In Asia this morning, the Nikkei (+0.2%), Hang Seng (+0.3%) and Shanghai Composite (+0.3%) are all higher after China’s central bank on Saturday cut interest rates for the second time in three months in a fresh sign of concern over slowing growth. Rates were cut by 25bp. At the time of writing, the USD is slightly stronger against the EUR, while oil prices have retreated.
On Friday US GDP was revised down by slightly less than expected in Q4, as the economy expanded by 2.2% q/q annualised with consumer spending remaining particularly strong and business fixed investment revised up a bit. With overall final domestic demand revised higher the US outlook seems roughly unchanged after the first revision of the growth numbers.
Numbers out of Norway were pretty bad on Friday. Retail sales came out weaker than expected in January and unemployment increased, clearly showing weakness in the oil sector and related industries.
Swedish and Danish numbers were stronger than expected. Growth in Sweden was 1.1% q/q in Q4, indicating strong momentum. Inflation and inflation expectations are what is important to the Riksbank in the near term, though. Growth in Denmark was positive for the second consecutive quarter at 0.4% q/q.
Day and week ahead
Most important this week: we expect another strong US jobs report on Friday with a 250k gain in non-farm payrolls. The impact of the winter storms is a major uncertainty, though.
The ECB meeting on Thursday is set to be a rather unsurprising event. We do not expect changes to the policy rates or changes to ongoing or upcoming programmes. If we are lucky, the ECB will tell us the exact starting date of the purchases (assuming they have not started by the meeting) and the list of agencies eligible for QE purchases. The market response should be rather muted.
We also expect no change to the monetary policy stance at the BoE meeting. In China, the annual meeting of the National People’s Congress will begin on Thursday with much focus on the new growth target. Moreover, the Norwegian regional report and the Polish rate announcement are due this week.
Two very important numbers are due today:
Euro-area HICP could have risen in February compared with a month earlier for the first time since June last year. From January to February, the Brent oil price in EUR terms increased by 10%. We expect that to have contributed to an increase in consumer prices by 0.6% m/m, lifting the year-on-year rate to -0.3% (from -0.6%). The core rate (excluding energy, food, alcohol and tobacco) probably remained unchanged at 0.6%, in our view. The policy implications of small moves in the inflation rate are currently negligible. Inflation is way below target, inflation expectations are low too and QE has been decided.
We expect the US ISM manufacturing index to fall to 53.0 in February from January’s 53.5. Although we expect the ISM index to decline in February, it should remain at a level still consistent with decent growth. Historically, an ISM index of 53 has been consistent with a 3½-4% annualised growth rate in real GDP.
In addition the US January personal spending and income report will likely show core PCE inflation unchanged at 1.3% y/y.
Rates
Clear upside inflation surprises from Spain and Germany lifted German yields on Friday, but once again yields retreated from their intraday highs later in the day – another suggestion that the upside for yields remains capped for now. Bond markets very much continue to wait for the ECB to finally start its sovereign QE programme.
Intra-Euro-area bond spreads narrowed across the board. At least almost, as Greek spreads went against the trend and widened. Spanish and Italian 10-year spreads ended the day around 4 bp narrower versus Germany.
The US 10-year yield spent most of Friday trading just above 2%, finally ending the day slightly below. In the bigger picture, the clear rebound in yields seen in the first weeks of February has stalled. Strong labour market data on Friday seems a prerequisite for keeping the yield above 2%.
This week’s bond auction calendar includes supply from Austria tomorrow and Spain and France on Thursday
FX
EUR/USD broke below its uptrend since January on higher-than-expected US core inflation last week. The pair remains around technically important levels, and uncertainty remains high ahead of the operationalisation of ECB QE: will EUR-negative flows follow or is it priced in?Relative money printing suggests EUR/USD should stay around current levels or head lower (first targeting 2015 lows at 1.1098). Furthermore, the normal pattern of both EUR/USD and the DXY since the 1990s is for the USD to appreciate at least until the Fed lifts rates. Our forecasts are consistent with this.
The SEK gained last week helped by surprisingly strong data. While activity data play a secondary role for the Riksbank, firms should have an easier time hiking prices with GDP growing at 2.7% y/y as was revealed last week. Inflation and inflation expectations remain crucial however, and need to rise further to keep the Riksbank from easing policy further. Technically the next important level on the downside is around ~9.27. Our call for an April rate cut suggests EUR/SEK is a buy on dips at these levels.
In contrast to Swedish data, Norwegian data surprised slightly on the negative side. NOK/SEK broke below the rising trendline since the lows on 15 December. This week’s oil investment survey (5 March) and the regional network survey (6 March) will be key for Norges Bank’s outlook and hence for the NOK.
Nordea