12.02.2016, 10 am • RBA Governor plays down financial market turmoil RBA Governor Glenn Stevens stated in his testimony to the parliament that financial markets have now chosen to focus more strongly on issues that have been there all along. The key question is whether the recent turbulence will have a negative effect on aggregate demand in Australia or abroad, and that cannot be answered yet. If the recent chaos has indeed affected the Australian economy, the RBA has the flexibility and willingness to cut rates further, should that be appropriate. At its last meeting, the Bank remained on hold, but in the update of its forecasts a few days later, it revised down expectations for GDP growth and inflation over the next two years. Following Governor’s comments, we would expect that the RBA decision on the 1st of March will be driven primarily by any changes in the incoming data that suggest the global turmoil has fed into weaker demand.
• Global stocks continue to slide European and US equity markets posted another day of significant declines on Thursday, while Japanese stocks suffered during the Asian day Friday as well, with Nikkei closing 4.8% down. It appears that markets are pricing the rising risk of a sharper slowdown or even recession in the global economy. The effectiveness of central banks’ policies has also been called into question, with many market participants suggesting that negative interest rates will damage the profitability of commercial banks and further exacerbate this risk-off environment. The winners continue to be the safe havens, and as long as we see no signs of a fundamental change in this risk-off environment, we expect these assets to gain even more. We would like to sound a note of caution however as far as JPY is concerned, as the BoJ’s Kuroda said that they are “closely watching market moves”. As such, sharp spikes in yen crosses like yesterday cannot be ruled out.
• As for today’s indicators, we get the preliminary GDP data for Q4 from Germany and the Eurozone as a whole. Both the figures are expected to show that the two economies grew by 0.3% qoq, the same pace as in Q3. The German growth data have already been released and came in line with their forecast, which increases the probability for Eurozone’s data to follow suit. Germany’s final CPI rate for January is also coming out and is expected to confirm its preliminary estimate. As for Eurozone’s preliminary growth rate, the fall in global demand, warmer-than-usual weather and the Paris terror attacks may have all weighed on the economic growth. However, these could have been offset from falling unemployment, lower energy prices, and a large boost in public spending as a result of the huge migrant influx. As a result, we view the risks to the forecast as balanced and we believe that the reaction on the euro could remain muted. Also from Eurozone, industrial production for December is forecast to have risen, a turnaround from a fall in November. Bearing in mind that industrial production in Eurozone’s two largest economies, Germany and France, fell unexpectedly in December, we see a high likelihood for a soft IP print from the entire bloc as well.
• In the US, the main event will be the retail sales for January. Both the headline and the core figures are expected to have risen after a fall in December. In January, the labour market continued to tighten, energy prices fell further and cold weather across the country may have boosted sales. Also, the Conference Board consumer confidence index improved further during the month, which suggests that consumers remained optimistic despite the international turmoil. As such, a rebound in retail sales seems likely and could support the dollar, at least for a while. We also get the preliminary U of M consumer sentiment for February and the forecast is for the figure to remain unchanged from the previous month.
• We have two speakers on Friday’s agenda. New York Fed President William Dudley and Dallas Fed President Steven Kaplan speak.