Weekly Forex Analysis – 30 January
The US will be back in focus this coming week, publishing a plethora of key data releases that will highlight the Atlantic economic divide. With the UK and much of the Eurozone entering recession, 4Q11 GDP out of the US was slightly below expectations at 2.8% likely given good consumer spending numbers. The GDP data tended to work with the very dovish stance portrayed by the FOMC earlier this week, especially since GDP prices was subdued at 0.8% as was core PCE deflator at 1.1%.
Growth is clearly vulnerable to either a EUR area, or oil shock, but barring either of these, growth is still in the range that will keep global risk appetite modestly bid. We are also likely to see further gains in US Non Farm payrolls, which will keep consumer confidence supported and spending growth in positive territory. Furthermore, the business sector is likely to remain in good health with the ISM surveys expected to hold up well based on regional indicators already released. US economy still set for moderate expansion Although there is reason to suspect that the US economy cannot maintain the fairly robust expansion it looks set to have recorded in Q4, the trend should still point to the upside.
The global slow down should have weighed only moderately on US growth. This view is corroborated by the fact that the export order indicator of the national ISM purchasing managers’ index for manufacturing has recently ‘stabilised’ above 50, following its sharp decline in 1H11. For the overall ISM index, we envisage a marginal increase from 53.9 to 54.5 in January, which would mark the highest level since June. Note that the series is subject to revisions in coming days, which might change the December starting basis.
In 2H11, on average, 150,000 new jobs were created every month in the US. While the labour market is improving, the pace of recovery is still disappointing. But with initial claims for unemployment insurance visibly dropping over the past weeks, hopes are now increasing that payroll gains look set to come in higher. In January, however, job creation should still be counteracted by a special effect, as the strong 200,000 rise in December was enhanced by buoyant Christmas shopping via the internet, which resulted in 42,000 additional delivery and courier jobs.
A similar phenomenon was also recorded in previous years, but previous December’s new jobs were generally scrapped in January. As this effect has been continuously increasing in importance in recent years, it is not fully reflected by seasonally adjusted data. Our payroll forecast of +110,000 reflects an expectation that there will be significant payback this month in the courier (-42,000) and retail trade categories (-20,000) following on the heels of sizeable increases in these sectors in late-2011. Meanwhile, the continuation of relatively mild weather conditions could provide a modest boost for some employment categories – such as construction. In contrast, a severe winter blizzard had a negative impact on payroll employment in January 2011. On an underlying basis, we suspect that job gains are running in the neighbourhood of +150,000 per month at this point.
Note that this report will include the annual benchmark revision to the payroll data. A few months ago, the BLS indicated that their preliminary assessment of the likely adjustment to the benchmark month of March 2011, was +200,000 (or +17,000 per month). By historical standards, a revision of this magnitude (+0.1%) would be quite small, implying that the so-called birth/death model has been tracking net business formations reasonably well. Finally, the unemployment rate is expected to tick up a tenth of a percentage point – to 8.6%
The Eurozone focus will remain on political developments given the lack of solution to the sovereign debt crisis. However, Greece is also likely to be a key discussion point given the need for the approval of bailout funds to avert the threat of a default as early as March. Datawise, February CPI will be of interest. Inflation has clearly peaked and is set to fall to 2.6% this coming week. Further falls in the next few months will highlight the growing room the ECB has to ease monetary policy and even, potentially, adopt quantitative easing. Next week’s EU summit should see the final drafting of the fiscal compact although the debt brake looks likely to be watered down. The bailout package for Greece is unlikely to be finalised. The key US ISM and payroll reports are likely to signal moderate growth for the US economy while the euro area HICP looks set to ease further towards 2.0%. At the EU summit on Monday, EU heads of state look poised to tone the fiscal compact treaty.
However, the southern countries are likely to soften the stance of debt brake by asserting exceptions under exceptional circumstances. A new bailout package for Greece is unlikely to be finalised, even though headline risk from the PSI talks remain elevated in coming days. Together with the economic sentiment indicator for the euro zone, which – like the other sentiment indicators – should have risen further, preliminary consumer price data for January is due to be released next week. In our view, the Eurozone inflation rate looks set to have dropped visibly from 2.8% to 2.4%, despite the recent increase in the oil price. Core inflation should have come down marginally.
In the UK, the purchasing managers’ indices will be in focus. They have a good correlation with GDP and so we’ll be looking to them for a guide as to how deep the recession will be in the UK. We already know that retail sales have contracted sharply in January and soft PMIs will reinforce expectations of further QE from the Bank of England at the February MPC meeting.
In Japan, IP dived in November and the trend is clearly down. The December update is due this coming week – monthly growth in excess of 3.0% is needed to allay concerns of a major downturn. Labour market data is also due, but remains distorted by the lingering effects of the March 11th disaster on labour market participation.
Next week in Russia, the CBR decision will be in focus (we don’t rule out a 25 bps cut in the refi/fixed-term REPO rate, but the latest CBR comments suggest it may take a wait- and-see stance this time) together with the first GDP estimate for 2011, which we expect at 4.3%. In Poland PMI may have lost its downward momentum in January, but the reading should still point to a cautious approach of enterprises. With the recent flow of hawkish comments from the MPC, the inflation expectations reading may have greater than usual importance. The high reference level of CPI and continued concerns of households likely sent it above 5%, but a stronger PLN may be a good remedy.
On February 3rd in Turkey, Turkstat will announce January CPI. In December, CPI increased 0.58% m/m pulling annual inflation to 10.45% in 2011, while PPI rose 1.0% m/m, closing the last year at a level of 13.33% y/y. For the first month of 2012, we expect CPI to be 0.68% m/m and PPI 0.60% m/m, implying that both figures will remain at double-digit levels on an annual basis at 10.74% and 11.37%, respectively.
In the Czech Republic, we expect the CNB board meeting will be a no change event. Despite the CNB board’s bearish outlook on economic growth, rate hikes were officially contemplated due to the currency underperformance, compared to the CNB staff forecast. In our opinion, however, broad support for a rate hike seems unlikely in the near term, provided CZK does not enter a firm depreciation trend.