Monday, January 17, 2011

The Weak, I mean, Week Ahead : Recent US data flow has been a little disappointing after what had been a fairly strong run of figures up to Christmas.

Recent US data flow has been a little disappointing after what had
been a fairly strong run of figures up to Christmas. Adverse weather
may well have played its part. Consumer confidence in the ABC weekly
sentiment index has recovered now that the situation has improved and,
as a result, I looked for University of Michigan sentiment to rise as
well, but consumer confidence dropped unexpectedly in January, as the
current conditions index fell to 79.8 from 85.3, offsetting a better
reading from the outlook component. 1-year-ahead inflation
expectations also picked up from 3.0% to 3.3%, though the 5-year
expectation held steady for the fourth consecutive month at 2.8%. On
top of this, business inventories grew only a meagre 0.2% m/m in
November, from an expected 0.7%. Destocking by the auto sector was the
principal cause (also notable in weak production figures in the IP
survey), but could also mark the start of an anticipated inventory
slowdown. Whilst this could weigh on GDP growth in the 4Q10 and 1Q11
figures, it is likely to be substantially offset by weaker imports.

All the decline in the headline was due to an inexplicable 5.5-point
drop in the current conditions index, which usually just moves more or
less in line with jobless claims and should now be in the low 90s
rather than January's 79.8. Anything can happen month-to-month, though
and I expect a clear rebound in February. Expectations, meanwhile, did
not rise as much as I had hoped but the trend is clearly upwards and
we expect modest steady gains over the next few months. Anecdotally,
retail activity has performed well since Thanksgiving and this should
translate into a healthy retail sales report, but the December retail
sales release was a little disappointing, rising 'only' 0.6% m/m,
and there were downward revisions to earlier releases. Stripping out
autos and petrol, retail sales were up a moderate 0.4% m/m. Not bad,
but not too exciting either. The subcomponents of this series were
unusually volatile, and conflicting, with strong rises in motor
vehicles, furniture, building materials health and personal care,
sporting goods and non-store retail offsetting outright declines in
electronics, food and beverages, clothing, general merchandise and
miscellaneous. Difficult to read too much into these figures, and bad
December weather might be a disruptive factor. However, not all parts
of the US economy are doing quite as well. On the one hand, I expect
residential construction activity to continue bumping along the
bottom. US existing home sales, on the other hand, may turn out above
5.0m for the first time since June last year. The NAR's pending home
sales index showed another uptick in November, so I look for a modest
gain in the pace of December re-sales (+2.6%). I will update my
estimate if regional sales figures (often reported ahead of the
national data) contain any notable surprises.

As we began Week #2 of 2011, markets remained on the thin side which
probably explains some rather odd price action. Many moves of the
first week in January were reversed this week, most notably the
EUR/USD exchange rate from a low at $1.2860 to $1.3458, taking EUR
crosses up with it, gaining most against the AUD from A$1.2900 to
$1.3500. Eastern European currencies are at their strongest against
the USD in 6 weeks, while the EUR/SWK at 8.8300 is at its best level
since September 2003. Stock indices have been very mixed indeed, each
working off its own dynamics. The Nikkei and US indices inched to yet
new recent highs, most European ones held unsteady at December's
highs, with big regional variations; Spain's Ibex index at one point
managed to rally 10.5% in just 3 days - welcome probably, but surely
raising questions. Mumbai's Sensex lost 9.0% this fortnight and at
one point this week Bangladesh's Dhaka General Index lost 15.5%,
closing the exchange and causing violent street protests which were
broken up by the police. Interest rates also not moving in tandem:
Schatz at 1.17% highest in almost a year, likewise Polish 5-year
(5.80%), though most 10-year Treasury yields while up a little on the
week remain within December's ranges at/around 4.30%. Baltic Freight
Rates have dropped considerably since November.

Father Christmas delivered no presents to Eurozone central bankers and
finance ministers; sovereign debt problems are back with a vengeance,
spreads over 10-year Bunds at new records for Belgium (143 bps), Italy
(201 bps) and Spain (275 bps). A subsequent massive collective sigh of
relief and narrowing of spreads as Portuguese and Spanish T-Bond
auctions found adequate bids. German 2010 GDP grew at 3.6%, best since
unification after plunging in 2009, underlining the difference between
the weak and the strong. UK Manufacturing grew 5.5% y/y to November
keeping it at some of the highest levels in 3 decades. The ECB and
Bank of England kept rates unchanged at 1.00% and 0.50% respectively,
but in surprise moves the Central Banks of South Korea and Thailand
upped theirs by 25 bps to 2.75% (the Kospi at a new record 2,109) and
2.25% respectively. The PBoC raised bank reserve requirements by 50
bps. They, like Mr. Trichet, are a 'little rattled' by above
target inflation, though the latter did boast of a 'remarkable track
record' where Eurozone CPI was 1.97% in the 12 years since the
single currency's introduction. Mervyn King has no such luck,
December Input PPI running at +12.5% y/y, caused in large part by a
weaker GBP, something the MPC so happily embraced earlier hoping it
would prompt to an export-led recovery. Instead, as any sensible
person could have told them, it has caused a record £8.74bn trade
deficit. Euribor and Short Sterling futures 30-60 bps off highs;
Eurodollars flat.

Blizzards, unseasonable snow, floods, volcanic eruptions, small
earthquakes, 1000s of birds falling out of the sky. The worst La Nina
since 197/74 continue until March so let's hope any further damage
can be contained while helping those in need. Monday is a US holiday
with Japan December Consumer Confidence and UK January Rightmove House
Prices early on. Tuesday busy with an ECOFIN meeting too: Japan
December Department Store Sales, UK Nationwide Consumer Confidence,
RICS House Price Balance, CPI, November DCLG House Prices, US TICS
Flows, January NAHB Housing Market Index, Empire State Manufacturing
Survey and German ZEW Survey plus the Bank of Canada decides on rates
(unanimously expected unchanged at 1.00%). Wednesday Tokyo December
Condominium Sales, November Tertiary Industry Index, Eurozone Current
Account, UK Average Earnings, ILO Unemployment, December Jobless
Claims, EZ16 Construction Output, US Housing Starts and Building
Permits. Thursday Japan December Convenience Store Sales, German PPI,
US Existing Home Sales, Leading Indicators, January Philadelphia Fed
Survey and UK CBI Industrial Trends. Friday Japan November All
Industry Activity Index, UK December Retail Sales and German January
IFO. Sunday are Portuguese presidential election.

In the UK, data out Tuesday are expected to show annual CPI climbed to
a 7-month high of 3.4% in December, from 3.3% in November and 3.1% in
September. This would take CPI further above the Bank's target rate of
2.0%. Core consumer price inflation is seen remaining at 2.7% in
November. I expect higher oil and commodity prices to have had an
upward impact on CPI in December, while food prices remain elevated.
Petrol prices rose in December and utility bills increased. The
evidence also suggests the severe weather in December did not push
retailers into offering significantly more discounts and promotions to
try to boost sales. Specifically, the British Retail Consortium
reported that overall shop price inflation rose to 2.1% in December
from 2.0% in November. Food price inflation was stable at 4.0% in
December, while non-food inflation rose to 1.1% in December from 0.9%
in November.

Consumer price inflation looks likely to 'touch' 4.0% over the
next few months (I currently forecast a peak of 3.8%) because of
higher oil and commodity prices, as well as elevated food prices.
Furthermore, VAT rose from 17.5% to 20.0% in early January, although
this may not actually push the annual inflation rate up, given there
was also a VAT hike in January 2010 (to 17.5% from 15.0%). CPI will
hopefully move below 3.0% late in 2011 as the upward impact from VAT
developments, higher energy, commodity, and food prices, and GBP's
past sharp depreciation wanes. Meanwhile, underlying inflationary
pressures should be 'limited' by appreciable excess capacity,
likely muted growth in 2011, strong competition on the high street,
and high unemployment. Inflation will hopefully dip below 2.0% early
in 2012 as the impact of the January 2011 VAT hikes drops out and the
UK housing market 'stalls'.

I expect UK house prices to trend down gradually to lose around 10%
from their peak 2010 levels by the end of 2011. This implies that
house prices are likely to fall by a further 6–7.0% during 2011.
High (and likely to rise) unemployment, muted wage growth, an
increasing fiscal squeeze, low consumer confidence, difficulties in
getting a mortgage, a housing supply/demand balance currently firmly
in favour of buyers, and a house price/earnings ratio above long-term
norms are a poor combination of factors for house prices. Low interest
rates and the current stamp-duty holiday for first-time buyers on all
properties costing up to £250,000 only partially offset these adverse
factors—especially as it is difficult for many people to get a
mortgage. I continue to 'busk' the trend and feel convinced that
the Bank will NOT raise rates until Q4.

On Monday and Tuesday there will be important meetings of European
finance ministers, discussing the possible next steps in the
Eurozone's crisis management. Even if the German government is
officially still reluctant to change the 'rules of the game', an
increase in the size and scope of the EFSF has become likely. Like the
US, adverse weather may have influenced some (recent, mixed) UK
reports but with fiscal austerity, tight credit conditions and
negative real household disposable income growth we are less
optimistic on the UK's prospects than consensus. Even though
inflation should pick up further in months ahead (I look for 3.4% this
week on CPI), I doubt medium-term inflation pressures are sustainable
and favour no change to monetary policy until 'at least' Q4 at the
earliest.. The impact of the harsh winter will also be reflected in
German confidence indicators.

In Japan, political tensions will receive attention this week. Expect
politicians to 'put pressure' on the BoJ to ease policy further,
given DPJ officials will not want the economy to be in recession
during April's local elections. Brazil's monetary policy committee
(COPOM) meets on Wednesday with Alexandre Tombini at the helm for the
first time. Considering the worrying inflation dynamics in the context
of continued domestic demand strength, I expect a new round of rate
hikes. I expect 3 consecutive hikes of 50 bps, bringing the SELIC rate
to 12.25% by April. The Bank of Canada also convenes this week, with
no change to policy expected once again, given the impact further
divergence from Fed policy would have on the already strong CAD. The
quarterly report is released the following day, which will be keenly
eyed for updated projections and risks to the outlook
Although Turkey's December inflation caused market players to expect
another rate cut at this week's meeting, I do not agree with this
view as December's inflation did not signal any improvement in the
inflation outlook. I think that the CBT will 'watch and await' the
effects of previous month's decisions a bit longer before taking
further actions. Conversely, in Poland the MPC has left little doubt
that there is going to be a rate hike this week, most likely by 25
bps. The key releases in Russia will be 2010 federal budget
performance and inflationary data, including weekly CPI (to reflect a
rise in regulated retail tariffs for electricity and natural gas) and
Dec PPI. In Ukraine, industrial and retail sectors should see strong
growth in both m/m and y/y terms in Dec on the back of recovering
domestic demand since the middle of 2010.

China will dominate headlines for its 4Q10 GDP, December inflation
data and President Hu's visit to the US. I view the PBoC's lower
CNY fixings in the last 3 days as a political gesture ahead of Hu's
visit. I have not altered my view that renminbi appreciation is not
going to be part of the PBoC's disinflation policy

No comments: