• MON: Chinese GDP (Q4), Industrial Production (Dec) and Retail Sales (Dec); Eurogroup Meeting; US Martin Luther King Jr. Day.
• TUE: German ZEW Survey (Jan); EU Economic and Financial Affairs Council.
• WED: US President-elect Biden's inauguration; PBoC LPR Setting (Jan); BoC Policy Decision; German GfK Sentiment (Feb); UK Inflation (Dec); EZ CPI Final (Dec); Canadian CPI (Dec); Japanese Trade Balance (Dec).
• THU: ECB Policy Decision; BoJ Policy Decision & Outlook Report; Norges Bank Policy Decision**; CBRT Policy Decision; SARB Policy Decision; Australian Labour Report (Dec); New Zealand CPI (Q4); Japanese CPI (Dec).
• FRI: UK Retail Sales (Dec); EZ, UK & US Flash PMIs (Jan); Canadian Retail Sales (Nov).

CHINESE GDP (MON): Chinese Q4 GDP is expected to show growth of 3.2% Q/Q and 6.1% Y/Y, while some expect the full year GDP to show an expansion of 2.1%, following the revised 6.0% growth in 2019. China is seen as one of the rare positive growth stories of 2020, and the only major global economy expected to show an expansion amid the onslaught of COVID-19, as it benefits from being the first-in-first-out of the pandemic, supported by China’s status as the world’s factory amid increased demand for pandemic-related goods. Furthermore, China’s activity was also boosted by shifts in orders as other countries struggled with virus outbreaks and further lockdowns, which was evident in the continued jump in China’s exports, while factory data was also encouraging during the prior quarter (the November Official Manufacturing PMI printed its strongest reading in over 3 years and although it then eased in December, it still registered the 8th consecutive month in expansion territory). Chinese President Xi also recently touted positive growth, and he expects 2020 GDP to exceed CNY 100tln after around CNY 99tln in 2019. The GDP release will coincide with Industrial Production and Retail Sales data for December in which median forecasts are for 6.9% (prev. 7.0%) and 5.5% (prev. 5.0%) respectively, with the data likely to be underpinned by increased demand heading into Christmas and a further improvement in China’s consumer trends.

PBOC LPR (WED): The PBoC is expected to maintain its benchmark lending rates for the ninth consecutive meeting, with the 1-year Loan Prime Rate (LPR) expected to be held at 3.85% and the 5-year rate at 4.65%. An unchanged outcome will likely be underpinned by the continued improvement in economic data, whereby the latest trade metrics backed the narrative of the robust Chinese economy, whilst the GDP release on Monday will likely see 2020 growth of 6.1% Y/Y. The central bank has also refrained from any adjustments to its LPR alongside its closely tied 1-year Medium-term Lending Facility (MLF) rate since April, which points to the unlikelihood of any changes to its benchmark rate given that the central bank had previously lowered the MLF rate first on the last three occasions prior to reducing its LPR. The PBoC has instead opted to conduct policy through liquidity operations. Furthermore, the PBoC Vice Governor on Friday voiced that current interest rate levels are appropriate – adding even more weight behind a hold in its LPR.  

BOC POLICY DECISION, CPI (WED): The Bank of Canada will hold rates at 0.25%, and likely to reiterate that the policy rate will be maintained at current levels until economic slack is absorbed and its inflation objective is achieved (it has suggested that this would be achieved in 2023); accordingly, it will also stick with CAD 4bln of QE per week. The central bank will publish updated economic projections; Canadian bank RBC reckons that these may be upgraded given that the October projections preceded the positive vaccine developments; that said, RBC says that near-term forecasts may be mixed, with the Q4 growth view upgraded, but the Q1 view could be negative; “there is some focus in the lead-up on a possible move lower in the effective lower bound to a still positive number (from 25bps to 10bps) after BoC communication late last year,” it writes, “while this is an option if the BoC sees more stimulus as necessary, we do not think that will be its assessment given the improved medium-term outlook and strong fiscal backstop to manage near-term virus risks.” RBC also does not foresee the central bank bringing forward its timeline for rate normalisation from the current 2023, something that might come later in the year. Canadian CPI, out on the same day, is seen holding steady; analysts note that an average of the three BoC core inflation measures has held-up quite well in the pandemic, averaging 1.7% in the November data; RBC says that there are risks of small upside in the December print for these metrics.

UK INFLATION (WED): Headline CPI for December is seen rising modestly to 0.5% Y/Y from November’s 0.3%. The November print was almost wholly influenced by the domestic lockdown – namely caused by a drag in footwear and clothing. Desks cited the BRC shop price index as a proxy for the trend in retail sales – which suggests that shops maintained discounts as December saw some reopenings in a bid to attract consumers. Analysts at RBC suggest that this, alongside lower food prices should cap the headline print – and thus, the desk only sees a modest pickup to 0.4% Y/Y.  In terms of the path ahead, the most recent BoE statement (pre-January lockdown) noted that "CPI inflation is expected to rise quite sharply towards the target in the spring, as the VAT cut comes to an end and the large fall in energy prices earlier this year drops out of the annual comparison."

ECB POLICY DECISION (THU): After the action taken in December, next week’s meeting is set to provide little in the way of fireworks, and will instead likely offer a platform for the Bank to take stock of existing measures and the economic outlook for the Eurozone. Accordingly, consensus looks for the Bank to stand pat on the deposit, main refi and marginal lending rates at -0.5%, 0.0% and 0.25% respectively, and to maintain bond purchases via the PEPP envelope held at EUR 1.85trl until the end of March 2022. Since the prior meeting, inflation remains lacklustre with the Y/Y CPI holding at -0.3% and core (ex-food and energy) at just 0.4%. December survey data from IHS Markit continued to highlight the differing fortunes of the services and manufacturing sectors. However, given the survey period, these data points offer a slightly stale insight into the EZ economy in what is a particularly fluid situation for the region as governments act to stem the spread of the virus. As such, market participants will turn to the ECB for its view on the state of the economy. That said, recent remarks from President Lagarde have suggested a more sanguine view of the economy than some might have expected with Lagarde stating that the start to the year has been on a more positive base than some have argued and the projections released in December are still plausible. Nonetheless, with not much expected from the opening statement, journalists will likely push Lagarde on what more the ECB can do to support the economy should activity remain supressed for a prolonged period of time or if she believes that current measures are sufficient to combat a further deterioration in the Eurozone. In response to this line of enquiry, Lagarde will likely continue to ask for support from fiscal authorities. Elsewhere, fluctuations in the EUR since December have not been enough to warrant any adjustment in the Bank’s stance of the strength of the currency. Perhaps of greater interest will be any further insight into the outcome of the ECB’s strategic review. Last week, the ECB head remarked that policymakers wish to arrive at a degree of clarity and predictability when defining the inflation target.

BOJ POLICY DECISION AND OUTLOOK REPORT (THU): The BoJ is widely expected to refrain from any policy adjustments at next week’s 2-day meeting, with the central bank likely to keep rates at -0.10% and QQE with Yield Curve Control to target 10-year JGBs at around 0%. The consensus for the BoJ to remain on hold follows the prior meeting where it maintained policy settings, but extended the March deadline for its package of measures to ease corporate funding strains by six months (was expected) and announced mild adjustments to the programme by removing the upper JPY 100bln upper limits on funds provided to each eligible financial institution for the lending. The central bank also confirmed it would examine a more effective and sustainable monetary easing framework to achieve its price target with the outcome to be released at the March meeting, but added there was no need to change its YCC framework, which has led to the analysts’ view for the upcoming meeting to likely be uneventful. The recent state of emergency declaration in Tokyo and 10 other prefectures due to COVID-19 also supports the case for a wait-and-see approach, as policy makers would mostly likely prefer to observe how the pandemic plays out and its impact on the economy before making any adjustments; the BoJ has emphasied that it would take additional easing steps without hesitation, as needed, with an eye on the fallout from the pandemic. The central bank will also release its latest Outlook Report which contains board members’ median forecast for Real GDP and Core CPI, while reports stated the central bank is to consider downgrading its view of the economy due to consumption being impacted by COVID-19 emergency measures but could see an upward revision to 2022 growth forecasts.

NORGES BANK POLICY DECISION (THU): The Norwegian central bank is expected to keep all policy measures unchanged, with rates held at zero at the interim (non-MPR) meeting. Particularly, as the December gathering saw substantial alterations to their rate guidance where the timing for a 10bps hike was brought forward to June 2022 from September and a 25bps move to September 2022 from March 2023. Since the last confab, we have seen the re-imposition of lockdown measures in several countries globally which could serve to dent the Norges Bank’s near-term forecasts. However, any such update would likely not be announced until the March MPR, or Governor Olsen’s annual address in February, and either way, should not alter the Bank’s formal guidance which envisages rates on hold until domestic conditions begin normalising.

CBRT POLICY DECISION (THU): As things stand, there is no consensus on what action the central bank might take following the the last meetings' 200bps rate hike, taking its main policy rate to 17.00%. The sizeable hikes in November and December came after Governor Agbal took office in early November following the ousting of Uysal over his policy approach which ultimately failed to stem the Lira weakness – with central bank independence remaining in question. In its December statement, the MPC noted that its interim target was to cool inflation this year, with its end-2021 forecast of 9.4% vs the official target of 5%. The CPI print for December modestly topped expectations at 14.60% vs 14.03% in November. Since the December meeting, the USDTRY rate has remained relatively stable, supporting a wait-and-see approach. Analysts at UBS highlight that the prior statement refrained from adopting an explicit hawkish bias, thus “suggesting that it does not plan to tighten monetary policy further in the near term”; its analysts believe that the most likely scenario for the central bank is to keep the main rate unchanged at current levels through mid-2021 before easing gradually in H2 this year. 

SARB POLICY DEICISON (THU): The SARB will likely hold its key rate at the record low 3.50%, following the 300bps of cuts in 2020, though a minority have pencilled in a 25bps cut, perhaps influenced by two members of the MPC calling for cuts at the previous confab. Credit Suisse, which had expected a rate cut at the previous meeting, notes that the SARB’s forecast revisions were in favour of a policy rate cut (CPI and core inflation were revised lower, negative output gap revised wider, current account balance revised higher, while the ZAR’s NEER and REER were revised up). “Despite further downside revisions to inflation forecasts the SARB's model projects no more cuts,” Credit Suisse writes, “instead, the SARB’s Quarterly Projection Model implies two 25bps increases in the repo rate in 2H 2021, in line with its September projections.” But CS argues that the recent developments in South Africa should push members into the rate cut camp, particularly in light of the increased COVID restrictions imposed in December; additionally, the South African government has made progress on public sector wage negotiations, which may keep a lid on inflationary pressures in the months and years ahead, potentially giving the SARB more license for looser policy.

AUSTRALIAN LABOUR MARKET REPORT (THU): Aussie employment growth is expected to have slowed in December, and the Street expects +50k jobs to be added to the economy, vs +90k in November. The participation rate is seen ticking up to 66.2% from 66.1%, while the unemployment rate forecast to dip to 6.7% from 6.8%. Desks argue that the labour market is recovering faster than GDP – although this is not surprising given the government support for jobs. However, this imbalance has brought into question whether the labour market can keep up the momentum. ING expects an addition of 67k for the December headline print – at the top end of the forecast range, “made up primarily of a bounce in part-time employment, which we figure is due after the very weak 5.8K reading in November (down from 81.7k in October).” The bank also suggests that this will likely see the unemployment rate cool, possibly to 6.6%. Its analysts continue to see the end-2021 unemployment rate to 5.7% which they argue would also translates to the RBA leaving rates on hold for this year at least before normalising monetary condition perhaps sometime next year.

NEW ZEALAND CPI (THU): Fourth quarter CPI Q/Q and Y/Y are expected to see upticks to 0.9% (prev. 0.7%) and 1.7% (prev. 1.4%) respectively. This compares to the RBNZ’s forecasts of 0.2% and 1.1%. That said, desks suggest greater uncertainty surrounding the Q4 metrics amid COVID-related disruptions, despite the country remaining at the lowest alert level since September. This is partly due to Stats NZ introducing a new methodology to gauge international airfares and overseas accommodation. Stats NZ also noted that Q4 in-person data collection was not impacted while Q3 and Q2 data collection proved to be difficult. Contrary to expectations, analysts at ASB see a more downbeat release with the Q/Q print at 0.2% and Y/Y at 1.1%, and argue that while risks are broadly balance, there was a greater degree of COVID-related uncertainty. The rationale cited includes higher housing costs, CPI methodology tweaks, lower-than-usual increase in transport group prices, lower food prices and scattering of price movements in other groups such as tourism-related pricing. “Risks of outright deflation look to have receded in recent months and we don’t expect as much downside risk over the inflation outlook” the bank said, adding that the diminishing risk of deflation points to the OCR likely not moving lower from its current level of 0.25%. ASB expect a muted reaction to the release; “Current market pricing has just 5bps of cuts priced in, suggesting there is little conviction that the RBNZ will move the OCR until the COVID-19 fog clear.”

UK RETAIL SALES (FRI): Retail sales is expected at +1.0% M/M following the lockdown-driven 3.8% fall in November. For context, during the first lockdown, retail sales slumped 18.1%. The sector is expected to see some respite amid the end of the national lockdown at the time. That said, there were more stringent local lockdowns in December whereby non-essential shops were forced to closed to combat the spread of COVID-19 – thus the level of retail sales likely stayed below October levels. Nonetheless, analysts at Oxford Economics see a more optimistic print of 2.8% M/M.

EZ FLASH PMI (FRI): The upcoming PMI report from the Eurozone is expected to conform to the ongoing narrative surrounding the region which is one of diverging fortunes for the manufacturing and services sectors. Manufacturing PMI is set to remain in expansionary territory of 55.0 vs prev. 55.2, with the services set to slip to 44.5 from 46.4, leaving the composite at 47.6 vs prev. 49.1. The guiding force behind survey data remains lockdown measures that have been imposed across the region, with Germany having been under a particularly stringent lockdown since mid-December, while large parts of France (recently expanded to the whole of France) have been subject to curfew restrictions. This allied with looser restrictions on the manufacturing sector means that the chasm between manufacturing and services is likely to remain in place until lockdown measures can be eased. Market participants will be mindful of any forward-looking indications on how the roll-out of vaccines is being perceived by managers. However, given that the roll-out is in its infancy and political leaders are guiding towards a prolongment of existing measures, this may be of greater focus for upcoming reports.

UK FLASH PMI (FRI): In a similar vein to the Eurozone report, the January Markit PMI release is likely to highlight the differing performance of the manufacturing and services sectors. The former is expected to remain in expansionary territory with a print of 53.0 vs prev. 57.5 with the services set to slip deeper into contractionary territory of  45.3 vs prev. 49.4. On the manufacturing front, a decline in the headline is likely attributable to stockpiling efforts ahead of the conclusion of the Brexit transition period. From a services perspective, the deterioration will be as a consequence of nationwide lockdown announced on January 4th, with restrictions of a greater magnitude than November but less prohibitive than last spring. Beyond the headline metrics, participants will be eyeing any details on disruptions caused by Brexit and optimism regarding the rollout of the vaccine with the UK's efforts achieving greater success than many global peers. 

NOTE: This report was published on Friday 15th January 2021 to Newsquawk clients.