• China’s manufacturing continues to shrink China’s official and final Caixin manufacturing PMIs showed that the country’s manufacturing sector continued to contract in January. The final Caixin index beat expectations of a decline and instead increased a bit, while the official index fell by more than estimated. Both the indices remained below the boom-or-bust 50 line, which caused China’s stock markets to give back some of Friday’s gains. The Shanghai Composite 300 closed the Asian day down approximately 2%. Following the latest GDP data that showed the economy grew at its slowest pace in a quarter of a century in Q4, these soft manufacturing figures add to concerns of continued sluggishness in the Chinese economy. What is more, these indices are the first signs on how the Chinese economy has performed in the start of the year and as a result they increase concerns that the softness may carry over into the second quarter. The weakness has persisted despite the significant fiscal and monetary stimulus in 2015, with the PBoC having cut rates six times throughout last year. Therefore, the continuous weakness in the manufacturing sector increases the possibilities for further stimulus by the Bank. The reaction on AUD and NZD however will depend on the form and magnitude of the policy action.
• Today’s highlights: During the European day, we get the final manufacturing PMIs for January from several European countries and the Eurozone as a whole. As usual the final forecasts are the same as the initial estimates, thus the market reaction on these news is usually limited, unless we have a huge revision from the preliminary figures. The UK manufacturing PMI for the same month is also coming out and is expected to have declined marginally from December, but to have remained above the 50-line. Given that the fall in the production sector was one of the main drags for the Q4 GDP and that manufacturing remained flat between November and December, another soft print could be a first sign that the British economy entered the year on a weak note. We get the manufacturing PMIs for January from Sweden and Norway as well.
• In the US, the main event will be the release of the US personal income and personal spending figures for December. Both are expected to have risen, but at a slower pace than in November. Given that the 1st estimate of the US GDP for Q4 showed a strong slowdown in growth, further slowdown or even a decline in consumption cannot be ruled out, especially as wage growth remained flat throughout the month. We also get the US core PCE rate for the same month. The ISM manufacturing PMI and the final Markit manufacturing PMI, both for January are due out. The market tends to pay more attention to the ISM index which is expected to have increased, but to remain below the crucial 50 level. This would be the 3rd consecutive month of the index staying below 50, which suggests that shrinking demand for drilling equipment from energy producers continues to weigh on the manufacturing sector. Net-net, since these indicators are forecast to have declined, the dollar could lose some of its recent steam. The Canadian RBC manufacturing PMI for January is also coming out.
• We have three speakers on Monday’s agenda: ECB President Mario Draghi, ECB Executive Board member Benoît Cœuré and Fed Vice-Chairman Stanley Fischer.
• As for the rest of the week, on Tuesday, the Reserve Bank of Australia holds its first monetary policy meeting for the year. At the December meeting, Bank officials decided to keep the key interest rate unchanged amid signs of improvement in business conditions throughout 2015 and a stronger growth in employment. They signaled however that low inflation may afford scope for further easing. Given that Australia’s labor market continues to show signs of improvement and that the Q4 CPI data showed that the Bank’s favorite inflation measure stayed close to the lower bound of the 2%-3% target band, we expect the Bank to stand pat once again. In the statement accompanying the decision though, we expect a shift to a more dovish tone. The recent global turmoil combined with falling commodity prices, a sluggish domestic growth, tepid inflation and a slowing housing sector may give Bank officials some food for thought to keep policy accommodative.
• On Wednesday, we get the ADP employment report for January, two days ahead of the NFP release. The ADP report is expected to show that the private sector gained 220k jobs, fewer than it did in the previous month where the print hit 257k. Nevertheless, this is considerably higher than the 200k mark and also in line with the Fed’s view from the latest statement that labour market indicators will continue to strengthen. Although an unreliable predictor of the NFP number, this could increase speculation that the NFP print on Friday will also exceed 200k, which is the current forecast.
• Thursday is another Super Thursday in the UK, as the BoE simultaneously releases its monetary policy decision, the meeting minutes and its quarterly Inflation Report. No change in policy is expected, while consensus is that the vote will once again be split 8-1 with Ian McCafferty to maintain his call for a rate hike. Therefore, the focus will be on the minutes of the meeting and the tone of the Inflation Report. Following Gov. Carney’s comments that now is not the time to raise rates, we don’t expect the Bank to hit the hike button any time soon. So, we will look through the minutes for any hints on how far hike expectations have been pushed back. Collapsing oil prices, the volatility in China, as well as moderate domestic wages and growth are enough reasons for the Bank to be patient. However we will hold the view that the biggest obstacle for the Bank is the uncertainty surrounding the “Brexit” referendum. Evidence of a dovish rhetoric in the minutes and the Inflation Report are likely to add further selling pressure on the pound.
• On Friday, the US employment report for January will take center stage. The current market forecast is for nonfarm payrolls to increase 200k, down from the solid 292k print in December. Moreover, the unemployment rate is expected to have remained unchanged at 5.0%, while average hourly earnings are forecast to have accelerated on a monthly basis. In the statement following the latest FOMC policy meeting, officials stated that they are assessing the implications of the global and financial conditions for the labor market and inflation. Therefore, this employment report will be a significant driver for policy makers. Another solid report could bring back to light expectations for further rate hikes in 2016 and could encourage USD-bulls to add to their positions.
• In Canada, the unemployment rate for January is expected to have remained unchanged at 7.1%. In its January monetary policy statement, the Bank of Canada described national employment as resilient but noted job losses in the resource sector, which includes the oil industry. Bearing in mind that the recent minor recovery in oil prices began just after the 20th of January, any resulting increase in the revenues of the oil industry may not be reflected in this month’s data. As such, although the forecast is for an unchanged unemployment rate, the decline in revenues and investment the country’s energy sector has experienced during the better half of the month could have weighed on employment, at least in oil-intensive regions.