Daily Forex Focus – 16 January
After the Friday the 13th fireworks display, compliment of S&P, the economic data may likely imply a choppy week for financial markets with a range of data releases, central bank speeches and political events. In the Eurozone, there are 2 important issues: the negotiations between the Greek government and bond holders on private sector involvement (also known as a voluntary haircut), and negotiations on the final texts and agreements for the fiscal compact. European debt auctions will also be an important guide to sentiment. In the US, inflation is expected to trend lower, but with consumer confidence likely rising and housing data set to perform relatively strongly, there appears little case for additional policy stimulus in the near term.
The dent in US output in November will probably have been no more than a one-off glitch, as industry is still on a clear growth course. December should have ended well in the black, and the first regional surveys for January will probably show even better results. US industry achieved 4.0% growth last year, making it a major driving force behind the recovery. This was due largely to generous corporate investment, with the corresponding demand for items such as machinery. Admittedly, output was down m/m from October by a slight 0.2%, but this will have been due to a one-off factor. The widespread floods in Thailand hit US car makers, whose orders for supplies were down. It was hoped that things would improve in December, as indicated by the number of man-hours worked in manufacturing: these had fallen in November, but in December increased by 0.5%. Consequently, we expect industrial output in December to have risen by 0.4%, which would mean that the upward trend would have continued.
Moreover, the new year would appear to have got off to a good start. The first regional industrial survey results for January due out next week, the Empire State index and the Philly Fed index, are expected to be encouraging. Since the regional indices have caught up with the national ISM index and the order component of the Empire Index has recently failed to keep pace with the aggregate index, however, we expect only minor improvements vis-à-vis December: The Empire State index is likely to have risen from 9.5 to 10.0 and the Philly Fed from 10.3 to 11.0. Also, please be advised that Monday is a holiday in the US in observance of Martin Luther King Day.
In Germany, we will see the release of the ZEW survey and it is likely to reflect a somewhat more upbeat take following months of disappointments. The improvements in the US, the weaker euro and the small rally in stock markets should support financial analysts’ confidence. Moreover, given the lack of important European data out next week, the Eurozone debt crisis should steer markets. In the UK, the BoE chose not to change monetary policy in January, but with this week’s data set to show a sharp drop in inflation, unemployment rising further and the trend in consumer spending remaining soft, we suspect that additional policy easing will be forthcoming in February. Despite 3Q11 GDP looking weak after stripping out exports, we expect the Bank of Canada to hold rates at 1.00% this week given that core inflation is still above 2%.
It is a quiet week in Japan by way of scheduled releases, with November updates to tertiary sector activity and machinery orders due. Weakness in manufacturing is leeching across to weaker service sector activity, and the November update should indicate a cyclical downturn is proceeding. In the machinery orders release, we watch for some signs of moderation in the decline in overseas orders. In Russia, next week’s external trade data should be of low interest, given that we already have the preliminary FY estimate. Eyes are likely to be on consumer confidence indicators for 4Q11 and then on IP/PPI figures, which we think will flag slowing IP and moderating PPI inflation pressure. In Poland, December output numbers may be less upbeat than previously, given the widening discrepancy between current production and leading indicators. The risks of a high CPI path, as mentioned recently by the MPC, may materialise in the December reading – reaching the inflation target in 2012 now seems unlikely. We expect little room for surprise in Brazil’s monetary policy meeting next weekend. Bank rhetoric appears more balanced now, but the easing cycle is set to be extended with a further 50 bps of cuts. Inflation is declining, but remains high, while activity has decelerated sharply, although preliminary December data already show incipient signs of a rebound.
China’s 4Q11 GDP and December activity data on industrial production, retail sales and fixed asset investment are also due. China will be announcing its Q4 growth figures next Tuesday. We expect GDP growth to slooooow to 8.5% y/y in Q4, down from 9.1% in Q3. This will leave full-year growth for 2011 at 9.2%, down from 10.4% in 2010. We envisage a considerably lower figure of +7.5% this year. The December industrial output figures are also to be announced on Tuesday. For some months now, the Chinese PMI for manufacturing has been at around 50, which would normally mean growth rates of 12-13%. We expect the December figure to be up 12.3% on December 2010. Elsewhere, Taiwan’s IP, and Singapore and Thailand’s export data, all for December, should help fine-tune 4Q11 GDP growth forecasts for these economies. The Philippines’ BSP also meets next week. We are in the unanimous consensus, forecasting a 25 bps policy rate cut to 4.25%, and do not expect this to be the last BSP cut – we expect one more in 2Q12.