Global Markets Trying to End Week on Upbeat

The US S&P 500 closed above 1950 for the first time since January 6.  Global equity markets are broadly higher in response.  At the same time, ahead of the G20 meeting, the world's second and third-largest economies have signaled additional stimulus will be forthcoming.  

In Japan, the Abe government is reportedly considering a front-loaded supplemental budget for the start of the new fiscal year.  The disappointing CPI figures reported earlier today, with headline and core measure easing back to zero,  adds pressure on the BOJ to provide more monetary stimulus as early as next month. 

Earlier this week, Chinese officials suggested there was scope for some further fiscal easing. Today's news is that the PBOC appears to have confirmed a somewhat easier monetary stance.  Governor Zhou characterized the policy as "prudent with a slight easing bias."  In the recent past, he said it was a "prudent policy, making reasonably ample liquidity."  

Germany stuck to its position, refusing to provide additional fiscal stimulus.  However, preliminary February inflation reading from both Germany and Spain will only add to the pressure on the ECB to ease monetary policy again when it meets on March 10.  Spain's preliminary harmonized CPI fell to -0.9% from -0.4% in January.  This was greater deflation than the market is expected.  The month-over-month decline of 0.4% was twice the consensus forecasted decline.  

The German states have been reporting their preliminary readings today, and shortly the national figure will be released.   Nearly all the states have reported new deflation pressures, and this warns of downside risks on the flat consensus forecast after a 0.4% year-over-year pace in January.  German CPI (harmonized) has been above zero since September, which was the only negative CPI print since January 2015.  

On Monday, the preliminary February eurozone CPI will be published.  The consensus was for a pullback to 0.1% year-over-year from 0.3%.  Given indications from Germany and Spain, the risk is on the downside.    This coupled with the confirmation of softer PMI readings will likely encourage speculation of additional ECB action. 

We note that Bundesbank's Weidmann, who has been critical of ECB efforts under Draghi, does not vote at the March meeting, under the rotating voting regime.  The central banks of Ireland, Greece, Cyprus and Estonia also do not have the vote next month.   Nevertheless, our understanding is that voting is a formality and that a degree of collegiality has been preserved.  This means that Weidmann's counsel will still exist even without being backed by a vote. 

Ireland holds its national election today.  The polls suggest that the current coalition is unlikely to secure a majority.  The rise of independent candidates warn that forging a new coalition may be difficult.  It could take several weeks.  However, barring a new shock, the economy is still set to grow the fastest in the eurozone this year, and Irish assets have not suffered in the run-up to the election.  

The dollar-bloc currencies have turned in a constructive week.  The Canadian dollar is the strongest of the majors this week, with a 1.9% gain.  The New Zealand dollar is just behind it.  The unexpected merchandise trade surplus reported today has lifted the Kiwi nearly 0.5%. A small decline in exports was offset by a larger decline in imports.  This produced a NZ$8 mln surplus in January.  The consensus forecast was for a NZ$271 mln deficit.   The Australian dollar's 1% rise this week puts it in third place among the majors.  

Rising commodity prices, including oil, copper and oil are commonly cited drivers for the dollar-blocs gains.  We would add the rally in equities, though acknowledge that Australian and Canadian shares are lower on the week.    The Canadian dollar often tracks the short-term interest rate differential with the US.  

We had thought that the spread was stabilizing, but this has proved premature.  The US premium slipped to nearly 23 bp yesterday, which was the least since the first half of November.  The narrowing of the premium this week has been more a function of the backing up of Canadian rates than a fall in the US.  

The key today’s North American session may not be so much about the data as it is about the market itself.  The issue is whether the S&P 500, which is now higher on the month, can hold on to the early follow through gains after yesterday’s recovery.  A weekly close above the 1945-1950 area would put it on solid footing going into March. 

That said, today’s data will likely confirm the contrast between the sluggishness of Q4 15 GDP and the recovery here in Q1 16.  Q4 15 GDP is at risk of being revised to around 0.4% from 0.7%.  It is old news and confirms the near stagnation, which was already baked in the cake by the time the FOMC met in mid-December and hiked rates. 

Separately, the January personal income and consumption figures are expected to underpin expectations for a strong snap back in Q1 16.  Going into today’s report, the Atlanta Fed GDPNow tracker says growth in Q1 appears to be near 2.5% at an annualized pace.   Also, the Fed’s preferred inflation measure (core PCE deflator) is expected to have ticked up to 1.5% from 1.4%.  It would be the highest reading since October-November 2014.  It is still off the 2% target, but the gradual direction is clear.    

Lastly, before Europe closes, the University of Michigan’s consumer confidence will be reported.  The preliminary report showed a decline in inflation expectations.  Fed officials may feel more comfortable dismissing market-based measures, such as the break-evens if the survey-based measures were firmer.  However, the weakness in both supports current market expectations for no Fed move next month (while keeping a June hike on the table).  

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