The Dow finished up 396 points Friday on the back of the Bank of Japan’s surprise announcement instituting negative interest rates on excess reserves held by banks in Japan.
It’s a sign that central bankers haven’t given up yet in their belief that they can still influence economic growth even though rates are at or below zero in many countries.
Yet in finishing at 16,466, the Dow was up only 372 points for the week. Less than all of Friday’s gain. A good result no doubt, but the intra-week volatility that this price action speaks to highlight that while the Dow and markets around the globe are rallying, much uncertainty remains.
Locally, the ASX rallied 1.8%, the Australian dollar traded briefly above 71 cents during the week and risk assets more broadly found some buyers. Some of this strength came from a tenuous positive correlation with crude oil which rocketed almost 5% higher last week.
It sets up an interesting week for traders. We have two huge RBA events, Tuesday and Friday, Chinese data Monday and US non-farm payrolls Friday.
For the moment, the bulls have it but can it last?
- The Bank of Japan makes a stand for all central banks. The BoJ cut rates into negative territory as it tries to fight deflation and weak growth. But, for all of BoJ governor Haruhiko Kuroda’s “through the minus interest rate combined with quantitative easing, I hope we can support companies and individuals in breaking their deflationary mindset,” I’m incredibly cynical that this is really just about a weaker currency, the Yen, and the BoJ’s fear that USDJPY, was going to drop down and through important support in the 115.50/116 region. That would have made Japan Inc. less competitiveness with China.
Kuroda has won this battle, and goosed stocks higher in the wake of the surprise move Friday. It’s not long now until Mario Draghi must deliver on his own promise of more easing. Stocks are rising again as a result. But traders will be wondering how long the rally can last.
- Crude oil, the rally the bear market needs? Or a real change? Crude oil rallied almost 5% after the Russians said the Saudis are willing to discuss production cuts last week. That news dragged stocks and risk assets higher, and put the US dollar under a little pressure. That was until Kuroda and the BoJ’s surprise. But the big question for markets, two actually, is if the Saudis will bring OPEC to the table and, along with the Russians, actually cut production at a level that will sustain prices. The second question is if the current positive, and reasonably strong, correlation with stocks (usually either negative or weak) hold?
Australian Calender – (courtesy CBA Economics)
- The week ahead is a big one for Australian financial market participants. The RBA takes centre stage with an interest rate announcement on Tuesday and the Statement on Monetary Policy (SMP) on Friday. Market pricing implies a negligible chance that the RBA cuts the cash rate next week and we agree.
- Reserve Bank, Board meeting and Statement on Monetary Policy – We expect the RBA will leave the cash rate unchanged. And we think the Bank’s GDP and underlying CPI projections will be left largely intact in the SMP. Cutting through the market frenzy, however, we are left with an economy where economic activity has rolled on, the labour market has strengthened and inflation remains low. The IMF may have cut global growth projections but those for China were left unchanged. Commodity prices may have fallen. But they also went up! We expect the RBA will respond to this mix by maintaining its conditional easing bias. They will probably maintain the line from the December meeting that “the outlook for inflation may afford scope for further easing of policy”, should that be appropriate to lend support to demand.
The main interest will be how policy makers are reading China concerns and market volatility. Post-meeting statements are necessarily short. And they are often carbon copies of the previous month. So we may have to wait until Friday (release of the Quarterly SoMP) for a more detailed analysis of current RBA thinking.
- December retail sales (via NAB Market Economics) — Friday’s December retail sales report –- which includes December quarter volumes and is an important element of consumer spending –- is the most market-sensitive release. NAB looks for a monthly increase of 0.6% up somewhat from growth of 0.4% in November. Retailing industry anecdotes suggest that December was strong, if not as strong industry reports had suggested, even though ABS retail trade underwhelmed in November. We note that this week’s December quarter inflation report revealed that core “market sector” (retail) goods prices rose 0.8% in the quarter, an indication that trading conditions facilitated some exchange rate pass-through in the latter months of last year. NAB’s modelling and assessment points to the likelihood of a modest upside surprise in December.
Elsewhere on the Australian economic data front, there are updates on retail trade, building approvals, house prices and the trade balance. The pick of the bunch looks to be the retail trade report. But it’s likely to receive less attention than usual because it’s published at the same time as the SMP. Building approvals are likely to show a rebound in December after November’s slump. And we expect to see another sizeable monthly trade deficit to close out 2015.
International Calender (courtesy NAB Market Economics)
NZ: RBNZ Governor Wheeler speaks Wednesday and the RBNZ’s McDermott on Thursday; Q4 labour market report Wednesday; ANZ commodity price index Tuesday with the dairy auction that night.
China: Official PMIs and Caixin manufacturing PMI Monday; then quiet data-wise.
- This week sees the release of two of the most market-sensitive indicators.
Monday lunchtime sees the release of the official manufacturing PMI for January, the market expecting little change (as has been the norm with this data release) from December’s 49.7 to a reading of 49.6 in January. Along with the release of the manufacturing is its non-manufacturing counterpart. There’s no consensus forecast available; in December, the index was 54.4.
Three quarters of an hour later at 1245 AEDT comes the private sector Caixin manufacturing PMI which is also expected to be little changed. It was 48.2 in December and is expected to be 48.1 in January. Likewise no forecasts for the case in services PMI that was 50.2 in January.
US: ISM manufacturing Monday, payrolls Friday the big releases; also personal spending/PCE deflators Monday and ISM non-manufacturing PMI Wednesday.
- Non-farm payrolls – Friday is headlined by December non-farm payrolls with the market expecting headline growth of 200K, down from 292K in November with an unchanged unemployment rate of 5.0%. There will also be close focus on average earnings which are expected to have grown by 0.3% in January up from no growth in December. The trade balance for December is also out on Friday.
Japan: Quiet data week ahead; final manufacturing PMI Monday, leading index Friday.
Euro: Final PMIs, unemployment, retail sales, ECB economic bulletin.
UK: Manufacturing PMI, then monthly BOE meeting.
Canada: Quiet start ahead of labour market, trade, and Ivey PMI Friday<