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Markets Week Ahead from Societe Generale

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Markets Week Ahead

Markets Week Ahead – Brave new 2017 to kick off with higher euro area inflation

Following last year’s dramatic political events, policy uncertainty is expected to remain high also this year. A theme to follow closely will be the strength of rising inflation in the euro area. This week’s expected rise in December inflation to over 1% looks set to fuel concerns further over inflation expectations, bond yields and ECB policy, while survey data should confirm robust GDP growth at the end of last year. In the US, this week’s data should justify the Fed’s recent hike, with the ISM and payrolls remaining strong. In Asia, focus will be on China’s end-year FX reserves which should have declined somewhat.  

United States: Healthy data to start the new year
The start of 2017 is likely to bring a batch of healthy economic data, in part justifying the Fed’s December hike. ISM factory index may have inched up further in December, while the ISM nonmanufacturing may have slipped slightly but likely remained solid.Meanwhile, we expect that NFP probably advanced by 185k, in line with the ytd average of 180k. Lastly, the FOMC minutes could reveal some officials’ thinking with respect to the potential impact of fiscal policy.

Euro area: Inflation set to rise to a three-year high
Data this week should continue to point to a resilient recovery in the euro area. Inflation data are expected to show oil prices having a more decisive impact on inflation, with headline inflation expected to have risen to 1.1% yoy in December, a 39-month high. Core inflation should however remain stable at 0.8% (watch for surprises in French and German CPI data on Tuesday). Final December PMIs should be broadly stable, at a high level consistent with GDP growth of nearly 0.5% qoq in 4Q16, while European Commission survey data should rise slightly further. Unemployment data in Germany and Spain should improve further, while factory orders in Germany could have dropped rather sizably in November, following a strong rise in October.

United Kingdom: Looking back – a first glimpse at December
2017 will start with the first glimpse of business conditions in the final month of last year. The December PMIs are likely in aggregate to indicate that economic momentum was little changed from November but with minor hints of cooling.

Asia Pacific: China’s FX reserves barely above $3tn
The focus of the week should be China’s year-end FX reserves figure. Negative valuation effects and continued FX intervention likely lowered the reserve stock by another $40bn to $3,010bn. Elsewhere, we forecast a sizable decline in the Australian trade deficit for November, thanks to the steep increase in commodity prices. Taiwan’s CPI inflation is expected to have increased further to 2.2% yoy in December, on rising fuel prices, but the core reading likely eased.

Eastern Europe: Waiting for MPC reaction after expected Polish CPI rebound
With no data releases, we may see investors’ first reaction to confirmation of the end of the deflation period in Poland. Inflation is likely to enter the 1.0-1.5% range in January-February.

Latin America: Inflation trends strengthen in Latam in December
Inflation likely rose in Mexico while it declined in Chile and Colombia. Brazil’s industrial production contracted at a slower pace in November. Lastly, in Chile, economic activity probably rebounded in November.

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