E-mail:    

Macroeconomics, Psychology, headwinds, US economy, PCE deflator, fx trader, forex China-Map-Close-Up-Country

Another way is through the inflation differential. Several years ago, it was thought desirable that the periphery has lower inflation than Germany. However, Germany was experiencing disinflation and sometimes outright deflation. This forced deflationary condition on others. However, Germany now has higher inflation, even above target, and this is a net positive for the periphery, though the real impact requires this to be sustained.

Japan has a full slate of economic reports but the consensus view is unlikely to change. Japanese growth may be improving, but it is not firing on all cylinders. Industrial productions, exports, and government spending are largely offsetting the drag of consumption and domestic demand. A small increase in Q4 capex appears to be mostly in the export sector, and industrial output is accelerating. The median expectation is that capex rose 0.6% in the last three months of 2016, recouping less than half the decline in Q3.

Household consumption in January is not expected to improve from the 0.3% year-over-year contraction reported in December. The poor consumption is not a function of the high level of unemployment as is the case in parts of Europe. The Japanese unemployment rate is expected to slip to 3.0% in January, matching the cyclical low, from 3.1% at the end of last year.

Also, Japan is the last of the large high income countries that continue to wrestle with deflation. The core measure, which excludes fresh food finished 2016 at minus 0.2% year-over-year. It is expected to be at zero in January when it is reported at the end of next week.  The core measure more comparable to the US measure, which excludes food and energy fell to 0.1% in December, the lowest year-over-year pace in three years. The recent peak was 1.3% at the end of 2015. It may have risen to 0.2% in January.

The UK reports the January PMIs starting in the middle of the week. The economy remained firm in H2 16 despite the wobble and fears around the referendum. While the low rates and sterling's depreciation have been important shock absorbers, the risk seems to be on the downside. Most of the benefits will likely dissipate by Q3. The PMIs are likely to be largely steady with a slight softer bias.

Similarly, China's official and Caixin version of the PMI also be a touch lower than at the end of last year. The February times series are likely to be skewed by the Lunar New Year celebration and will most likely not elicit an important market response. Capital outflows appear to have slowed, and the February reserve figures are expected to be reported March 6-7. Recall that the $12.3 bln draw down of reserves in January was the smallest since last July. The yuan has edged higher against the US dollar this month, but the 0.2% gain is more a sign of stability than an appreciating trend.

The implied volatility of the yuan has fallen sharply. This is consistent with less bearish outlooks. The implied 12-month volatility is near 6%, the lowest since late 2015. It had finished last year above 8%. The implied 3-month vol is near 4.7%, which is a four-month low. It was near 7.3% at the end of last year. Also since early January, the offshore yuan (CNH) has traded at a premium to the onshore yuan (CNY).

The Bank of Canada is the only major central bank that meets in the week ahead. There is practically no chance of a change in policy, and there is little need to adjust the economic projections. The slow recovery continues, but there is still plenty of slack in the economy. There has been an improvement in the terms of trade, and the risk of a trade disruption given the new US administration appears to have slackened. However, non-energy exports have disappointed (-4.1% in December).

Canada reports GDP figures the day after the BoC meeting. The economy is expected to have expanded 0.3% in December after 0.4% in November. Growth appears to have accelerated to 2.0% at an annualized pace in Q4 after a 3.5% pace in Q3, which was the strongest in a couple of years.

Australia also reports Q4 GDP. It is expected to have bounced back after contracting 0.5% in Q3. A 0.7% expansion in Q4 would put year-over-year growth just below 2.0%. The risk is on the downside after last week's disappointing capital expenditure figures.

<<Previous     Next>>