Market will be hypersensitive to any change in FOMC tone

Genevieve Signoret

Macro Views

Next week

Next week’s main market-moving events are the Greek elections on Sunday and the U.S. FOMC meeting on Wednesday. Markets will be hypersensitive to even the slightest change in the Federal Open Market Committee’s tone or hint that the FOMC has begun to doubt that it will raise rates as early as June. For detailed comments on these and other global market moving events, scroll down.

Activity

China’s GDP grew 7.3% y/y in Q4, which is the same pace as in Q3. 2014 growth was 7.4% down from 7.7% in 2013.

Markit global manufacturing PMIs were mixed. China’s came to 49.8, still in contraction zone but higher than the December 49.6. The euro area’s accelerated to 51.0 from 50.6. The USA’s slipped to 53.7 from 53.9 in December, confirming the downward trend begun in September 2014 when it reached 57.9.

Consumer prices

Mexico’s annual inflation slowed down sharply in the first half of January. Headline annual inflation came at 3.08%, down from 4.08% in December, while the core fell to 2.43% from 3.2%. A slowdown was expected, but not one this sharp. The drop was driven by four main factors: the elimination of domestic long-distance charges, a smaller gasoline price increase than last year’s, a drop in the fruit and vegetables sub-index, and a high year-ago comparison base. We forecast 3.24% inflation for Mexico in 2015.

Policy

The European Central Bank (ECB) extended its quantitative easing program to include sovereign bonds. Mario Draghi—the ECB president—announced that the ECB will buy €60Bn worth of government bonds, asset-backed securities and covered bonds every month until at least September 2016. The extended program will start in March. Markets were pleasantly surprised: whereas they expected a €500Bn program, the ECB delivered €1.1Tn one, and an one that’s open ended in the sense that the ECB will carry out this program until “until the Governing Council sees a sustained adjustment in the path of inflation that is consistent with its aim of achieving inflation rates below, but close to, 2% over the medium term.” We expect this action to prevent the euro area from falling into a deflationary spiral.

The Bank of Brazil continued its tightening cycle with a 50bp increase in its monetary policy rate to 12.25%—its highest level since 2011. Inflation is still high and growth low in Brazil. This week, Joaquim Levy—Brazil’s new finance minister—announced tax increases on fuel and loans to individuals to help balance the government’s budget deficit. More fiscal discipline in Brazil would bring interest rates down. Currently and traditionally, the central bank has alone borne the burden of fending off or battling inflation.

The Bank of Japan maintained unchanged its quantitative easing program. It lowered its real GDP growth estimate 2014 but revised up its projections for 2015 and 2016. It lowered its core CPI projection for 2014 to 0.9% (excluding impact of VAT hikes) and 2015 to 1.0% while raising it marginally for 2016 to 2.2%.

The Bank of England minutes this week showed that Martin Wheale and Ian McCafferty—the two hawkish dissenters of previous meetings—had realigned themselves on January 8 with the majority backing up an unchanged monetary policy stance.

Next week: the details

Events in red are those most likely to shake markets.

Sunday 25

• Greece: Snap parliamentary elections (Jan). Polls still indicate Syriza—an extreme left party that threatens to exit the euro area if Greece’s debt is not restructured— likely to win. Nonetheless, they will very likely need at least one coalition partner to form a majority government. Also, Germany has expressed openness to debt restructuring as long as it doesn’t involve debt forgiveness. This would be achieved by lengthening the debt term structure.

Monday 26

• Japan: International trade (Dec).
• Mexico: Retail sales (Nov).

Tuesday 27

• Euro Area: EcoFin meeting.
• UK: GDP (Q4, first estimate). Consensus: 0.6% q/q (from 0.7% in Q3).
• USA: Durable goods orders (Dec), PMI services Markit (flash), S&P/Case-Shiller house prices (Nov), Conference Board consumer confidence (Jan). The U. of Michigan consumer sentiment is now above its pre-Great–Recession level. We expect the Conference Board consumer confidence to confirm this data point with a new post-recession high. Consensus: 95.0 (from 94.1 in Dec).
• Mexico: Global economic activity indicator (IGAE) (Nov.

Wednesday 28

• USA: Monetary policy meeting. We don’t foresee any change in the U.S. monetary policy stance. We’re agnostic as to whether the communiqué’s tone will change. Also, as to whether the FOMC will introduce doubt as to its expectation that it will start raising rates in June. Recall that we forecast that the first hike will come in Q3. Markets will be hypersensitive to any such change. This meeting won’t be followed by a press conference or updated forecasts. Consensus: rate unchanged at 0.00–0.25%.

Thursday 29

• Germany: Consumer prices (Jan, flash), unemployment rate (Jan).
• Euro Area: Money supply and commercial bank lending.
• USA: Unemployment claims (Jan 24).
• Brazil: Monetary policy meeting minutes (Jan 21).
• Mexico: Monetary policy meeting. Consensus: rate unchanged at 3.00%.

Friday 30

• Japan: Consumer prices (Dec), industrial production (Dec, flash), unemployment rate (Dec). Plummeting oil prices have been pushing down Japan’s CPI. The Bank of Japan has showed concern about the effect that this phenomenon might have in the inflation expectations. We expect the Japanese industrial production to start recovering from last year’s tax hike. Consensus: consumer prices, 2.3% (from 2.4% in Nov); industrial production, 0.3% y/y (from –3.7% in Nov).
• Euro Area: Consumer prices (Jan, flash), unemployment rate (Dec). January’s annual inflation rate is expected to be negative for the second consecutive month. We don’t interpret this as meaning that the euro area is falling into a deflationary spiral but rather see this negative measured rate as reflecting a drop in the relative price of gasoline. Consensus: –0.5% y/y (from –0.2% in Dec).
• Turkey: International trade (Dec).
• USA: GDP (4Q, flash), consumer sentiment U. Michigan (Jan, final). We expect U.S. real GDP growth to slow down to 2.5% q/q saar in Q4. This would mark a slowdown from Q3, when it grew by 5.0%.