This morning, Minneapolis Fed Chairman Neel Kashkari penned an essay “Why I Voted to Keep Rates Steady” in which the former Goldmanite says that while core inflation “seems to be moving up somewhat, it is doing so slowly, if at all.” He adds that “financial markets are guessing about what fiscal and regulatory actions the new Congress and the Trump administration will enact. We don’t know what those will be, so I don’t think we should put too much weight on these recent market moves yet.”
Repeating a on often heard lament about the lack of rising wages, Kashkari points out that “the cost of labor isn’t showing signs of building inflationary pressures that are ready to take off and push inflation above the Fed’s target” and adds that “it seems unlikely that the United States will experience a surge of inflation while the rest of the developed world suffers from low inflation.”
A three-in-one, that’s why its called Super Thursday.
All three come at 1200GMT
Governor Carney’s press conference follows at 1230GMT
1. On interest rates – the Bank is pretty much unanimously expected to keep rates unchanged (0.25%) and the asset purchase target at £435bn (I have seen just one analyst expect the target to lower).
It is worth noting the UK economy is showing better than expected signs:
Growth is stronger than it was expected to be after the yes vote on Brexit. There are plenty of expectations around for slower growth ahead as the impacts of Brexit become clear, but these have not been evident in the official data. I’ll admit to being in ‘you are all doomed, just you wait’ camp, but the evidence so far has been opposite this (i.e. don’t listen to me!). Yesterday I posted the view of the UK’s National Institute of Economic and Social Research – they are pretty much of the same view as me, & they’ve been eating humble pie too: NIESR has progressively revised up its short-term estimates for British economic growth since the referendum, thanks in large part to consumers who kept on spending
Unemployment is falling (at an 11-year low if I recall correctly)
Inflation is ticking higher, and will perhaps overshoot the topside target (2% is the target). BoE Governor Carney is on record as saying the bank will not be overly tolerant of an inflation overshoot.
Despite these better signs the Bank is expected to be remain in ‘wait and see’ mode, watching more data, especially on business activity and consumer spending. In November Governor Carney said the Bank had a neutral policy bias, so I’d expect a clear indication of a shift in the bias before any policy move on rates or QE. This (a shift in policy bias) is something to watch for from the Bank today.
2. The minutes will be scoured for hints of how the Monetary Policy Committee members voted and reasoned, looking for signs for the future direction on rates and QE
3. The Quarterly Inflation Report will be a big key focus. It will include the BoE’s latest forecasts for growth & inflation. The most recent Bank update to these forecasts was way back in November;
The Bank of Japan is poised to upgrade its three-year economic growth outlook in the final days of January in light of strong recent indicators, though stronger inflation forecasts will be a harder sell.
The central bank will compile its quarterly outlook on economic activity and prices at a two-day policy meeting beginning Monday. The report will outline the BOJ’s forecast for each of the three years through fiscal 2018,
The last report, released in November, pegged gross-domestic product growth at 1% for fiscal 2016, 1.3% for fiscal 2017 and a slim 0.9% for fiscal 2018. Discussions this time are expected to center on the first two years, with the fiscal 2017 growth forecast thought to be headed for the mid-1% range.
Signs for an upgrade are strong. The BOJ in December boosted its outlook for Japan’s economy as a whole for the first time in 19 months. Such goods as smartphone parts and automobiles are driving up exports and industrial production, while consumer spending on durable goods such as cars is on the rebound as well. Changes made late last year to the GDP calculation method will also give the figure a boost: companies’ research and development spending, which has shown consistent growth over the years, now counts as investment.
BOJ Gov. Haruhiko Kuroda said at a World Economic Forum panel discussion Jan. 20 that he expects Japan’s economy to grow by around 1.5% in fiscal 2016 and fiscal 2017, significantly exceeding the country’s potential growth rate.
EM FX ended the week mixed. Markets continue to grapple with the outlook for the so-called Trump Trade, which we believe is intact. MXN and TRY recovered from the relentless selling of recent days, but both remain vulnerable. Indeed, if the jump in US yields on Friday continues this week, most of EM should remain under pressure.
India reports December WPI Monday, which is expected to rise 3.50% y/y vs. 3.15% in November. December CPI came in slightly lower than expected at 3.41% y/y, and so there are some downside risks to WPI. RBI next meetsFebruary 8 and it will be a tough call since the impact of the November demonetization is still being felt in the economy.
Russia reports November trade Monday. Exports are seen contracting -2.7% y/y, while imports are seen rising 5.1% y/y. As a result, the 12-month surplus is expected to narrow to $88.5 bln from $90.1 bln in October and would be the lowest since February 2005. Q4 current account data will be reported Tuesday and is expected at $7.4 bln. If so, the 4-quarter surplus would fall to $21.8 bln, the lowest since Q3 1999. Higher oil prices should prevent the external balances from deteriorating further in 2017.
Singapore reports December trade Tuesday. NODX is expected to rise 7.0% y/y vs. 11.5% in November. Despite the trade data, the economy remains a bit soft, but rising price pressures are likely to keep the MAS on hold at its semiannual policy meeting in April.
Malaysia reports December CPI Wednesday, which is expected to rise 1.9% y/y vs. 1.8% in November. Bank Negara meets Thursday and is expected to keep rates steady at 3.0%. The bank has been on hold since the last 25 bp cut back in July. It does not have an explicit inflation target, but rising price pressures are likely to prevent any further easing for now.
What events and releases will impact trading in the week starting Jan 16th.
ECB interest rate statement. Thursday 7:45 AM ET/1245 GMT. ECB Draghi press conference to follow at 8:30 AM ET/1330 GMT. The ECB will meet next week and announce that rates will remain unchanged. The last meeting the ECB moved increase the types of bonds that could be purchased for QE purposes (read German notes). That included bonds with yields below the -0.4% deposit rate. In addition, they lowered the maturity requirement to one-year from two- years (read German notes). However, they also reduced the amount of QE purchases from 80B Euro to 60B Euro until the end of December. There will be no change in policy, nor change in QE. So the focus will be squarely on the comments from Draghi during his traditional prepared statement and then Q&A. Will he sway more toward the hawkish Germans or keep committed to the the same path..
Bank of Canada rate statement. Wednesday at 10 AM ET/1500 GMT. Press conference at 11:15 AM ET. The bank will also release its quarterly Monetary Policy Report (MPR) at 10 AM ET. Stephen Poloz and Senior Deputy Gov. Carolyn Wilkens will give a statement and hold a press conference. The rate is expected to remain unchanged at 0.5%. In their last MPR, they saw 2017 CPI at 1.9% and core CPI at 1.7%. That was down from earlier projections of 2.1% and 2.0% respectively. For GDP they estimate growth of 2.2% (up from 2.1%).
US CPI/Core CPI. Wednesday at 8:30 AM ET/1330 GMT. The US will release consumer price data for December with expectations for MoM rising by 0.3% (vs. +0.2% last month). The Ex Food and energy is expected to increase by +0.2% (vs +0.2% last). The YoY numbers are expected to rise to 2.1% from 1.7% and 2.2% from 2.1%. The core YoY ended 2015 at 2.1% with the high extending to 2.3% in Feb and again in August
Australia employment change. Wednesday at 7:30 PM ET/Thrusday 0030 GMT. The Australian employment report is expected to show employment change of 10.0K vs 39.1K last month. The gain last month was well above the estimate of 17.5K. The unemployment rate did move higher to 5.7% last month from 5.6%. The estimate is for the rate to remain at 5.7%. Last month full time employment rose by 39.3K. The part time employment fell by -0.2K.
UK Retail sales. Friday at 4:30 AM ET/0930 GMT. The November retail sales in the UK are expected to to dip by -0.1% vs. +0.2% estimate last month. Ex auto fuel a larger -0.4% decline is forecast. The YoY changes are expected to show healthy 7.2% and 7.5% gains respectively.
Did you ever notice that when you look at all the failed predictions in any given December, what ended up happening was the opposite of what everyone predicted?
Contrarian Economic Predictions
Given that most predictions end up being wrong, why not just take a look at what passes for conventional wisdom and do the opposite?
Warning: many of these involve Trump.
1. Trump is going to nuke somebody in 2017
It is true that Trump wants to increase, rather than decrease, our nuclear capabilities, which runs pretty much counter to anybody’s idea of what constitutes peaceful behavior in 2017.
The interesting thing about the nuclear threat is that as the popular perception of it has waned since the Cold War, the actual nuclear threat has increased as the number of nuclear weapons has declined.
What if the opposite happens—what if peace breaks out all over in 2017? And what if it is because of Trump?
In a decision that will bring big cheer to the common man, the RBI (Reserve Bank Of India) has hiked the daily ATM withdrawal limit to Rs 4,500 per card. This would come as a huge relief to people who stand in queues for a long time and still manage to get only Rs 2,500.
In its latest notification, the RBI said, “The daily limit of withdrawal from ATMs has been increased (within the overall weekly limits specified) with effect from January 01, 2017, from the existing Rs 2500/- to Rs 4500/- per day per card. There is no change in weekly withdrawal limits.Such disbursals should predominantly be in the denomination of Rs 500.”
The current withdrawal limit per bank account per week has not been revised, a fact that is likely to disappoint people.
The Narendra Modi government’s move to demonetise old Rs 500 and Rs 1000 notes has largely been supported by the common man, though most agree that the implementation could have been better planned and executed. Long queues at banks and ATMs were a common sight in the first few days since the historic decision was announced by PM Modi on November 8. The situation has admittedly improved since then, but with increase in the daily limits, the government and banking system must work to ensure that ATMs have enough cash. But even as the central bank has eased the ATM withdrawal limit, the government is leaving no stone unturned to promote cashless transactions.
With Trump’s border tax adjustment looking increasingly likely, the stock market – as JPM has warned in recent days – is starting to fade the relentless Trumponomic, hope-driven rally since election day instead focusing on the details inside the president-elect’s proposed plans. And, as explained earlier in the week, if the border tax proposal is implemented, economists at Deutsche Bank estimate the tax could send inflation far above the Federal Reserve’s 2% target and drive a 15% surge in the dollar.
While this would be bad for stocks, as a 5% increase in the dollar translates into about a 3% negative earnings revision for the S&P 500 all else equal, a surge in inflation would also wreak havoc on bond prices, and send interest rates surging, at least initially, before they subsquently plunge as a result of a rapidly tightening, deep “behind the curve” Fed unleashes a curve inversion and recessionary stagflation becomes the bogeyman du jour.
The Bank of Japan revised its economic outlook for the first time in 19 months during the two-day policy meeting that ended Tuesday. But that is apparently the only step the central bank is taking at this time.
“The headwinds seen in the first half of this year have ceased,” BOJ Gov. Haruhiko Kuroda told reporters following the meeting. Markets were riled by heightened concerns directed at emerging economies at the beginning of 2016, only to be shocked in June by Britain’s referendum to exit the European Union. The BOJ was forced to loosen its policy in July, raising its target for exchange-traded fund purchases.
During the second half of 2016, the economic landscape has slowly brightened, beginning with U.S. readings. The Japanese economy has followed suit with increased exports and production. Consumption also recovered from a slump caused by a soft stock market and inclement weather at the beginning of the year.
“Japan’s economy has continued its moderate recovery trend,” the BOJ said in a statement published after the meeting. The central bank had previously qualified that view by highlighting sluggish exports and production.
Fresh guidelines issued by the Reserve Bank of India on Monday on limiting cash deposits of demonetised bank notes have added to the confusion. The central bank issued guidelines where it said that individuals will only be able to deposit demonetised bank notes above ₹5,000 only once till the remainder of the deposit deadline i.e. December 30, 2016.
On the surface, the guideline appears to be one that will hit the remaining black money hoarders in a single blow. However, the government hasn’t been able to plug laundering and cash leaks at banks. Therefore, the common person, who would’ve planned to deposit the money at a later stage, for various reasons like possibly to beat the early queues, would be hit unnecessarily.
Since the time demonetisation was announced, RBI has played a less than stellar role in managing the currency exchange and currency distribution process. Regular guidelines coming at regular intervals put the country in a state of confusion as to what will follow next and the damage control seems to be never-ending.