28.01.2016, 10 am
• Fed stays on hold, ‘monitoring global economy’ The Fed remained on hold yesterday, and expressed some concerns about the global financial turbulence. Officials took note of the recent global volatility by stating that they are closely monitoring global economic developments and they are assessing their implications for the labor market and inflation. The hints of concern among the FOMC members left market participants in doubt as to whether the Bank will take further action in March, pushing down the implied probability of such an event to 23% from 28%. Overall, while the statement reflected the cautious tone investors expected by acknowledging the increased international risks, the FOMC did not rule out a hike at the March meeting. Any improvement in the US data going into the next meeting could bring forward expectations for the Fed to pull the trigger, especially as officials will have updated projections and forecasts to work with.
• RBNZ also holds its fire but signals further easing The Reserve Bank of New Zealand also kept interest rates unchanged yesterday, but signaled that further easing may be required over the year to ensure inflation moves towards its target range. The Bank pushed back the date by which it expects inflation to hit its target, quoting a softening global economy, falling dairy prices and lower fuel prices as the main contributors of this delay. The RBNZ also talked-down the Kiwi, stating that further depreciation in the currency is appropriate. If incoming data continue to show weakness, or if dairy and fuel prices continue falling, we could see expectations for a March rate cut to rise even more. The market currently assigns a probability higher than 50% of such action at the next meeting. This could keep NZD under pressure in coming weeks, which would also be in line with the Bank’s call for a weaker currency.
• Today’s highlights: During the European day, Sweden’s official unemployment rate for December is expected to have increased. This would be in line with an increase in the PES unemployment rate for the same month. The country’s retail sales for December are expected to have fallen, a turnaround from the previous month. Since both the indicators are released at the same time and are forecast to show a deterioration, we could see SEK weakening somewhat following these releases.
• In the UK, the preliminary estimate of Q4 GDP is expected to show that the growth rate has increased to +0.5% qoq from +0.4% qoq the previous quarter. However, there are doubts over the performance of the British economy as manufacturing and construction PMIs have softened throughout the quarter, while retail sales were mixed. Industrial and construction outputs have also been soft, with November’s reports revealing declines. A possible disappointment in the figure could push further back expectations for a rate hike from the BoE and could bring the pound under renewed selling pressure. Something like that would also confirm the recent comments by BoE Governor Carney that now it’s not the time to raise rates. Having all these in mind and given the uncertainty surrounding the “Brexit” referendum, we believe that the Bank could be reluctant to hike until there is greater clarity on Britain’s position within Europe.
• From Eurozone, the German flash CPI for January is forecast to have accelerated to +0.4% yoy, from +0.2% yoy in December. As usual, we will look at the larger regions for a guidance on where the headline figure may come in and thereby as an indication for the near-term direction of EUR. A rise in the inflation rate of Eurozone’s growth engine could indicate a rise in the bloc’s CPI rate due to be released on Friday and may support EUR, at least temporarily. Eurozone’s final consumer confidence for January is also coming out. Expectations are for the figure to show that the improvement in the preliminary print was short-lived, and instead confidence declined from the previous month.
• From the US, we get durable goods orders for December. Both the headline and core figures are forecast to have fallen after stagnating the previous month, mainly by shrinking demand for drilling equipment from energy producers as well as a stronger dollar, which makes exports less competitive. Moreover, the ISM manufacturing index for the same month slipped to its lowest level since 2009, increasing the possibilities for durable goods orders to decline. This could cause the greenback to weaken, at least temporarily. Initial jobless claims for the week ended on the 22nd of January are forecast to have decreased from the previous week. This would drive the 4-week moving average down as well. We also get pending home sales for December, which are expected to have rebounded after falling in November.
• We only have one speaker on Thursday’s agenda: ECB Governing Council member Jens Weidmann.