European Outlook: The stock rally started to fizzle out yesterday. The DAX didn’t manage to hold gains above 12000 and closed slightly below and while the FTSE 100 managed gains above 7300 Eurozone peripherals headed south, and U.S. stocks closed narrowly mixed, which was followed by a disappointing session in Asia, where the Nikkei was -0.04% down at the close. Yesterday’s FOMC minutes showed no sign of urgency for a March hike, even if “many” officials saw the chance of a hike “fairly soon”. Bund futures moved up from lows in after hour trade, but while FTSE 100 futures are moving higher, U.S. stock futures are still narrowly mixed. Bund gains should continue to be capped by a reversal of safe haven flows, as French political jitters eased somewhat and French yields came down sharply on Wednesday. Still, Eurozone breakup fears will continue to haunt bond markets. Strong data out of the U.K. and Germany yesterday failed to dampen the uptick in Bund and Gilt futures. Today’s calendar includes detailed German GDP at the start of the session, followed by French business confidence and the U.K. CBI retailing survey.
Fedspeak: Fed governor Powell largely toed the line on gradual hikes, based on the economy roughly meeting its forecast path, with risks to the outlook now more in balance after a period of Fed patience. He expects stable economic growth and inflation back up to its 2% target over the next couple years, while a further modest drop in unemployment would equate with further labor market tightening. Powell believes the Fed is close to its employment objective and now requires non-monetary policies to encourage participation. On shrinking the balance sheet, he said there’s a time to reconsider the balance sheet, but first must get “well away” from zero rates. He expects that rates can be raised again “perhaps reasonably soon,” while it’s very difficult to incorporate fiscal changes into economic forecasts. March is on the table in terms of a possible rate hike and one option is to raise rates soon if the economy continues on its current path. He would prefer to keep the portfolio stable until rates are high enough to “react to a downturn,” while shrinking the balance sheet is a way to remove accommodation.
FOMC minutes: “many” officials saw chance of a hike “fairly soon” if the economy remained on track. That’s not a new sentiment, however, and doesn’t hint strongly at March. A “few” officials thought that a hike at an upcoming meeting would give the Committee flexibility. Several judged the risk of a “sizable undershooting of the longer run normal unemployment rate was high” and if that were the case a more aggressive stance might be needed. But, inflation was still running short of the Fed’s goal, a few saw downside risks. “A couple of participants expressed concern that the Committee’s communications about a gradual pace of policy firming might be misunderstood as a commitment to only one or two rate hikes per year.” And while there was no formal discussion of the balance sheet, participants “also generally agreed that the Committee should begin discussions at upcoming meetings about the economic conditions that could warrant changes in the existing policy of reinvesting proceeds from maturing Treasury securities.” While March is on the table, the Fed and the markets will be in wait and see mode, watching the data and financial conditions for clues.
UK: UK second-estimate Q4 GDP was revised upwards in the q/q figure, to 0.7% growth from the 0.6% preliminary estimate and the 0.6% growth of Q3. The y/y comparison was revised downwards, however, to 2.0% from 2.2%, also below the 2.2% y/y growth clip reported in the previous quarter. The ONS stats office highlighted that the better than expected q/q figure was driven by an improvement in the manufacturing sector, which rose 1.1%, while the big service sector put in a steady growth rate of 0.7%. The contribution form exports were stronger than expected, rising 4.1% q/q, which followed a 2.6% q/q contraction in exports in Q4. Imports fell 0.4% q/q. Business investment fell 1.0% q/q. For 2016 as a whole, the economy rose 1.8%, below the preliminary estimate of 2.0% growth. An inventory drawdown and weaker exports accounted for the downward revision in the annual figure.
Canada: Canada’s retail sales a set-back for December GDP: The 1.0% drop in retail sales volumes was a surprise but not a shock, as higher gasoline prices were seen lifting both the total and ex-autos sales value figures. Instead, broad-based volume declines resulted in the first decline since June. The drop-in retail sales volumes is a source of downside risk to our 0.3% estimate for December GDP. But we are maintaining that projection given upbeat manufacturing, wholesale and energy figures. Wholesales grew 0.9% and manufacturing surged 2.3%. Housing starts improved 10.2% to a 206.3k unit pace in December. Hence, the contribution from construction production should be positive. Energy export values grew 15.9% m/m in December although higher prices were behind the gain. Yet the manufacturing report’s petroleum and coal shipment values grew 11.6%, driven by firmer volumes as a number of refineries resumed production after maintenance and retooling work in September and October. An as-expected monthly gain would leave a 2.0% GDP growth pace in Q4 (q/q, saar), overshooting the BoC’s 1.5% estimate and providing additional reassurance to the bank that the pick-up in the economy anticipated for 2017 is on track.
Main Macro Events Today
- US Crude Oil – Last week’s EIA Crude Oil Inventories expected to fall to 3.4M from 9.5 M last time.
- US Initial Jobless Claims & House Price – Initial jobless claims may bounce back 8k to 247k for the week ended February 18. FHFA home price index is expected to rise 0.37% to 242.2 in December, along with EIA energy.
- RBA – RBA Governor Lowe will testify before the House of Representatives Standing Committee on Economics, in Sydney.
- Fedspeak – Atlanta Fed centrist Lockhart will be “Looking Back on 10-years at the Federal Reserve Bank of Atlanta” from 8:35 ET.
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