The coming week will be a busier one for financial markets as key data releases and central bank meetings get underway. GDP figures out of China and the European Central Bank’s policy meeting will be the highlights but the biggest headline grabber could be the much-awaited speech on Brexit by British Prime Minister, Theresa May.
Also coming up next week is the World Economic Forum in Davos, Switzerland on January 17-20, though major central bank heads appear to be giving the event a miss this year.
Week gets off to quiet start with Japanese machinery orders
Monday looks set to be very quiet as US markets will be closed for Martin Luther King Day. However machinery orders out of Japan should keep traders busy. Core machinery orders are forecast to fall by 1.7% month-on-month in November, after jumping by 4.1% in October. Uncertainty over Trump’s trade policy and his opposition to the Trans-Pacific Partnership could have unnerved Japanese businesses during the US election month of November, with the subsequent slide in the yen that boosted exporters, occurring later than the survey.
Australian employment data eyed
The Australian dollar has had a positive start to 2017, gaining 4% against the US dollar so far in January to recoup some of its post-US election losses. However, any signs of a sustained economic slowdown following the surprise third quarter contraction in Australian GDP could pull the aussie lower again. Thursday’s employment data will therefore be closely watched as a weak figure could be negative for the aussie. Also to watch is the Westpac consumer sentiment index on Tuesday.
China GDP unlikely to surprise
China will be the first major economy to report growth figures for the fourth quarter of 2016 on Friday. Its economy is expected to have expanded by 6.7% year-on-year in the final three months of 2016. China’s President, Xi Jinping, recently indicated he was open to the country’s growth rate falling below the official target rate of 6.5-7%. And given the continued lacklustre performance of exports, GDP growth could yet slow further in 2017, which would add to the existing downside pressure on the yuan. Also out on Friday are retail sales, industrial output and fixed asset investment numbers for December, all of which are expected to remain stable from the prior month.
ECB meets amid split on QE extension
The European Central Bank will meet for the first time this year on Thursday. Having only reviewed and extended its asset purchase program back in December, the ECB is not expected to announce any changes to its policy. However, ECB President, Mario Draghi, might get quizzed in the press conference on the apparent split within the Bank’s Governing Council where some members were not happy to extend the bond purchases beyond March 2017, according to the minutes of the December meeting. The minutes contributed to the euro’s climb above $1.06 and therefore any further revelations could cause further moves in the single currency.
In terms of data, the final estimates of Eurozone CPI in December are due on Wednesday, though no revision is forecasted. Before then, the latest German ZEW economic sentiment index is released on Tuesday. Germany’s closely watched gauge of investor confidence is expected to extend its post-Brexit rebound in January to rise to 18.8.
Brexit looks set to dominate week once again
British PM, Theresa May, will make a much-anticipated speech on the UK’s Brexit strategy on Tuesday where she is expected to outline the first concrete details on the government’s approach to the Brexit negotiations. A fuller plan is not expected until February but the markets will get the first glimpse on the likely path of the Brexit negotiations. The pound tumbled to 3-month lows this week as investors begin to price in a ‘hard Brexit’ and there could be further losses ahead for the British currency if May takes a hard line over key issues such as immigration in her speech.
UK data may struggle to get attention from the Brexit headlines next week despite the busy calendar. CPI figures are released on Tuesday and are expected to show headline inflation edging higher to 1.4% year-on-year on December. Core inflation is forecast to remain steady however, at 1.4%, in a sign that sterling’s depreciation since the summer has yet to fully feed through into retail prices. On Wednesday, unemployment figures are out and the jobless rate is forecast to stay unchanged at 4.8% in the three months to November. Wage growth is also expected to be little changed in November. Finally, retail sales will round up the week on Friday. Retail sales are forecast to accelerate to 7.3% year-on-year in December from 5.3% previously.
Bank of Canada to keep rates on hold
The Bank of Canada will too hold a scheduled policy meeting next week a day before the ECB on Wednesday. Despite some signs of weakness in the economy, the Bank is expected to keep rates at 0.5%. A rate cut cannot be ruled out however, after Canada’s GDP unexpectedly shrank by 0.3% in October, or at the very least, for the Bank to take a more dovish stance. A rally in the Canadian dollar over the past two weeks might also give the BoC reason to be more dovish. Also to watch out of Canada next week are inflation and retail sales figures on Friday.
It will be a less interesting week for the US with only CPI numbers to excite the markets. Inflation data for December is out on Wednesday, with annual CPI expected to rise above 2% for the first time since 2014. Industrial output figures are also due on Wednesday and are forecast to show an expansion of 0.6% over the month in December, while on Thursday, building permits and housing starts are published.
by XM Research