- ECB and Bank of England both make rate calls
- US wage growth data set to fall short of inflation again
- UK consumer borrowing could offer up red flag over economic recovery
The week kicks off with first estimates of Eurozone Q4 GDP. Whilst the annual figure is widely expected to show some modest growth, there’s also concern that the quarterly print could slip back into negative territory. That’s likely to be attributed to both rising costs and the latest wave of COVID infections, but in the current inflationary environment it presents a true headache for the ECB. Their reaction to this print in the monetary policy press conference later in the week is likely to be under scrutiny.
Overnight on Tuesday, the Reserve Bank of Australia will issue its latest view on monetary policy. With employment running hot and a Chinese rate cut seen as being good news for the economy, there’s definitely scope for some action here. The bank’s governor late last year said he didn’t expect the conditions to justify a rate hike would be met in 2022, but it’s an evolving situation and markets appear to be pricing in the prospect of more than one increase in the coming months. Aussie dollar volatility could well ensure off the back of this decision, as it seems inevitable that some will be disappointed by the news.
Back to Europe and German Retail Sales data for December is also set for release. Again, the extent to which COVID worries dragged on consumer activity pre-Christmas will be in focus, although there appears to be consensus that a reading well above November’s -2.1% year-on-year figure will be seen. Inflationary pressures should also help lend some support here too, although given that, any failure to break into positive territory would equate to a notable decline in real terms. Any reaction by the Euro may however be subdued until we have heard from the ECB.
UK Consumer Borrowing data for December is up for publication on Tuesday, too. The Bank of England’s consumer credit reading is tipped to show growth of just £0.7 billion, down from the £1.2 billion recorded in November and something that could be interpreted as a cooling of consumer demand. We know that retail was disrupted in the run up to Christmas with plan B restrictions coming into place, but this number could also hint at concern over both the rising cost of living and interest rates. With consumer demand so fundamental in terms of sustaining economic growth post-pandemic, the Pound could well struggle off the back of this.
ADP Payroll data for January will be the highlight of Wednesday. A fairly sharp drop is expected here, with suggestions being that the number could come in towards the 200,000 mark as seen around a year ago. This may knock some momentum out of the dollar, given the Fed’s pivot to a more aggressive stance over monetary policy was predicated by a surging labour market.
Thursday will see a double header of rate calls with both The European Central Bank and The Bank of England updating on their latest position. Expectations are that there will be no change seen out of Frankfurt where the ECB is still battling low wage growth and even core inflation doesn’t appear to be posing that much of a threat. The subsequent press conference may however offer up some clues as to when a change in tack will be seen, in turn presenting some upside risk on the Euro. Conversely in London, the expectation is that another 25 basis points will be added to rates as the Bank of England looks to tackle soaring inflation which increasingly doesn’t look as if it will be as short lived as had been hoped. In turn this offers downside risk for Sterling, should the MPC not act as expected.
To round out the week, we have January’s Non farm Payroll data, alongside other key employment facts. In light of the ADP release on Wednesday, the more insightful points here are likely to be average hourly earnings – tipped to nudge above 5% year-on-year whilst remaining below inflation – and the unemployment rate. This was 3.9% in December and is set to be around the same. That’s fast approaching the frictional unemployment level, which may in turn offer policymakers some confidence that wage growth may start keeping pace with prices. With that in mind, an unemployment rate above 4% could be sufficient to knock sentiment ahead of the weekend break.