For a more comprehensive round up of the week, listen to Stephen’s full report here.
February still has the best part of a fortnight to run, but it is the first fortnight or so of March that is starting to catch our eye in terms of potentially market-moving data and possible responses by central banks. In terms of economic data, we expect a run of weaker economic readings from the US, mostly because of the unusually long and repeated periods of brutally cold and snowy weather that has affected much of the US North East. We also expect the January-February readings of retail sales, industrial production and urban fixed asset investment spending due from China on the 10th of March to be soft, heralding Q1 GDP growth below 7% y-o-y, when it is released in early April. Australian Q4 GDP, due on the 4th of March, is also likely to show comparatively soft GDP growth – around 0.5% q-o-q – but it is likely to also show, in the same data release, a third consecutive quarterly fall in real national income, highlighting how challenging it will be to lift economic growth to long-term trend in the next year or so.
If the economic readings pan out as we think is likely in the US, China and Australia, they are likely to elicit policy responses from central banks and probably, in the case of Australia, ahead of the data release. It is possible that the Peoples’ Bank of China (PBOC) will announce cuts to its deposit and lending interest rates early in March. The US Federal Reserve (Fed) will, in our view, probably use the announcement on 18th March after its next policy meeting to “reset the dial”, guiding markets on when it may start to lift interest rates to late 2015. We also expect the Reserve Bank of Australia (RBA) to cut the cash rate again by 25bps to 2.00% when its board next meets on March 3rd. If these monetary policy announcements occur, bad economic news may not dent the strength of risk assets.
Taking the US first, a downward blip in growth because of unusually bad weather should not necessarily adversely influence the views of either the Fed, or the markets, about longer term growth prospects. If it is only a matter of bad weather denting growth – as appeared to be the case in the severe winter the previous year (early 2014) – growth is likely to recover sharply in the Spring and Summer months.
Early 2015, however, is shaping up rather differently than early 2014. Overlaying bad weather damage to US economic growth, are the negative impacts of the strong US dollar; threats from low oil prices to the previously strongest part of the economy, shale oil development, and a developing risk of more intense disinflation – bordering deflation – that could adversely influence current spending by US businesses and households.
Given these economic developments, we view it as likely that the Fed will now want several months to see how well, or otherwise, the US economy fares. At the very least, the Fed will want to nuance the word “patient” in its guidance on when it will start lifting rates to imply considerable patience. The various Fed Governors’ are likely to lower their 2015 year end forecasts for the Fed funds rate (currently near zero) from around 1% at the moment to perhaps 0.5%.
In China, the economic data has taken a lurch for the worse early in 2015. The usual crop of monthly economic readings are limited for January to the international trade data and inflation readings. This is because of the floating date for the Lunar New Year celebrations. Monthly data is the most likely to be severely affected by the seasonal effect of the various holidays; retail sales, industrial production and urban fixed asset investment are released as joint January-February data in March. On the basis of the small batch of January readings – exports -3.3% y-o-y; imports -19.9% y-o-y; CPI 0.8% y-o-y; producer prices -4.3% y-o-y – growth and inflation have both taken a weaker turn than widely expected. It is likely that other readings will reflect this softer turn too, hence our concern about the batch of January-February readings to be released on 10th March.
With CPI inflation running well below the PBOC’s target of 3.5% and threatening to push even lower on the basis of sharply falling producer prices, the PBOC has plenty of capacity to ease monetary policy. The threat of GDP growth pushing lower too adds to the pressure for the PBOC to ease.
As far as the RBA is concerned, softer growth in China implies even more downward pressure on mineral export prices, which will weigh on the terms of trade and imply that any fall in real national income registered for Q4 2014 will be followed by more quarterly falls, at least in Q1 and Q2 2015. Relentlessly weak national income growth means that the RBA will take little comfort even when month-to-month economic readings take a stronger turn, as they have for the most-part in November and December. The risk will remain heavily skewed towards the improvement being only temporary, while national income growth stays very weak. We see the RBA cutting the cash rate again by 25bps to 2.00% on 3rd of March before the Q4 GDP reading, more particularly, the national income reading, the following day proves the need for a further rate cut.