Week In Focus: BoE, RBA & RBNZ All Convene, With Brexit Negotiations & Chinese Trade Providing Risk Elsewhere
Monday: Brexit Negotiations Round Begins
Tuesday: RBA Monetary Policy Decision, UK Services PMI (Jan)
Wednesday: New Zealand Labour Market Report (Q4)
Thursday: BoE Monetary Policy Decision & QIR, RBNZ Monetary Policy Decision, Chinese Trade Balance (Jan)
Friday: Canadian Labour Market Report (Jan), RBA Statement on Monetary Policy
There are no tier one releases due from the US during the week.
Across the border in Canada focus will fall on January’s labour market report due on Friday. Consensus looks for headline jobs growth to slow to 1K from December’s 78.6K, while the unemployment rate is expected to tick up to 6.0% from the 5.7% seen in January. Alongside its latest monetary policy decision (where it hiked as expected) the Bank of Canada noted that “labour force participation and hours worked are showing promising signs. Recent data shows that labour market slack is being absorbed more quickly than anticipated. Wages have picked up but are rising by less than would be typical in the absence of labour market slack.” On the wage front RBC notes that “wage growth has picked up but remains a bit low relative to the unemployment rate at 2.9% Y/Y for permanent workers. In any case, the BoC’s recently introduced wage-common measure discounted the LFS wage growth figure in favour of less timely values from productivity, national accounts, and establishment employment data.”
Other releases of note: Monday: US Services & Composite PMIs (Jan, F), ISM Non-Manufacturing PMI (Jan) Tuesday: US Trade Balance (Dec), Canadian Trade Balance (Dec), US JOLTs Job Openings (Dec), Canadian Ivey PMI (Jan)
There are no tier one releases due from the region during the week.
Other releases of note: Monday: Eurozone Services & Composite PMIs (Jan, F), Eurozone Retail Sales (Dec) Wednesday: German Industrial Production (Dec)
Early focus will fall on Brexit negotiations, with EU chief negotiator Barnier due to visit UK Brexit Minister Davis in London as the next round of talks get underway on Monday.
The heavily watched services PMI will also cross on Monday, with analysts looking for a reading of 53.8, which would represent a modest uptick from December’s 53.6. Last time out, survey collators IHS-Markit noted that “new order growth eased to a 16-month low” while “input price inflation hit a tspanee-month high.” The collators also highlighted that “trends in hiring and business investment in fixed assets such as offices are showing signs of deteriorating, as is expenditure on IT, computing and other business services as worries about Brexit result in delayed spending decisions. Rising price pressures are meanwhile also hurting consumer facing companies in particular.”
The first Bank of England (BoE) monetary policy decision of 2018 will conclude on Thursday, with consensus looking for the BoE to stand pat, with a 9-0 vote. The noted risk to consensus is that either/both hawks within the MPC (Saunders and McCafferty) cast a dissenting vote in favour of another hike. The decision will be accompanied by the latest Quarterly Inflation Report (QIR).
Since the BoE last convened, official statistics revealed that the UK economy expanded by 0.5% Q/Q in Q4 (against the BoE’s forecast of 0.4% in November). On the inflation front, CPI has peaked (for now), oil prices have risen by circa 13% and the GBP has moved higher on a trade weighted basis.
Citi suggests that “new BoE forecasts may reflect somewhat stronger growth and higher inflation rates, although the Bank will likely remain cautious due to Brexit uncertainty” (November’s QIR can be found here). Citi also posits that “the MPC’s supply assessment could lead to higher slack estimates, which would be dovish. But also lower potential growth. That would set a lower speed limit and thus be hawkish.”
BoE rhetoric since the last meeting has towed the line, in that it is consistent with the view portrayed in November’s QIR. Governor Carney has noted that wages are picking up, but conceded that they are not growing spectacularly, he also reiterated that he expects investment in the UK to pick up in 2019. The Governor has also suggested that inflation pass tspanough due to the exchange rate shock has further to go, and that he expects inflation to remain above 2% in the near future. Carney also stressed that any unwind of QE will be well telegraphed when the time comes.
Elsewhere BoE hawk Saunders noted that it is likely that interest rates will need to rise further over time, but any further tightening will be limited and gradual. Saunders also noted that Brexit could push BoE policy in either direction and reiterated that he expects the labour market to continue to tighten. Finally, BoE newcomer Tenreyro stated that, at the December meeting, she saw 'ample time' before the BoE would need to raise rates again.
Looking ahead, more focus seems to be placed on the May meeting, with several investment houses looking for further tightening then. Interest rate markets are currently pricing in a little over 50% chance of a hike in May.
UBS can see the MPC hiking in May “if a transitional deal has been struck, while we still expect the Brexit process to generate strengthening headwinds for the UK economy for a considerable time, the stronger than expected outturn for Q4 GDP and the better momentum the economy starts 2018 with as a result could give the MPC a window of opportunity to raise Bank Rate.”
However, UBS concedes that “there are growing doubts about whether the UK and EU will agree on a transitional deal by the time of the EU Council Summit in late March, and failure to do so would stay the MPC's hand as uncertainty intensifies and the economy slows more materially.”
Barclays, meanwhile, are in line with consensus and expect the next hike to come in November of this year, although they do note that “risks to our call are tilted towards an earlier hike.”
Friday’s production data will give us more insight into economic growth in Q4, after the initial GDP estimate came in at 0.5% Q/Q. Manufacturing production is estimated to have risen by 0.3% M/M from 0.4% last time out, industrial production is expected to fall by 0.9% M/M against a prior rise of 0.4% while construction output is expected to rise by 0.1% against a prior 0.4%. In December PMI collators IHS-Markit noted that the “UK manufacturing sector growth remains solid at the end of 2017 as output, new orders and employment rose at solid rates, with input cost and output price inflation easing.” For construction, the group suggested that “growth eased slightly in December. Housing remains by far the best performing area of activity, new orders rose at fastest pace since May and the sharp rate of input price inflation continued in December.”
Other releases of note: N/a
Early focus in China will fall on Monday’s Caixin Services PMI. As ever, there are no expectations; the prior release stood at 53.9, while the latest official survey came in at 55.0. In December, survey collators Caixin noted that “the expansion in new business picked up for the second consecutive month. Prices charged increased at a slightly slower rate in December, while input prices rose at the joint-fastest pace since February 2013.”
The other release of note in China will come on Thursday in the form of the trade balance, with consensus looking for USD 54.00bln from USD 54.69bln last time out.
In Australia focus will fall on Tuesday’s Reserve Bank of Australia (RBA) monetary policy decision. Consensus looks for the RBA to stand pat, with only one of the 48 surveyed by Reuters looking for a 25bps hike. The recent Q4 inflation headline was slightly softer than expected, however, the RBA’s preferred trimmed mean metric held steady at 1.8% Y/Y, as it remained below the bottom end of the RBA’s 2-3% band.
In his final address of 2017 RBA Governor Philip Lowe noted that “the continuing spare capacity in the economy and the subdued outlook for inflation mean that there is not a strong case for a near-term adjustment in monetary policy.” There has been little in the way of fresh developments surrounding household debt and consumer demand, but ANZ are looking for a more upbeat tone in the statement “after a positive run of data both domestically and globally. The higher AUD provides a bit of an offset and may see some refinement to the RBA’s commentary around the currency, but its move in trade weighted terms since November is minimal and commodity prices are stronger, so we don’t think there will be that much concern about the impact of the higher.” It is also worth noting that Governor Lowe will speak on Thursday and the Bank will issue its quarterly forecast update on Friday.
Tuesday will also bring the release of December’s and ultimately Q4’s retail sales. Consensus looks for a 1.0% Q/Q gain in Q4, against the 0.1% seen in Q3. ANZ notes that the quarterly release should reflect “solid nominal sales growth but only a very modest rise in retail prices.”
Across the Tasman in New Zealand, liquidity will be lower on Tuesday as the country observes Waitangi Day. Wednesday will bring the release of the quarterly labour market report, with analysts expecting employment change growth to slow to 0.8% Q/Q in Q4 from 2.2% last time out, the employment rate is expected to tick up to 4.7% from a prior 4.6%, while the labour cost index is seen steady at 0.7% Q/Q and 1.9% Y/Y. ANZ suggests that “the underlying message is still likely to be one of a strong labour market overall, albeit with moderating underlying growth. Wage growth is now off lows, but is still expected to be modest. We do not expect the figures to materially alter the RBNZ’s thinking on the outlook for the OCR, which is still firmly on hold.”
The Reserve Bank of New Zealand (RBNZ) will convene and issue its first monetary decision of 2018 on Thursday, with all of those surveyed expecting the central bank to stand pat. Most believe that interim Governor Grant Spencer will act as a placeholder, before Adrian Orr assumes the role in March. As a result, consensus looks for the Reserve Bank to maintain its balanced assessment and to emphasise that interest rates are likely to remain low for a considerable period of time.
It is also worth noting that a new Policy Targets Agreement (PTA) is yet to be signed. ASB suggest that “the published forecasts should depict a solid outlook for economic outlook. The low inflation starting point and higher than expected NZD could result in marginal downward tweaks in the published Official Cash Rate profile, but given pending changes in the monetary policy framework, financial markets should tread cautiously on drawing too much into any tweaks.”
The aforementioned soft Q4 CPI release was perhaps not as weak as the headlines suggested, as the domestic inflationary pressures were more positive than the tradeables side of the release which weighed on the headline. Nonetheless, markets reacted to the release pushing out expectations of the first RBNZ rate increase from November 2018 to the first quarter of 2019.
Westpac are more sanguine than the majority, noting that they “have long argued that inflation will prove lower than the RBNZ expects, and continue to forecast OCR hikes only from late-2019.”
Other releases of note: Tuesday: Australian Trade Balance (Dec), GDT Dairy Auction Thursday: Australian NAB Business Confidence (Q4) Friday: Chinese Inflation Data (Jan)