Monday: Eurozone & US Flash PMIs
Tuesday: German Ifo Survey,
Wednesday: Turkish rate decision
Thursday: ECB rate decision, Riksbank rate decision, US Durable Goods
Friday: BoJ rate decision, UK GDP, US GDP
On Friday, markets get the first look at US growth statistics for Q1 and consensus calls for 2.3% Q/Q growth (annualised), down from 2.9% in Q4 2017. However, Q1 is notoriously weak, averaging just over 1% this millennium so 2.3% would not be too bad considering and would likely be celebrated by US President Trump. In terms of Fed forecasts, the closely followed Atlanta Fed GDPNow model expects growth of 2.0% in Q1 with the New York Fed’s equivalent model forecasting growth of 2.9%.
RBC are siding more with the pessimistic Atlanta Fed rather than the more optimistic New York Fed. “Consumer spending had a slow start to Q1 thanks in part to delayed tax refunds which kept retail activity muted in the quarter,” writes RBC. “The relatively soft consumer outcome underpins our pretty lacklustre 2.0% call for headline GDP growth.” Nevertheless, even if growth is soggy, markets may choose to overlook this given the new tax cuts coming into effect in Q2.
The European Central Bank is not expected to provide any monetary policy changes next week, and will likely reiterate that rates are to remain on hold until way beyond the end of APP, signalling that the possibility of rising rates is still further down the line; most analysts see the first hike in mid-2019. With the looming decision over the end of its QE programme, the focus will fall over any language tweaks in its forward guidance. While some do not see the central bank making any further adjustment to their statement after the ‘easing-bias’ was removed at the last meeting, others are more sceptical, and expect the central bank to axe it’s ‘loosening bias’ and remaining less explicit over asset purchases intervention. Goldman Sachs expects the ECB to reiterate that growth is solid and in line with its March macroeconomic projections, despite the softening in data seen in Q1. There has, undeniably been some cooling in economic data, however most surveys continue to paint a picture of an economy that performing well (Markit suggested that PMIs are consistent quarterly growth of 0.6%, down from 0.8-0.9% rate, but still “impressive”. This weakness in data may garner some detailed discussion by participants at the meeting, Goldman Sachs says, specifically, whether recent weakness in activity indicators point to a more pronounced slowdown in Euro area growth than previously expected, whether the uncertainty over the extent of remaining slack in the Euro area economy, and the likely evolution of that slack in the future. “Progress is being made in stabilising the Euro area economy, but there is still not a sustained adjustment in the path of inflation,” Goldman Sachs writes, “we expect the ECB to communicate again the need for patience, prudence and persistence in monetary policy. We also expect the ECB to maintain its three criteria for assessing progress in achieving a sustained adjustment in the trend of inflation: (i) convergence of inflation over the medium term; (ii) confidence in the expected path of inflation; and (iii) resilience of inflation convergence.”
The Riksbank is expected to keep rates unchanged at -0.50% on Thursday. The meeting, however, may see the central bank tweak its current guidance after weakness in recent inflation data, which may also see it cut its growth view. The recent inflation data only hinted at mild price pressures building in the economy; in Q1, the central bank had pencilled in a rate of inflation around 1.7%, but the Q1 data came in at 1.5% in January, and remained at that level. Nevertheless, analysts at Capital Economics are confident that rate rises will still come this year. “The Riksbank’s previous guidance was consistent with either two interest rate increases of around 10bp in July and September or a 25bp rise in September,” Capital Economics says. “While we expect this to be revised, there are three key reasons to think that the Riksbank will signal rate rises this year: first, the Bank shares our view that house prices will stabilise this year; second, a large part of the drop in inflation in January was due to statistical effects; third, the Riksbank’s forecasts were predicated on the krona being more or less unchanged between the last meeting and now.
A number of European surveys are being released this week including flash PMIs on Monday and the German Ifo index later in the week.
The March Composite PMI from the Eurozone declined to 55.2 from 57.1 in February, the weakest pace of growth since early 2017 with German activity at an 8-month low, French at a 7-month low and Italian at a 14-month low. Nevertheless, the PMI readings were still comfortably in expansionary territory and bad weather was again a factor. Markets will be looking for whether the slow down is more entrenched or if the PMI readings have bottomed, particularly with the ECB looking to start their exit from easy policy this year. Poor weather is again expected to weigh on activity this month with the Eurozone Composite PMI slipping to 55.0.
The German IFO survey has also shown signs of a slowdown in German activity recently. However, this month, there is an overhaul of the indicator with the figures being rebased to 2015, which is expected to result in a lowering of the figures. Oxford Economics are still not overly confident, “Given earlier evidence from other surveys, the new Ifo will likely start on a low note.”
UK GDP is released on Friday and markets are expecting a tepid reading of just 0.3% Q/Q although risks are likely tilted to the downside. “The PMI surveys collectively signal a quarterly GDP growth rate just under 0.3%, down from 0.4% in the fourth quarter,” said Chris Williamson, IHS Markit’s Chief Economist. However, much of this slowdown can be attributed to the so-called Beast from the East, and markets may choose to overlook this backward-looking data set. NIESR were even more pessimistic in their forecast for UK GDP growth, calling for just 0.2% in Q1. “The main reason for the weakness was severe weather in March,” the think tank writes. “There is a small offset in industrial production growth which recovered in the first quarter after the previous quarter was affected by the Forties oil pipeline shutdown.” The expected weak data comes amid a week where GBP tumbled after slower than expected wage growth, softer than forecast inflation and weak retail sales. A Bank of England rate hike in May appeared a forgone conclusion just a week ago but the soft data and comments from BoE Governor Carney have now dampened expectations with markets pricing in just a 40% chance of a 25bps move in May.
Australian CPI is expected to rise 0.6% in Q1 Q/Q, taking the annual headline to 2.1%, the first time above 2% since Q1 last year and before that Q3 2014. “The key core measures are likely to remain more subdued and we expect the average of the trimmed mean and weighted median to be 0.45%,” writes RBC in a note. “This would imply y/y core CPI edging marginally lower to 1.8% and marking the ninth consecutive quarter of sub 2% core inflation,” the bank added. Looking forward, the RBA don’t seem in any rush to be hiking rates with the latest minutes suggesting that there was not a strong case for a near term move in policy, although they still agreed that the most likely move would be up. However, they were still cautious on inflation, saying progress is likely to be gradual.
The Bank of Japan policy meeting next week will be the first for new Deputy Governors Amamiya and Wakatabe, and analysts will be keen to see whether they follow-through with their generally dovish views, particularly for the latter, who has called for further aggressive policy to try and stoke reflationary pressures. This week, data showed that challenges remain on the inflationary front. Although headline inflation declined in-line with expectations in March, at 1.1% (vs 1.5% previously) it remains meagre. The overall decline in inflation isn’t likely to worry the BOJ, according to Japan Macro Advisors. Instead, what should concern the central bank is the measure of CPI that excludes fresh food and energy, which remained unchanged at 0.50%. “While there are signs that wages in Japan are starting to rise, it has not translated into a rise in overall price level,” JMA writes, “The basic stance of the BOJ nowadays is that higher inflation is in the pipeline and we need to wait. However, we would at least need to see a sign of mild acceleration in the inflation to have any confidence in the BOJ’s prediction.” JMA does not think that new BOJ deputy Wakatabe will follow dove Kataoka in calling for further monetary easing, but he may show sympathy for the view; his views are interesting in the context that markets have been building expectations that the BOJ will be moving towards policy normalisation, and JMA will it will be interesting to see whether Wakatabe reminds the market that there is at least as many possibilities of an additional easing as a tapering policy, JMA says.