Insights from nomura
THIS WEEK’S HIGHLIGHTS :
United States: Yellen’s Semi-annual Monetary Policy Report to Congress Chair Yellen reiterated her recent views on the labor market, inflation, and monetary policy. The biggest news of the day was when she indicated the FOMC may wait until next year
to change the reinvestment policy.
United States: A Glimpse of convergence? Incoming activity data suggest the economy may have started to gain momentum in January, closing the gap between highly elevated sentiment following the election and anemic growth in real activity.
Global Economic Outlook Monthly: A brighter European outlook We have moved above consensus on euro area growth and expect only a mild slowdown in the UK.
Europe: Assessing Europe’s deleveraging efforts Most European economies are now less stressed than they were either on the eve of the global financial crisis of 2008-09 or before the more specific European crisis episode of 2010-11.
Japan: FY16-18 economic outlook revisions – Signs of faster growth We forecast slower growth in 2017 H2 on dropout of stimulus boost, sluggish income growth.
India: The 2017 state elections Opinion polls published after demonetisation but ahead of voting, on average, suggest that the BJP government will retain Goa, win Uttarakhand, manage a plurality in UP, but lose in Punjab.
Taiwan: Upgrading our economic outlook Despite strong electronics production in the near term, we remain cautious on Taiwan’s growth outlook in H2 2017 and 2018, due to the cyclical downturn in electronics parts, structural headwinds and limited room for
Colombia: Cautiousness is the new name of the game January’s decision coupled with last Friday’s minutes helps to clarify BanRep’s priorities.
Our view in a nutshell :
United States :
• We expect the economy to start to grow modestly above trend in 2017 at a pace of about 2%.
• We see better growth in H2 2017 and H1 2018 due to a strong likelihood of fiscal stimulus primarily from tax cuts.
• By H2 2018, the boost from fiscal stimulus wanes and drag from tighter immigration and monetary policies bind.
• We see a bit more inflation from increasing pressure induced by tighter labour markets and new barriers to trade.
• We believe potential growth will remain low due to weak productivity growth and a structural decline of the LFPR.
• We expect a somewhat faster pace of hikes to the tune of two hikes in 2017 and three in 2018.
• The risk to our outlook is high due to the uncertainty around non-monetary economic policy after the election.
• We see growth of 1.8% this year (above consensus) falling to 1.5% in 2018 & 2019 as Brexit materialises.
• Inflation is set to rise thanks to sterling’s depreciation, though we think the spike will be short-lived.
• Thus, the Bank of England should look through rising inflation and leave rates (and QE) on hold until H2 2019.
• We are relatively optimistic on the Eurozone outlook and anticipate further positive data surprises.
• On monetary policy, we expect the ECB to announce a tapering programme in H2 2017 to commence in early 2018.
• We do not believe that a large political shock will emerge this year that would destabilise Europe’s economies.
• Despite a soft patch in some recent economic data, we expect the economic recovery to continue through H1 2017.
• We expect core CPI inflation to stay below the targeted 2% level despite the recent yen depreciation.
• While the expectation arises for an earlier exit from the easing, BOJ is unlikely to raise the current rate targets soon.
• Extreme protectionism under the Trump administration and renewed yen appreciation are the key risks.
• Outside Mexico, we judge Asia to be the region most exposed to a more inward-looking US administration.
• A regional credit crunch is a non-trivial risk amid a late-stage credit cycle, rising US rates and a slowing China.
• In the medium term we see the biggest opportunities in Asia’s tiger cubs: India, Indonesia and the Philippines.
• China: We expect growth to slow modestly to 6.6% y-o-y in Q1 and PPI to rise further to above 7% on a base effect.
• Korea: We expect a belated 25bp rate cut to 1.00% in Q4 2017 after a possible early presidential election in H1.
• India: Demonetisation is set to hurt near-term growth, but we expect a stronger rebound in H2 2017 and into 2018.
• Indonesia: We expect growth to rise, boosted by coordinated policy stimulus and reforms gaining more traction.
• Australia: Higher commodity prices are positive but a number of headwinds will keep growth sub-trend.
EEMEA (Emerging Europe, Middle East and Africa) and Latin America
• S. Africa: Minimal reforms will not prevent mid-year ratings action; political noise will grow further.
• Hungary: MNB may well burrow further down the rabbit hole even as interbank rates fall to base in the coming months.
• Poland: Reform plans have seen minimal implementation meaning stronger growth remains a more distant hope.
• Turkey: Politics heat up as we approach the Executive Presidency endgame, while inflation accelerates.
• Brazil: Amid political noise, government pushes for fiscal measures that require Congressional approval.
• Mexico: Focus will be on NAFTA negotiations.
• Colombia: The economy is still pending adjustment on the external and fiscal fronts after the terms-of-trade shock.
• Chile: Economic recovery will remain highly dependent on the government’s ability to restore business confidence.
United States | Data preview :
The week ahead
Attention turns to the minutes for the 31 January-1 February FOMC meeting, which may include key agendas such as reinvestment policy and the degree of accommodation.
Existing home sales (Wednesday):
Home sales fell 2.8% m-o-m to an annualized 5490k in December, likely driven by a sharp drop in housing inventory level. The month’s supply indicator was down to 3.6-month supply in December, the lowest since January 2005. In January, there may have been some recovery as pending home sales, which tend to lead existing home sales, rebounded in December. Also, steady mortgage
applications for home purchases in January and December suggest demand in the housing market may have sustained in January. Thus, we forecast existing home sales were up 1.1% m-o-m in January, acceleration to an annualized rate of 5550k.
FOMC minutes (Wednesday):
As expected, in the 31 January-1 February FOMC meeting, the Committee kept the target range for the federal funds rate at 0.5-0.75% with no substantive changes to the language on monetary policy.
However, there were some modest changes to the economic conditions and economic outlook paragraphs. In particular, the language on the causes of disinflationary pressure was removed. Given the recent firming of core goods prices suggested by the CPI
report, it would be interesting to see how the FOMC assessed the lingering impact from the lower energy prices and strong dollars in the past on inflation. If FOMC participants had become confident that these transitory factors sufficiently diminished and goods
prices would likely continue to increase, this confidence could have some implications to the future path of monetary policy.
Elsewhere, we think reinvestment policy was likely on the agenda during this meeting, and we believe the minutes may tell us if this had been true, although Yellen’s recent remarks suggested that the Fed is unlikely to start reducing the Fed’s balance any time
soon. In addition, any discussion on the timing of the next rate hike should gain attention from the markets. Last, there could have been active debates on the degree of accommodation and hence, the level of the neutral interest rate. There was a subtle change in language during the Semiannual Report on Monetary Policy testimony to the Senate. Chair Yellen stated in her speech on 19 January that “The Committee judges, however, that the stance of monetary policy remains modestly accommodative.” By contrast, during this testimony, she omitted “modestly” and said “… our view that US monetary policy remains accommodative.” Although subtle, this change suggests that the FOMC believes rates will have to be raised more to get policy back to a neutral stance. We think the minutes
may confirm if this change was deliberate and is indeed a hawkish signal.
New home sales (Friday):
New home sales decelerated notably in December, registering an annualized rate of 536k, which is a 10.4% m-o-m decrease. In January, we expect new home sales to have rebounded. Mortgage applications for home purchases were up modestly in January. The sales of single family homes index in the National Association of Home Builders (NAHB) housing survey inched downward in January, but remained at an elevated level. Yet, the NAHB reported that industry headwinds such as labor shortage and supply-side constraints still persist. In addition, a sharp decline in new home sales in December warrants some positive payback in this volatile series in January. Therefore, we forecast an 8.2% m-o-m increase in to an annualized rate of 580k.
University of Michigan consumer sentiment (Friday): The preliminary February estimate of consumer sentiment from the University of Michigan survey fell slightly from 98.5 to 95.7. The decline was largely due to a modest drop in consumer expectations for the future rather than the assessment of current conditions. The sharp partisan divergence in sentiment seen after the election widened again in this issue. Given the starkly partisan response to the election, the asymmetry in consumer responses raises questions about the degree to which the post-election bounce in consumer sentiment will translate into stronger spending. In the final estimate for February, we hope to learn some additional color on the development of consumer sentiment.
As for inflation expectations, the median of consumers’ 5- to 10-year inflation expectations has remained relatively steady despite some monthly volatility. The FOMC tends to look through monthly fluctuations. We will keep an eye out for any sustained deviation from the current trend in upcoming reports.
Data preview Europe
The week ahead
A relatively busy week on the data front with flash February PMIs in the Eurozone. In the UK January public finances and the second estimate of Q4 GDP are in focus.
UK CBI industrial trends survey (Monday): This survey improved at the start of the year with the total orders balance rising to +5% – its highest reading for almost two years. Export orders have generally risen relative to before the Brexit vote and may improve further on account of stronger global growth and lower sterling. We forecast the survey to remain upbeat into February with the total orders balance remaining at its current level. One particularly important balance in this survey will be that of domestic price expectations, which rose to +28% (highest since early 2011) on account of falling GBP and rising commodity prices.
UK Public finances (Tuesday): We expect PSNB ex public sector banks at -GBP13.8bn in January. January is always an important month for the public finances with self-assessment income tax payments due. In addition, this is the last set of public finance data ahead of the Budget on 8 March. So far in the fiscal year to date (i.e. April-December 2016) the average improvement in the overall budget deficit relative to the same time in the previous fiscal year has been around GBP1.2bn per month. If that trend continues in the final three months of this fiscal year then the 2016-17 deficit (PSNB ex public sector banks) would come in at around GBP61bn, or around 3.1% of GDP. This compares with the GBP68bn/3.5% of GDP forecast that the Office for Budget Responsibility expected at the time of the November Autumn Statement, the improvement partly owing to revisions to the back data.
Euro area flash PMIs (Tuesday): We expect the euro area composite PMI to tick up to 54.5 in February from 54.4 in January, signalling robust private sector activity in Q1. At the sector level, we expect a further improvement in the manufacturing PMIs consistent with a strengthening global recovery. Specifically, we expect the manufacturing PMI to increase for the sixth consecutive month to 55.4 in February following 55.2 in January. We expect the services PMI to remain unchanged from the January reading at 53.7. These outcomes for February would be consistent with Q1 GDP growth of 0.5% q-o-q suggesting some moderate growth acceleration from 0.4% q-o-q in Q4 2016.
UK Q4 GDP second estimate (Wednesday): The first estimate of Q4 economic growth published last month came in at 0.6% q-o-q and 2.2% y-o-y, marking the third consecutive quarter of 0.6% quarterly growth. We forecast an upward revision to 0.7% q-o-q and 2.3% y-o-y following the stronger-than-expected industrial production reading for December. Combined with a modestly stronger construction outturn too, this adds 0.05% to GDP relative to the first estimate – meaning there is a risk to our view that growth does not round upwards and remains at 0.6% q-o-q. Also in the second estimate look out for the expenditure detail of GDP – business investment in particular will be a key focus and how it has responded to Brexit-related uncertainty and the associated fall in sterling.
German Ifo (Wednesday): We expect the German Ifo business climate index to remain unchanged from the previous month at 109.8 in February. The current situation index however is forecast to exhibit a sixth consecutive monthly increase to 117.1 in February up from 116.9 in January. However, we expect the expectations index to decline modestly for the second consecutive month to 102.9 in February from 103.2 in January.
Japan Data preview
The week ahead
We expect the lunar new year effect to exert downward pressure on real exports.
January trade statistics: nominal exports (Monday): Nominal exports in the first 20 days of January rose 6.5% y-o-y (versus 0.2% in the first 20 days of December 2016), while nominal imports rose 5.3% (-0.7%). According to a Nikkei QUICK News report on 8
February, exports increased for auto parts and for semiconductors and other electronic parts, while imports increased for petroleum and telecom equipment.
There was one more business day in the first 20 days of January 2017 than in the first 20 days of January 2016, while the remainder of the month had the same number as the previous year. Taking this into account, and considering exchange rates and crude oil
prices in the first 20 days of January, which are likely to have affected imports and exports in the last part of the month (the yen was weaker than in December 2016 while there was a pause in the uptrend of crude oil prices), we estimate that nominal exports for January as a whole rose 1.2% y-o-y and that nominal imports rose 4.8% y-o-y, with both marking lower growth than over the first 20 days of the month. We estimate a trade deficit (original series) of JPY867.8bn and a seasonally adjusted trade surplus of JPY344.5bn.
Besides the large margin of the original series trade deficit, yen depreciation since the US presidential election and the rise in crude oil prices following the OPEC agreement to cut output, the lunar new year (which fell on 28 January this year) may have had a distorting impact. Japanese trade in January and February tends to be distorted by the lunar new year in Asia , with January exports being depressed and imports boosted in years in which the lunar new year falls before 8 February.
Adjusting our January nominal import/export estimates to reflect the corporate goods price index data for January (export prices growth of 0.8% y-o-y, import prices growth of 4.5%) results in seasonally adjusted estimates of -1.7% m-o-m for real exports and -2.7%
m-o-m for real imports. On a quarterly basis, we estimate that real exports in January were down 1.5% (average for October December 2016: up 3.2% q-o-q) and that real imports declined 2.6% (up 0.4% q-o-q). Although this marks a downturn from October-December 2016, when real exports were buoyant, our calculations suggest that the lunar new year depressed real exports in January by 1.7pp m-o-m. Excluding that, exports in January were flat month-on-month (-0.0%) after rising by 0.1% on average over October-December. In our assessment, there has been no evidence of any stalling in exports.
Asia Data preview :
The week ahead :
We expect slower Q4 GDP growth in Hong Kong and Thailand, and no change to Korea’s policy rate. Government budgets will be unveiled in Singapore and Hong Kong.
South Korea: We expect the Bank of Korea to leave its policy rate unchanged at 1.25% as CPI inflation and export growth (in USD terms) both rose in January, household loan growth slowed but remains at a high level, and political uncertainty at home and abroad remains elevated.
Taiwan: Despite the ongoing upcycle in electronics parts production, we expect industrial production growth to slow in January, biased down by fewer working days because of the lunar new year. The PMI new exports orders index dipped to 55.6 in January from 56.7 in December, suggesting that growth in export orders will also moderate.
Hong Kong: CPI inflation was likely stable in January at 1.2% y-o-y as housing rent inflation likely eased further. We expect Q4 2016 GDP to grow by 1.6% y-o-y, from 1.9% in Q3, as we believe an improvement in retail sales and solid construction investment should support the economy despite a smaller contribution from inventories. The FY17-18 budget, due to be presented on the same day as Q4 GDP, could include larger-than-expected stimulus measures such as public investment and one-off relief measures given a larger-than-budgeted fiscal surplus in FY16-17. We forecast a fiscal surplus of 0.3% of GDP in 2017, down from an estimated 0.5% in 2016.
Malaysia: We expect CPI inflation to spike significantly in January, boosted by a 20 sen (11%) hike in the RON95 petrol price to MYR2.10/litre and a low base.
Singapore: Core CPI inflation likely ticked higher in January because of a 5.7% electricity tariff hike and, along with higher car prices, likely boosted the headline number too. We also expect January industrial production growth to slow significantly in year-on-year terms because of an unfavourable base effect owing to the lunar new year holidays, but it should remain solid as we expect electronics production to remain strong. Finance Minister Heng Swee Keat will present the FY17 budget on 20 February. We forecast a fiscal surplus of 0.5% in FY17, down from an estimated 1.1% in FY16 (above the budgeted 0.8%), which should therefore be less contractionary. We expect the budget to have a longer-term focus in implementing the recommendations of the government’s Committee of the Future Economy
Thailand: We expect Q4 2016 GDP growth to slow to 2.8% y-o-y from 3.2%. The monthly activity data suggest weaker tourist arrivals, private sector consumption and private investment more than offset higher government spending and merchandise export growth
Emerging Markets Data preview :
The week ahead
South Africa’s 2017 budget and central bank meetings in Brazil and Colombia are in focus.
Brazil Central bank policy meeting (Wednesday): The BCB is likely to maintain its 75bp pace and avoid another surprise.
Colombia Central bank policy meeting (Friday): Banrep appears set to stay on hold as inflation expectations remain unanchored.
Marketing communication : This document has not been developed in accordance with legal requirements designed to promote the independence of investment research and its author(s) is/are not subject to any prohibition on dealing in the relevant financial instrument ahead of the dissemination of the marketing communication.
Quintessence Insights offers a small sample of the research available live on Quintessence Insider.
To access Quintessence Insider now