Week Ahead Data Memes: Inflation and GDP - BBH

Analysts at Brown Brother Harriman noted were traders and investors should focus the week ahead as inflation and GDP numbers are about to be released in the US, UK, China, and Switzerland. 

Key Quotes

"In the week ahead, there are two general data memes: inflation and GDP. The US, UK, Switzerland, and China report January CPI. The eurozone and Japan report Q4 GDP. A 0.3% rise in the US headline CPI and a 0.2% rise in the core rate will not prevent the year-over-year rate from slipping a bit due to the base effect. Still, it won’t change the underlying trend."

"In the other countries that report, inflation pressures are set to increase. In the UK, the year-over-year rate is likely to rise from 1.6% in December to 1.9-2.0% in January. This is still primarily the impact of the rise in energy prices, but the past depreciation of sterling will likely drive it going forward. In Switzerland, deflationary pressures are subsiding. CPI is likely to rise to 0.3% from the flat reading in December."  

"China’s inflation is also rising, and the stabilization of the economy may allow officials to turn their attention toward curbing credit growth. Still, the expected January increase to around 2.6% from 2.1% may overstate the case if prices rose ahead of the Lunar New Year. Yet, producer prices continue to accelerate. The year-over-year pace bottomed in 2015 at -6.0%. It moved above zero last September. Producer prices are expected to have accelerated to a 6.6% pace in January from 5.5% last December."  

"There are some downside risks to the initial eurozone’s initial Q4 GDP estimate of 0.5% after the disappointing German industrial output figures. Little appreciated, especially given the divergence of monetary policy, the US and eurozone growth in 2016 may have been the same at 1.6%. For the US, this is a little below trend, while eurozone growth is a little above trend."

"Japan’s economy rose 1% annualized in Q4. It was expected to stagnate. Consumption was flat, but capex rose 0.9%, net exports added 0.2%, and inventories took off 0.1%. It is the fourth successive quarterly expansion, which is the longest in three years. The BOJ estimates trend growth to be near 0.2%."

"The US and UK also report January retail sales. They may move in opposite directions. In the US, December retail sales rose a strong 0.6% and likely slowed to around 0.2%. Auto sales remained elevated but slowed sequentially, and this may be offset by an increase in gasoline prices. UK retail sales fell a sharp 1.9% in December and are expected to bounce back in January. The median forecast in the Bloomberg survey is for a 1.0% gain."

"The UK and Australia report their latest employment figures. The British labor market has been fairly steady. The three, six, and 12-month averages have converged just above zero.  In percentage terms, it has been between 2.1% and 2.3% for nearly two years.  In January, the claimant count is expected to have edged slightly higher.  However, some signs of deterioration have emerged."

"Employment growth (reported with an extra month lag), like earnings, has slowed. On a three-month comparative basis, it has been negative in October and November but is expected to have snapped back in December. Average weekly earnings growth is expected to have remained unchanged in December at 2.3% and 2.1% when bonuses are excluded.  In December 2015, average earnings on the three-month year-over-year measure rose 1.9%."  

"Australia experienced unusually strong job growth in Q4 16. The monthly average was 22.4k, which follows a loss of nearly five thousand jobs a month in Q3 16.  Full-time jobs growth was even more impressive, rising 31k a month on average in Q4, the strongest three-month average since Q3 2010. This is not sustainable. Thus there would seem to be downside risks to the median forecast for a 10k increase in jobs in January. The unemployment rate may be driven by the participation rate, which is expected to have remained at 64.7%. Last October's 64.4% participation rate may have been the low point."  

"Sweden's Riksbank meets on February 15.  It is not expected to change policy. However, it is a bit of a quandary. The ostensibly reason for its aggressive unorthodox monetary policy was to arrest deflation, and that meant in part to curb the strength of the krona. Inflation has moved toward 2%, but the krona appreciated about 5.25% on a trade-weighted basis since early November. It has recouped 61.8% of the previous six-month (~7.6%) decline. Industrial output and consumption finished 2016 on a soft note, but the January PMIs' suggest it was a temporary lull."  

"The euro's 6.75% decline against the krona is the driver. The central bank may find some consolation that the euro finished last week with two successive closes above its 20-day moving average for the first time since the first half of last November. Then, the cross was SEK9.85 rather than SEK9.49 now (having been down to SEK9.41).  Given the political calendar for the eurozone, the krona may not receive the same selling pressure as the euro."  

"Sweden reports the January CPI figures two days after the Riksbank meeting. The optics of a 0.7% monthly decline, which the median expects, may be worse than the reality. Headline CPI has fallen in January for at least the past decade. Due to the base effect, the year-over-year rate would ease, if the median is correct, to 1.5% from 1.7% in December. That was the highest reading in a little more than five years. What Sweden calls the underlying rate, which uses fixed rate mortgages to calculate CPI is expected to slip to 1.7% from 1.9%."

"EM FX ended last week on a firm note and is opening this week mixed. Falling US rates allowed many foreign currencies to gain some traction, but rates are edging back up. This week, a heavy US data slate is likely to test the market’s convictions on the Fed."   

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