24 Feb 2017

The week ahead: Monday 27 February 2017

Philip Shaw

Chief Economist

This week’s Fed news has tended to support our June call for the next FOMC hike. The line from this month’s minutes, talking about support for a tightening ‘fairly soon’ did not convey to us the impression of a central bank in a tearing hurry to raise interest rates again.  

Next week’s data flow will contain further clues to the dynamics of economic activity. First revisions to Q4 GDP, the Conference Board consumer confidence index and the manufacturing and non-manufacturing ISM indices are the key releases. Note that February’s jobs data will NOT be out. Instead the next employment report is scheduled for Friday 10th. But among a long list of senior Fed officials, Chair Janet Yellen speaks on Friday evening.

Centre stage in the eurozone will be Tuesday’s ‘flash’ HICP data for February. The headline inflation rate currently stands at 1.8%, more or less at the ECB’s target of ‘below, but close to 2%’. But its emergence from negative territory last spring owes largely to moves in energy and food prices, which could have a temporary effect. Indeed so far there has been little progress in underlying inflation pushing up from low levels. In fact, the ‘core’ HICP measure currently stands at +0.9%, exactly where it was a year ago. Any signs of firmer core inflation would be likely to support the euro, on the perception that the ECB would be closer to winding up its QE programme. Final composite PMI data for February are also due. Of course the ‘flash’ estimates have already been released but markets should get a reminder that this key piece of survey evidence is at a near 6-year high.

Investors will remain nervous over the run-up to the French Presidential elections. The news that centrist François Bayrou is supporting former Economy Minister Emmanuel Macron, rather than standing, reduces the risk that the centre and centre-right votes fragment in the first round. In turn this cuts the chances of a ‘hard left’ v ‘Front National’ run-off, which might propel Marine Le Pen to the Elysée. But both French CDS prices and bond spreads remain at elevated levels. By contrast we note that Dutch bonds spreads are relatively contained, despite the generally good showing of the populist right wing PVV party in the polls. The election in the Netherlands takes place on 15 March.

In the UK, the Article 50 bill looks set to continue its journey through Parliament. It moves to the committee stage of the House of Lords on Monday. As signalled previously, we see no reason why the bill cannot gain Royal Assent early next month, allowing the PM to invoke Article 50 by the end of March at the very latest. On the data side the various PMIs will help markets to gauge the tone of the manufacturing, construction and services sectors. Meanwhile Wednesday’s mortgage data (for January) will take the temperature of activity in the housing market. But we would also look at the strength (or perhaps the lack of it) in the consumer credit numbers. Last month’s figures showed a sudden drop in net lending to +£1.0bn from +£1.9bn, asking questions as to whether consumer spending may be slowing. We are pencilling in an outturn of +£1.4bn.

Elsewhere we get the run of February’s PMI data, both official and ‘Caixin’, from China. We expect the economy to remain sufficiently robust to enable the authorities to maintain their new found primary focus on financial stability. But data at around the time of the Lunar New Year can be unreliable and should be considered as such. Last, the Bank of Canada announces its monetary policy decision on Wednesday. PS

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