US
International trade data for December was released leaving participants with little to chew on by way of economic data. The trade deficit narrowed to $44.3 billion from $45.7 billion in the prior month, beating economists’ expectations for a more modest pullback (to $45.0 billion). Exports bounced back after two months of contraction, while imports followed suit, in line with an acceleration in economic growth at home.
Initial jobless claims fell substantially, going against market expectations for a modest increase. The headline number fell to 234k for the week ending February 4th while the 4-week moving average declined to 244k, the lowest level since 1973. The job openings and labor turnover survey for December also painted a picture of an increasingly tight labor market, with job openings hovering around the 5.5 million mark, while the quits rate slipped only slightly to 2.0%, but remained near the cycle-high level of 2.2%.
Philadelphia Fed president Patrick Harker said that March is on the table for a hike, echoing San Francisco Fed chair John Williams earlier comments that next month’s meeting should be considered for a potential rate move. On a diverging stance, Fed Bullard cautioned against raising interest rate too early amid uncertainty over the Trump administration’s fiscal policies. Federal fund futures indicated that markets now see a 25% probability that the central bank may raise rates next month.
Retail sales figures for January are released on Wednesday. Private consumption continues to be the main growth driver and given the very high level of consumer confidence, retail sales is expected to rise 0.3% month-on-month in January, which would indicate that private consumption got off to a great start in 2017.
CPI figures for January will be released on Wednesday too. CPI is expected to rise 0.3% month-on-month pushed up not only by core CPI but also by higher energy and food prices, implying an increase in the inflation rate to 2.4% year-on-year in January from 2.1% year-on-year in December. CPI core inflation is expected to fall to 2.1% year-on-year from 2.2% year-on-year, which means the Fed can afford to stay patient before hiking again.
Next week, Yellen delivers her semi-annual monetary policy testimony to Congress. First she testifies before the Senate Banking Committee on Tuesday and then before the House Financial Services Committee on Wednesday. This will be Yellen’s first public pronouncement since Trump’s inauguration, casting her testimony in a special light. What the Fed thinks about, and how monetary policy might react to, potential fiscal and regulatory policy changes will likely be the main focus of congressional questioning.
UK
According to the ONS, total industrial production in the UK increased by 1.1% month-on-month in December 2016. This was far better than the consensus expectation of 0.2%. This followed an increase of 2.0% in the previous month (revised from 2.1%). Total production was buoyed by a broad-based increase in manufacturing. Pharmaceuticals (which can be erratic) provided the largest contribution to growth. Also, basic metals and other manufacturing and repair increased markedly in December. In total, manufacturing production increased 2.1% in December, beating consensus expectation of 0.5%. December numbers were also raised to show an increase in manufacturing production of 1.4%, from 1.3% earlier estimated.
Economic sentiment (PMI, CBI and EC) suggests output growth in manufacturing should continue in 2017 and remain around the level seen toward year-end 2016, i.e. an annual growth rate of around 3% to 4%. Further ahead, it remains to be seen how both export and domestic orders develop. The sentiment surveys have indicated strong domestic demand, while export orders have been a little softer than expected. This was due to increasing inflation taking some of the competitive advantage from the weakened GBP.
CPI data for January will be released on Tuesday. Total CPI inflation is expected to rise to 2.1% year-on-year in January from 1.6% in December pushed up partly by higher energy and food prices. The other contributing factor is that both non-energy industrial goods and service prices fell less than in January last year, which will also have pushed total inflation higher. Core inflation is expected to rise to 2.1% year-on-year as well.
In the UK labour market report for December, unemployment rate (3M average) is expected to rise to 4.9% from 4.8%, as the very low print in September drops out of the three-month average. The annual growth in average weekly earnings ex bonuses (3M average) is likely to have fallen to 2.6% year-on-year in December from 2.7% year-on-year in November.
EU
In December, Target2 Eurozone claims outstanding reached a new high. They can be expected to increase further this year, since they are largely the result of the ECB’s bond purchases. On the other hand, it is problematic that most of the vendors of bonds to central banks have their Target2 accounts with central banks in the core countries, not on the periphery. This alone might reveal a lack of faith in the peripheral countries.
Once again Greece faces a deadline to receive much-needed bailout funds from its international backers, but so far it has not fulfilled the terms of its prior commitments. With heavy debts coming due in April and July, Greece hopes to strike a deal at the last EU summit before the European election calendar kicks off in March. Finance ministers meet on 20 February, with Greece near the top of their to-do list. There is mounting concern that several European partners will not participate in the bailout any longer if the International Monetary Fund doesn’t. The IMF this week called Greece’s debt burden unsustainable and called for debt forgiveness. Germany’s finance minister said debt cannot be forgiven as long as Greece remains a member of the euro area, though German chancellor Angela Merkel later said the Eurozone must remain together as one bloc.
German GDP growth in Q4 is due on Tuesday. German GDP was up 1.8% in 2016 compared to 1.5% in 2015. The observed GDP growth in Q1 to Q3 implies a growth rate of at least 0.6% quarter-on-quarter in Q4. Economic activity is expected to be slightly stronger at 0.7% quarter-on-quarter as indicated by very strong survey indicators throughout Q4, although hard data at the end of Q4 did not fully mirror the expectations created from the surveys.
German ZEW expectations are also released on Tuesday. The ZEW increased to 16.6 in January continuing the increasing trend from Q4 16. However, ZEW expectations are likely to face a decline in February to 13.4 in line with the IFO expectations dropping in January and the Euro area Sentix decline in February.
China
Having peaked in 2015 at over $4 trillion, China’s foreign exchange reserves slipped below $3 trillion in January, according to government data. Beijing has been selling down reserve assets for the past 18 months to try to stem capital outflows from the Chinese mainland.
China’s export figures were much stronger than expected but the release could be largely ignored. The year-ago % change in exports was up 15.9% in yuan terms and 7.9% in USD terms. Both benefitted from large declines a year ago when exports fell by 15% year-on-year in January 2016 in USD terms and 11% in yuan terms. So base effects swung the numbers much higher. That will be an even more powerful influence next month since those figures will be compared to numbers 12 months ago that were down 28% year-on-year in February 2016.
In China inflation data is due. Focus will mainly be on the Producer Price Index (PPI) as PPI inflation has shot higher since early 2016. However, it may be close to a peak as commodity price inflation is expected to peak soon. Since this is the primary driver of producer prices, PPI inflation is likely to come down during 2017.
Sources: Commerzbank, Haendelsbank, Danske Bank, Hong-Leong Bank, TD Economics, MFS Investment Management.