Start As You Are Meant To Go
If the beginning of the year is a harbinger to what the rest of the year will be like, 2020 could be a very eventful year in terms of geo-political risks, trade tensions and global crises - in unpredictable measure! For starters, within 7 days of the New Year, the world has already been brought to the brink of World War 3 and back again. Oil has shot up 7 percent in 3 trading days and back again. Gold has nearly touched a 7 year high. The risk-on risk-off pattern has reflected been reflected in and impacted almost every currency.
Against the backdrop of an election year in the United States, it is conceivable that this pattern of playing arsonist and fireman could recur.
Market expectations of a UK rate cut gathered momentum this week following what were interpreted as dovish comments by Governor Carney and MPC member Tenreyro. Two other members of the MPC, Saunders and Haskel, had already voted for an immediate rate cut at the last two policy meetings. Carney noted that the expected economic rebound, supported by fiscal policy, lower Brexit uncertainties and global recovery, is “not assured” and that the MPC is debating the merits of near-term stimulus. In a similar vein, Tenreyro said she would favour more stimulus if growth does not recover. Another argument is that the effective lower bound in interest rates favours more aggressively easing now – the so-called ‘risk management’ approach. In our view, the latest comments from Carney and Tenreyro certainly do not guarantee a majority of the nine MPC members will vote for more policy stimulus in the near term (the next announcement is on 30 January). But they have given notice that their tolerance of economic underperformance (with slack already judged to have opened up) is falling. Financial market pricing ‘bakes in’ such downside risks. The OIS curve appears to attach only about 25% probability to a rate cut on 30 January, rising to just above 50% probability by May. However, there are tentative signs that economic confidence may be recovering on the back of reduced Brexit and global trade uncertainties. Moreover, details of the expected fiscal stimulus measures in the Budget on 11 March have yet to be revealed, but have the potential to boost activity. Therefore, it remains to be seen whether current market expectations are warranted.
Weak global, "backward looking data" provides the broad context for next week’s UK data releases, which include monthly GDP for November (Mon), and CPI inflation (Wed) and retail sales (Fri) for December. We predict monthly GDP to be flat, reflecting no growth in services output and a small decline in industrial production. The three-monthly (Sep-Nov) GDP growth rate is seen edging down to -0.1%. Hence, a strong rebound in December would be needed to achieve the Bank of England’s central growth projection of 0.1%q/q in Q4 GDP. Survey evidence from the PMI suggests broad stagnation, but there are tentative signs from other surveys such as the GfK consumer confidence and our own Lloyds Business Barometer that sentiment may have started to improve. For December CPI inflation, we have pencilled in a sight fall in the core measure to 1.6% from 1.7%, but the effect of petrol prices is expected to keep the headline rate steady at 1.5%. Official December retail sales, meanwhile, are expected to show a strong rise, partly boosted by Black Friday falling into the December trading month in 2019. We predict a rise of 1.2%m/m for the headline measure, more than reversing the 0.6% decline in November. The official figures point to a slight fall in retail sales for Q4 as a whole, but the year-on-year comparison is expected to show a rise of around 2.5%. Michael Saunders (Wed) is scheduled to speak in Northern Ireland. As noted above, he is one of two MPC members who voted for an immediate rate cut at the last two policy meetings.
From a global perspective, the US and China are expected to sign a ‘phase one’ trade deal next week. Chinese Vice Premier Liu is to travel to Washington early next week, with the signature ceremony expected to be on Wednesday. President Trump has said that ‘phase two’ negotiations will begin ‘right away’, but may not be completed before the November elections. There are again a slew of Fed speakers next week, but the underlying message is likely to reaffirm that monetary policy is in a ‘good place’, following the three rate cuts last year. We expect the weakness of retail sales in November to be an aberration and see December sales (Thu) posting a solid rebound at 0.5% (for the ‘control group’ measure). Although December payrolls increased less than expected, underlying labour market conditions continue to underpin consumer activity. We expect US December headline CPI inflation (Tue) to rise to 2.3% from 2.1%, but for the core measure to hold steady at 2.3%. Inflation is not a particular concern at the Fed right now. Other data releases include industrial production and housing starts/permits (Fri). Returning GM workers led to a strong rise in November industrial output, which we expect to be partially reversed in December. The underlying picture for the sector remains soft, weighed by the impact of heightened global trade tensions.
Eurozone industrial production data for November (Wed) will provide a more complete picture for Q4 GDP. Germany and Spain reported strong rises, but that was less evident elsewhere. Overall, we look for a monthly rise of 0.2% in the Eurozone. Germany will also release full-year 2019 GDP growth, which we expect to show a fall to 0.6%, a six-year low, from 1.5% in 2018. Focus is likely to be on the publication of the minutes of Christine Lagarde’s maiden ECB meeting as President in December (Thu). Notable was the ECB’s assessment of ‘less pronounced’ downside risks to the economic outlook, while reiterating that governments with fiscal space should be ready to act. Key attention will be on any further clues regarding the ECB’s forthcoming ‘comprehensive’ strategic review, which is due to be completed by the year-end.
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See you next week!
None of the information in this article is, nor should be construed as financial advice. All foreign exchange transactions involve risk and you should always seek your own independent financial advice before entering into any foreign exchange transaction.