GDP growth to have accelerated from the previous quarter. Retail sales were stronger in Q4 than Q3, oil prices were elevated for most of Q4, prior and following the OPEC consensus, and the nation’s exports rose markedly following a soft Q3. Considering that when it last met, the BoC noted that another rate cut remains on the table, we believe that accelerating GDP growth is likely to diminish somewhat the likelihood for further easing by the Bank.
As we noted above, we also get the UK construction PMI for February.
On Friday, during the Asian morning, we get Japan’s CPI data for January. In the absence of any forecast, we see the case for both the headline and the core rates to have risen. We base our view on the nation’s forward-looking Tokyo headline and core CPI rates for January, both of which rose. Nevertheless, we doubt that any modest increase in these rates will lead to a material shift in BoJ policy away from QQE with yield-curve control. We think that the BoJ is likely to be happy to keep its ultra-loose policy intact for a while, amid gradually improving economic data overall and a considerably weaker yen following the US election.
From the UK we get the services PMI for February, and from the US, the ISM non-manufacturing PMI for the same month, both of which we already described.