How will central banks respond?
Inflation and interest rates have been at the forefront of investors’ minds so far this year, and that’s unlikely to change for some time yet. Earnings season provided a welcome and timely distraction and enabled markets to find some stability, but as we saw towards the end of last week, inflation continues to dominate.
While many expect inflation to peak over the next couple of months, for various reasons, and then fall quite quickly, there’s not an enormous amount of confidence that everything will go according to plan. And there’s plenty of evidence over the last few months of inflation catching central banks and the rest of us by surprise.
Next week offers plenty of economic data from around the globe. Unsurprisingly, the inflation indicators will attract the most attention, as will the commentary from the various policymakers that are scheduled to speak, with some slowly accepting that a big policy response is necessary. Others continue to push back against market expectations with little success. Whatever happens, it promises to be another fascinating week.
US
With Wall Street completely fixated on inflation, the upcoming round of economic data should confirm that the peak of inflation is nearing and that the US consumer is still strong. Tuesday’s release of producer price data should show that suppliers are still charging businesses higher prices while the Empire manufacturing survey is expected to return back to positive territory. On Wednesday, retail sales should bounce back as the omicron hit drove December’s slump to demand and supply disruptions. Also, in the middle of the week, Industrial production is expected to rebound. Thursday is a busy day that includes initial jobless claims, Philly Fed business outlook, housing starts, and building permits.
Fed speak will include speeches from James Bullard and Loretta Mester on Thursday. Fed’s Evans and Waller will participate in a panel that discusses the Fed’s new policy strategy.
EU
A relatively quiet week on the economic side of things, with the bulk of next week’s notable data coming on Tuesday. GDP and employment data for the euro area will be notable but no game-changer, the same can be said for the ZEW surveys, although they will contain some hint over how the economy is expected to perform amid higher levels of inflation. Once again, the ECB speak will be the highlight, but we can probably expect more pushback against market expectations ahead of next month’s meeting, when we will likely see a significant policy shift.
Olaf Scholz is scheduled to travel to Russia to meet Vladimir Putin on Tuesday in an attempt to ease tensions between NATO and Russia over Ukraine.
UK
Next week is when we get the UK data dump and, unsurprisingly, all of the focus will be on the CPI data and just how bad the situation has got. We don’t seem to get too many positive surprises now, and markets are already pricing in another four or five hikes this year, including another two consecutive increases in March and May. The BoE appears on board with the latter but has indicated that market expectations are excessive over the year. Perhaps next week will change their mind.
Boris Johnson continues to hang in there as we await the outcome of the police inquiry into numerous lockdown parties.
Russia
The CBR raised interest rates by 100 basis points on Friday to 9.5%, in line with expectations. It did leave the door open to more increases, though, despite the belief that inflation will return to target and peak soon.
Next week’s highlight will be the meeting between Putin and Scholz, with PPI data being of some interest.
South Africa
CPI data will be key next week as it currently sits right at the upper end of its target range and the SARB has raised rates at the last two meetings while signaling more could follow.
Turkey
The first test of the year for the CBRT is next week as it meets to decide whether to keep cutting interest rates or not. inflation has hit 48.7% if the official data is to be believed after the head of the agency was sacked. We could see a more restrained central bank over the next year as Erdogan will not want to go into an election next year with sky-high inflation, which may explain the relentless cutting exercise last year. Whether or not that gamble pays off is another thing, but we should learn more next week.
China
China releases CPI for January on Wednesday. Inflation is expected to slow to 1.0%, down from 1.5% in December. A decline in food prices likely offsets the rise in energy and gasoline prices.
India
On Monday, India releases CPI for January. Inflation came in at 5.6% in December and is expected to rise to 6%, which is the upper end of the central bank’s target of 2%-6%. The expected upswing in inflation is a result of higher food and telecom prices as well as supply chain issues.
India, the world’s largest democracy, will hold elections in five states, including Goa and Uttarakhand. Some 180 million people are eligible to vote, and the results could determine the political future of Prime Minister Narendra Modi and his Bharatiya Janata Party (BJP).
Australia
Australia releases the January employment report on Thursday. Job growth sparkled in December (64,800) but is expected to have ground to halt in January, with a consensus of a negligible 2,500 new jobs. This is a result of the Omicron outbreak in January, which significantly dampened job growth.
The unemployment rate is projected to have inched lower to 4.1%, down from 4.2% in December.
New Zealand
Mostly tier two and three data are being released over the course of the next week.
Japan
Japan releases fourth-quarter GDP on Monday. The economy is expected to have rebounded in Q4 as the government lifted health restrictions due to the Omicron wave at the end of September. The consensus for GDP Q4 stands at 6.0% y/y, after a contraction of 3.6% in Q3.
On Friday, Japan releases National CPI for January. Core CPI is expected to have posted a small gain of 0.3%, down from 0.5% in December. The drop in inflation can be attributed to the renewal of health restrictions across most of Japan, which put a dent in consumer spending.