Analytics & Forecasts

Global Macro Week Ahead

22 February 2016, 09:02
Batur Asmazoglu
Batur Asmazoglu
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US: The start of the week will see data on the housing sector, with releases for existing and new home sales. We expect existing home sales at 5.13M (-6.0%m/m) and new home sales at 515K (-5.3%m/m). Durable goods orders should see a strong rebound in January, rising to 3.0%m/m from -5.0%m/m in December. The number ex-transportation is also expected to increase, going from -1.0% in December to 0.2% in January. Personal income should rise slightly in January to 0.4%m/m from 0.3%m/m in December. Personal spending should also increase, reaching 0.3%m/m in January after a flat reading in December. We predict the PCE deflator to remain at 0.1%m/m for January (0.9%y/y) while core PCE should rise to 0.1%m/m from 0.0%m/m in December (1.5%y/y from 1.4%y/y). The FOMC left all options open at its January meeting and retained asymmetric guidance language suggesting the Committee's next policy move will be another rate hike. But the statement's dovish tone – combined with the same in Fed Chair Yellen’s Congressional testimony and the January minutes -- left the strong impression that the FOMC feels no urgency to continue hiking rates imminently. Policymakers need time to evaluate the effects of recent global economic and financial market developments. In the meantime, tighter financial conditions are already acting much like a policy firming anyway. We forecast the FOMC will wait until September before hiking its fed funds rate target again, and we expect a total of two rate hikes this year.

Developed Europe: EA flash PMIs should fall further in light of continued market turmoil in February. Weakness is likely to be broad based, with manufacturing falling to 51.5 from 52.3, services to 53.0 from 53.6 and composite to 52.8 from 53.6. German Ifo expectations are likely to continue to deteriorate, falling to 101.5 from 102.4. M3 growth looks to have plateaued after a strong pick-up in 2015, and we expect slightly softer growth of 4.4%y/y in January. We expect French flash HICP inflation to fall from 0.3%y/y to 0.0%y/y in February, German to fall from 0.4%y/y to 0.0%y/y and Spanish to fall from -0.4%y/y to -0.8%y/y. We expect EA economic sentiment to fall to 104.2 from 105. Consumer confidence should be confirmed from the flash. In the UK, the second estimate of Q4 GDP growth is likely to be unrevised at 0.5%q/q, with risks of downward revision to 0.4%q/q. 

ECB:In the January meeting the ECB left policy rates and QE unchanged. Importantly President Draghi indicated that the ECB’s policy stance would be reviewed at the March meeting, which reinforced the existing easing bias and clearly left the door open to further easing. Draghi highlighted the risks to euro area growth of global uncertainty and made clear that the inflation path for 2016 is now significantly lower. In light of this dovishness, we are now expecting at least another 10bps depo rate cut, and likely additional tweaks to QE at the March meeting. Any broader signs of an economic slowdown, continued malaise in the markets, or a strong re appreciation of the euro – on top of the weaker CPI profile already possible for this year – raise the risks of increased action. 

BOE:At the February meeting the MPC voted unanimously to keep rates unchanged at 0.5%. The voting pattern shifted from 8-1 to 9-0, with McCafferty switching his vote from a hike to unchanged. The February Inflation Report indicates that rate rises are some time away. But by having inflation rise above 2% at the end of the projected horizon under current market rate expectations, the MPC pushed back on market pricing (which incorporates chances of a rate cut). In its new economic projections, the BoE cut its forecasts for growth, inflation and wage growth. In our view, the Inflation Report supports our call that UK data are likely to follow a U shape with weakness in the near term and a rebound thereafter. The MPC is not ready to hike yet, even though still thinks that the next move in rates is up. In that regard we expect the first BoE hike in February 2017.
 Japan: We expect nationwide core CPI for January to edge down by -0.1pp to 0.0%y/y due to decreases in the positive contributions from food and recreational expense. Tokyo area core CPI for February should drop by -0.2pp to -0.3%y/y due to a greater negative contribution from energy prices. 

China: There are no major releases in the coming week. 

BOJ: The BoJ introduced a three-tier system for the IOER rates at its January meeting and decided to introduce a -0.10% rate for third tier excess reserves. Given the recent declines in inflation expectations and the prospective peaking of ex-energy inflation rates, further reduction in the IOER rate for the third tier looks likely into summer. We expect another 0.2% cut in April. We continue to think the BoJ is considering a twist operation as a back-up measure. Upgrading the monetary base growth target seems unlikely.

Turkey: The monetary policy committee (MPC) kept all key short-term interest rates unchanged on 19 January. The one-week repo rate was kept unchanged at 7.50%, the lower end of the short-term interest rate corridor at 7.25% and the upper end at 10.75%. The MPC’s more cautious outlook on inflation (mainly because of the 30% minimum wage hike) did not translate into a change in its guidance on the monetary/liquidity policy stance either. The already-high run-rate of core inflation might increase further in the coming period (not only because of the minimum wage hike but also because of the recent lira depreciation), but the most likely outlook for monetary policy in the next few months remains one of unchanged short-term interest rates, in our view. Meanwhile, the MPC dropped on 19 January its reference to the normalization/simplification of the monetary policy framework, making the monetary policy outlook more obscure, in our view.

Hungary: The Monetary Council (MC) kept the policy rate unchanged at 1.35% on 26 January. Central Bank President Matolcsy announced the end of the current easing cycle at his post-meeting press conference on 21 July. Matolcsy also stated that the MC plans to keep the policy rate at 1.35% for a “very long” period. We forecast Hungary’s end-year inflation at 1.9% yoy in 2016 and at 2.8% yoy in 2017. Accordingly, we expect the MC to keep the policy rate unchanged in the remainder of 2016 and in 2017, in line with its stated intention. However, we think that the probability of further monetary easing using unconventional tools is rising given last meeting’s dovish press release.

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