Monday: ECB’s Draghi speaks, US New Home Sales, New Zealand Trade Balance
Tuesday: German State and National CPI, US Advanced Goods Trade Balance, Fed’s Powell delivers semi-annual report to Congress
Wednesday: Chinese NBS Manufacturing/ Non-Manufacturing PMI, French GDP, EU Inflation, US GDP (2nd reading)
Thursday: UK Manufacturing PMI, US PCE, Japanese Tokyo CPI
Friday: PM May delivers key Brexit speech, Canadian GDP
Sunday: Italian General Election, Results of the SPD Coalition vote
One of the highlights of the week will be Fed Chair Powell’s first semi-annual testimony to Congress on Tuesday where he will likely shape his vision for the Fed going forward. Powell’s Fed is widely expected to follow a similar path to Janet Yellen’s but recent inflationary tailwinds have led some to predict a more aggressive tightening path than the median Fed expectation. The latest Fed projections had the median view expecting three hikes in 2018, recent data has led some to believe this will go up to four hikes and analysts at Goldman Sachs even suggested that the risk to this call is not to the downside but to the upside, adding that it’s possible the Fed will do five hikes in 2018. The monetary policy report – that this testimony is based on – was released on Friday and failed to provide too many fireworks ahead of Powell’s Congress appearance.
Elsewhere, the data highlight from the US is likely to be the personal spending, income and PCE data on Thursday as Nonfarm Payrolls is released on the second Friday of the month in March. Core PCE is expected to remain at 1.5% Y/Y with headline PCE also likely to remain at 1.7%. Nevertheless, most expect PCE to pick up in the coming months. “We expect core year-over-year inflation to gradually increase during the first half of this year, supporting the Fed’s inclination to hike rate four time during the year, starting in March,” writes Nordea. Wednesday also sees the second release of US GDP although Q4 GDP is expected to remain unrevised at 2.6% Q/Q on an annualised basis.
Across the border in Canada, Stats Canada also releases GDP figures on Friday. GDP is expected to have grown 1.6% Y/Y in Q4 a slight slowdown from the growth in Q3. The economy was on a tear in the early half of the year but appeared to be going from “a sprint to a marathon-like pace” towards the back end of 2017. Even with the slowdown, Canada is poised to have grown around 3% in 2017, double the pace of 2016 and likely the fastest in the G7 throughout the year.
The main theme for the market next week is likely to be one of politics with markets bracing themselves for the outcome of the Italian election. On Sunday 4th March, Italian voters will take to the booth to elect both the lower and upper houses of Parliament which in turn will (in theory) lead to the formation of the nation’s new government. However, it is unlikely to be a straightforward affair with all signs pointing to a hung Parliament. Rabobank highlight three key scenarios that markets should prepare themselves for: 1) a centre-right government between Forza Italia (Berlusconi), Northern League, Brothers of Italy, Us with Italy; said to be the most probable option but could be problematic if the Northern League perform well and Forza Italia lose influence over NL. 2) Grand coalition: A coalition between Forza Italia, the Democratic Party and several of the other centrist parties; however, obstacles include the ideological differences between FI and PD and whether or not such a coalition would be workable given seat allocations. 3) Populist government: the likes of the Northern League, Five Star and Brother of Italy may have the numbers but ultimately appears to be impractical with some of the aforementioned parties such as Five Star, historically opposed to coalition. If none of these options play out then PM Gentolini will most likely have to form a caretaker government until new elections are held. In terms of a potential market reaction, any form of uncertainty will likely be a hindrance for Italian assets with a populist government set to be the most devastating outcome. In terms of the broader EUR, it remains to be seen how much sway the outcome could have on the share-currency, however, if the result was coupled with an unsuccessful SPD vote then the EUR could easily lose ground to its major peers with two of the region’s big-hitters without a government.
Elsewhere in European politics and on the same day as the Italian election, the fate of the German government could be sealed as the outcome of the SPD party vote on whether to accept German Chancellor Merkel’s coalition proposal will be revealed. In terms of recent polling data, it appears that SPD members are likely to back a coalition deal but the result is far from certain as parts of the party refuse to prop up another Merkel government which was seen as relatively damaging for the party last time round. Depending on events in Italy, EUR could face selling pressure early doors on Monday 5th as a failure to strike a deal could lead to a minority government or another round of fresh elections.
This week could be a crucial one for UK PM May and her team as the Conservative leader outlines her position for upcoming trade discussions with the EU after her eight hour meeting with her cabinet last week. As always with UK politics, it unlikely to be plain sailing with the latest reports suggesting that opposition leader Corbyn could use a Key Brexit speech on Monday to shift his views in favour of Britain remaining in the customs union and thus potentially set PM May up with a devastating defeat in the Commons by teaming up with disillusioned pro-remain Tory rebels. Even if Corbyn refrains from doing so or the Conservatives manage to get their own house in order, questions remain as to how strong the UK’s negotiating position is with the EU after a Sun journalist tweeted on Friday “I’m told by a Cabinet source that the agreed Brexit blueprint is ‘an ambitious opening gambit’. In other words, little expectation the EU27 will accept it”.
There are a number of data releases from across the region throughout the week including Chinese PMIs, Japanese labour market data and Tokyo CPI, Australian Capex plans and NZ terms of trade.
Starting in China, the PMI reading are expected to remain firmly in expansionary territory all the official manufacturing PMI is expected to moderate slightly to 51.2 from 51.3. The Caixin reading, which surveys a different mixture is also expected to moderate to 51.3 from 51.5 which was a 13-mlnth high. They key points from the last report were that companies were generally optimistic although total new work and export orders had expanded at a slightly softer rate, pointing to moderating demand.
The Japanese unemployment rate is expected to fall to 2.7% from 2.8% in January after rising to that level in December as the number of unemployed increased by 10K. “The bigger picture is that the job-to-applicant ratio has continued to rise in recent months” writes Capital Economics, “which suggest that the jobless rate will fall towards 2.5% before long.” The Tokyo CPI – now released the week after the national CPI, but still released three weeks ahead of the corresponding nationwide data – is scheduled on Friday. Headline CPI is expected to tick up in the capital to 1.4% from 1.3% although the core measure (ex-fresh food & energy) is forecast to remain subdued at 0.4%, well below the Bank of Japan’s 2.0% target.
New Zealand releases trade data on Thursday with median expectation calling for unchanged. Westpac analysts are more positive, expecting terms of trade to increase 1.9% as rising global commodities and a weaker NZD drove exports 6% higher in the quarter. They also note that import values were strong, likely driven by a surge in volumes as import prices were subdued despite the weaker currency. Across the Tasman, the Australia capex estimates for 2017/18 are expected at USD 108.9bln, up 1.6% from the same estimate a year ago. The survey period also includes the initial estimate for 2018/19 capex spending plans with Westpac saying that service sector intentions will be of particular interest.