In the wake of the Bank of Japan’s shock decision to expand its easing program by moving to paying banks negative interest rates on surplus cash, attention will switch to a trio of central banks meeting this week, led by the Reserve Bank of Australia tomorrow, the central bank of India (also tomorrow) and the Bank of England on Thursday night, our time.
In addition to these meetings and the continuing markets fallout from the BoJ’s decisions, earnings reports across the world this week also sees the release of the usual start of month surveys of manufacturing and services which are likely to show a mixed picture – watch for the two Chinese survey’s results later today.
And Friday night sees the release of the January jobs data for the US – they will be important as usual, but against the fallout from the BoJ decision and the emerging impact of the higher dollar on exports, growth and corporate revenues and profits, the release could very well end up a big negative if it shows another strong month for jobs growth.
For us in Australia the RBA’s first meeting of the year is the biggest event of the week, and a rate cut is not expected from this meeting.
But the BoJ’s move has increased pressure for a possible reduction in coming months if there is a concerted surge in foreign buying of higher-yielding Australian assets by foreigners moving out of Japan and looking for higher returns.
That would push up the value of the dollar, and if sustained, that would have a similar impact to a tightening in monetary policy or a rate rise – not a fall that markets want.
But any pressure would meet the pressure on the dollar from the stronger greenback, thereby relieving pressure on the RBA to move to weaken the currency.
The RBA is now watching cost pressures more closely for early signs of inflation returning to be a problem – there’s nothing really nasty yet but last week’s consumer price figures for the December quarter did contain a few warning signs in what was a benign report so far as inflation is concerned.
It is only a possibility at the moment, but if the European Central Bank expands its quantitative easing program next month, as has been suggested by its boss Mario Draghi, then the RBA may have no choice but to cut the cash rate simply to offset the impact of such a move (and that from the Bank of Japan).
But the move by the BoJ has thrown into doubt the monetary policy direction of the US Federal Reserve which is already being openly questioned by the slowing pace of activity in the US economy and weak profits caused by the higher dollar.
The BoJ move has increased the upward pressure on the US dollar (we saw that on Friday in the way the yen fell sharply) and if the ECB moves to expand its easing, then the currency will rise (acting like a rate rise in itself).
Certainly Fed chair Janet Yellen will be under more pressure to justify December’s rate rise given what has happened in markets and the sharp slowdown in US 4th quarter GDP growth to an annual rate of 0.8% (or around 0.2% quarter on quarter).
She is due to make her first appearance for the year before the US Congress in a couple of weeks and the questioning will be fierce (given that it is also an election year in the US).
Friday’s GDP figures were only the first estimate and could be revised upwards in the second and third estimates over the next two months (as usually happens).
But it has confirmed that the US economy has slowed noticeably from the strong 3.9% rate seen earlier in 2015 and on that basis, questioning the Fed’s December rate rise.
The post-meeting statement tomorrow afternoon from RBA Governor Glenn Stevens will be read closely therefore for any change in policy direction from late last year.
The statement will summarise the RBA’s updated view of the economy which will be detailed in Friday’s release of the RBA’s first Statement on Monetary Policy for 2016.
The BoJ move will force the bank to rewrite parts of its overview and statement of risks, while the statement will contain the latest forecasts on growth and inflation – with a return to 3% growth possibly pushed out to 2017 from 2016.
Being the first week of the month, this is also a big week for local economic data releases.
So we get the January Core Logic RP Data home price indexes and the TD Securities Inflation Gauge for January (both today), the December trade figures and December building approvals (both on Wednesday) and retail sales data for December (Friday).
Building approvals and retail sales are expected to be solid, according to the AMP’s chief economist Dr Shane Oliver. The retail sales report will give us an estimate of sales growth in the December quarter (and Christmas) and the first glimpse of how the economy went in the 4th quarter.
The AIG business conditions PMIs for manufacturing and services will also be released this week, starting today. Industry car sales data for January will be released later in the week.
The December half and full year reporting season also steps up in pace this week with reports from a number of leading companies such as Downer EDI, Argo Investments and Tabcorp.
In the US, there’s also the usual start of month data deluge culminating in Friday’s jobs report for January.
Tonight sees the release of the monthly survey of manufacturing conditions, with the services report out on Wednesday night. Car sales figures for December will be released later today and tomorrow.
Friday night’s jobs report will see around 190,000 new jobs created, according to Dr Oliver. He says unemployment will remain unchanged at 5%. “Wages growth is likely to remain relatively subdued but with a slight rising trend,” he said. They hit an annual rate of 2.5% in December.
Tonight we will get the Fed’s preferred inflation and consumption indicators released as well as personal income and spending data. The trade data for December will be out on Friday (along with consumer credit figures).
The consumption and trade data will influence the 4th quarter GDP estimate – a strong report will see the 0.7% revised upwards, while a weak or static report will likely see the figure maintained or even trimmed.
The US 4th quarter results season hits full bore this week with hundreds of companies of all sizes reporting – the main reporters will be energy groups and the first round of releases from media companies. Comcast, News Corp, Alphabet (Google), and General Motors, plus Pfizer and Merck are among the groups due to report,along with a string of major companies from Europe, Japan, and China.
In China, the official and Caixin/Markit manufacturing conditions surveys for January (later today) are likely to remain subdued but services conditions PMIs should remain a bit stronger, as has been the case for the past few months.
Europe sees the release tonight and midweek of the usual monthly surveys on manufacturing and services. Producer prices and employment data will be out tomorrow night. Retail sales figures are out on Wednesday for the eurozone.
And in the UK the Bank of England meets on Thursday night and is likely to join other central banks in relaxing its monetary policy stance, if only in its post-meeting statement and forecasts.
