US
The Federal Open Market Committee (FOMC) stood on the sidelines this week, raising concern over economic and financial developments globally. The tone of the statement was more dovish than expected, reducing the odds of a March hike.
US economic growth slowed in Q4 last year, with the economy advancing by a meagre 0.7% q/q (annualised). Much of the drag on the headline number stemmed from weaker net exports and a continued drawdown in inventories, each subtracting 0.5 percentage points from the headline.
Although GDP is expected to rebound in the current quarter, the bounce back will be modest. Data released this week showed the manufacturing sector is having greater difficulty staving off the negative effects of tepid global growth, the strong dollar and the rout in commodity prices. Durable goods orders fell sharply in December, declining 5.1%. The outcome was well below expectations and can be in part traced to the always volatile aircraft component (down 29%). More troubling, however, was the 4.3% drop in core capital goods orders (non-defence capital goods orders ex-aircraft), which came on top of a downward revision for November.
Next week, the most important release is the jobs report for January due on Friday. The labour market tightened significantly in 2015 which was the main reason why the Fed raised the target rate in December. The financial turmoil partly reflects rising growth concerns due to tighter monetary policy in the US and weak economic data and hence a strong jobs report could potentially calm the markets.
EU
In Europe, the economic data was also mixed. While the UK continued to power along with growth of 0.6% (2.3% annualised), France painted a somewhat less rosy picture, growing just 0.2% (1.0% annualised) in the final three months of the year. Despite relatively soft growth in the Eurozone, there are some signs that inflation is moving slowly higher. German inflation accelerated to 0.4% (year-on-year) in January, up from 0.2% in December.
In the euro area, the week starts with release of the Spanish and Italian manufacturing PMI figures for January on Monday, while the corresponding service PMIs will be released on Wednesday. The unemployment rate for the euro area for December will be released on Tuesday. Retail sales for December are also due for release on Wednesday, and the focus is likely to be on any impact of the lower oil price and continued progress in the labour market.
UK
The most important event next week is the February meeting of the Bank of England’s Monetary Policy Committee taking place on Thursday. The Bank rate and the stock of purchased assets are expected to be maintained at 0.50% and GBP 375 billion, respectively.
Manufacturing production and order books showed signs of stabilising in the three months to January, but there are limited signs of a recovery in exports, according to the latest CBI Quarterly Industrial Trends Survey. Both domestic and export new orders were near flat, but that represented an improvement on the previous quarter when orders fell. Competitiveness abroad for manufacturers remains under intense pressure with sixteen of eighteen sub-sectors saying that their competitiveness in the EU was down on three months ago.
According to the British Bankers Association (BBA), the number of loans for house purchases fell in December. The figure is a good proxy for how activity in the housing market will behave in coming three to six months as the data are released in advance of the more comprehensive measure from the Bank of England.
Japan
The biggest news on the international front came late Thursday night when the Bank of Japan surprised markets by pushing interest rates below zero.
With the Bank of Japan joining their ranks, close to a quarter of global central banks now have interest rates in negative territory. The negative rate of -0.1% will apply to new reserves created by the Bank’s ongoing quantitative easing programme.
Sources: Danske Bank, TD Economics, Handelsbanken.
