Will the ECB start to buy sovereign bonds?

Genevieve Signoret

Macro Views

Outlook

We anticipate the ECB to announce on Thursday that it will extend its asset purchase program to include sovereign bonds.

Please see today’s Letter from the President for a summary of our outlook for 2015-2016. Also check out our new forecast tables and scenario assumptions.

Activity

December retail sales surprised to the downside. They don’t yet show the effect of falling prices on consumption. U.S. consumer confidence continues its upward trend.

The U.S. Beige Book confirmed our view that growth is slow to moderate, and credit conditions and bank balance sheet health are improving. Sentiment looking forward is positive. U.S. industrial production kept its pace. Mining growth slowed down at the margin but remained positive. Euro area industrial production shrank from a year ago. Country-level details reveal recovery in Spain, a slowdown in Germany and bad news turning worse in Italy and France.

Consumer prices

U.S. CPI headline inflation, which includes gasoline prices, plunged in December to 0.8%. Core inflation, meanwhile, barely slipped (1.7%, down 0.1 percentage point). UK inflation crashed to 0.5% y/y, half its November rate. India’s inflation moved up but remained lower than the central bank target ceiling. The Reserve Bank of India cut rates by 25bp to 7.75%.

Policy

The Swiss National Bank (SNB) shocked the forex market when it removed the Swiss franc euro cap. In 2011 the SNB implemented a policy to maintain the Swiss franc below 1.20CHF to the euro. Yesterday such ceiling was scrapped leading to an almost immediate appreciation of the Swiss currency of 40%; later that day it stabilized at around 11%. We’ll still attentive to the side effects this unexpected volatility can create.

The Reserve Bank of India cut its monetary policy rate during an unscheduled meeting by 25bp to 7.75%. In the communiqué the RBI invoked low inflation, weak demand, and the government commitment to stick to its fiscal deficit target as the motivation for the cut.

Next week

Events in red are those most likely to shake markets.

Tuesday 20

• China: GDP (Q4), industrial production (Dec), retail sales (Dec). This week’s positive trade data suggest an uptick in December industrial production. Consensus: GDP Q4, 7.2% y/y (from 7.3% in Q3); industrial production, 7.4% y/y (from 7.2% in Nov); retail sales, 11.8% y/y (from 11.7% in Nov).
• USA: Fed speech: Powell (voter).

Wednesday 21

• Japan: Monetary policy meeting. We don’t expect a change in the monetary policy, but we’ll be waiting for updated forecasts for GDP growth and inflation from the Bank of Japan.  Consensus: rate and asset purchase program unchanged.
• Switzerland: World Economic Forum 2015 in Davos (to Jan 24).
• Brazil: Monetary policy meeting. In December, the COPOM raised its monetary policy rate by 50bp to 11.75%. Brazil is experiencing stagflation. Consensus: Selic rate: +50bp to 12.25%.
• UK: Unemployment rate, monetary policy meeting minutes (Jan 8). In its last meeting the Bank of England left its monetary policy rate unchanged at 0.50% and its asset purchase program at ₤375Bn. With UK inflation down to 0.5% we expect the Monetary Policy Committee opinion to be less hawkish than it was last time.

Thursday 22

• Euro Area: Monetary policy meeting. The ECJ’s positive opinion on the Outright Monetary Transactions program, the aggressive move of the Swiss central bank and December’s negative inflation rate in the euro area, all point to a big Quantitative Easing (QE) program announcement next week. We expect this action will prevent the euro area from falling into a deflationary spiral. Consensus and TransEconomics: rate unchanged at 0.05%, QE ($500Bn).
• USA: FHFA house prices (Dec), Markit manufacturing PMI.
• Mexico: Consumer prices (H1 Jan)

Friday 23

• Global: Markit manufacturing PMI (Jan). Global manufacturing—excluding the U.S.—didn’t do well in 2014. We don’t expect this to change anytime soon.
• Korea: GDP (Q4, flash)

Sunday 25

• Greece: Snap parliamentary elections (Jan). Polls indicate that Syriza—an extreme left party— is likely to win. Nonetheless, they will very likely need at least one coalition partner to form a majority government. Although Syriza have softened its anti-euro stance in the last few months, concerned about a possible Grexit remain elevated compared with 6–12 months ago.