The selloff in equities continued in Asia overnight

31 January, 2017

European Outlook: The selloff in equities continued in Asia overnight. Hong Kong and China remained closed for New Year celebrations, but elsewhere market remained weary of Trump related policy risks. The BoJ left policy unchanged as expected and there was no sign of tapering, despite an upward revision to the growth forecast, but this failed to limit the selloff in Nikkei and Topix as it underpinned a stronger currency. U.S. stock futures are also down, but FTSE 100 futures are managing slight gains, despite a stronger Pound. The European data calendar is packed today, with the highlights including Eurozone inflation and GDP data, as well as German and Eurozone unemployment numbers and BoE lending data out of the U.K. There are also a number of ECB speakers, which are expected to play down the importance of the latest uptick in inflation.

Japan: Japanese household Spending came in unexpectedly at 0.3% lower than December’s 1.5%. Unemployment rate matches analysts’ predictions, since it came in at 3.1%, which consider being unchanged based on December’s rate. Furthermore, BOJ’s announced that monetary policy will be kept steady.

US data reports: The U.S. income report revealed a 0.3% December income rise after a small November boost that tracked assumptions, but a firm 0.5% consumption increase with a solid 0.3% “real” rise that modestly beat estimates. We saw a lean 0.2% December chain price rise that lifted the “real” consumption gain, while the savings rate fell to 5.4% from 5.6% (was 5.5%) in November. The firm close to Q4 consumption signaled slight upside risk to our 2.0% Q1 GDP estimate, which we left intact for now despite a small boost in our Q1 real consumption growth forecast to 2.2% from 2.1%, after a 2.5% Q4 clip. The savings rate has considerable room to fall as we eventually unwind the lofty 6.1% Q1 average and 6.2% figure last March, as the rate is well above the 4.6% cycle-low from November of 2013. The Confidence spike since the U.S. elections may indeed signal a further savings rate drop into early-2017 that boosts consumption relative to income. U.S. pending home sales bounced 1.6% to 109.0 in December after falling 2.5% to 107.3 in November from October’s 110.0.  But, compared to last December, pending sales are down 2.0% y/y versus the 1.4% y/y gain for November.

Germany: German inflation data led the way for an uptick in the Eurozone rate, to 1.6% y/y from 1.1% y/y in December. Base effects from energy prices are the main driving factor and with even the German rate holding below the ECB’s 2% limit, the central bank is unlikely to change its course on the back of the numbers. Given that spreads are already widening, it will be crucial for Draghi and Co to send a very clear message to markets in coming months. German Dec retail sales came in, early today, much weaker than anticipated at -0.9% m/m. Expectations had been for a rise of 0.6% m/m as a rebound from the slump in the previous month and the data are more than disappointing, and at odds with very strong consumer confidence figures and the Bundesbank’s full year 2016 growth estimate, which suggested a strong last quarter also thanks to consumption. However, official retail sales cover only a part of overall consumption, so the gap between the official data and the consumption numbers in the GDP measures seem to be widening

Main Macro Events Today                     

Draghi’s speech – ECB President Mario Draghi speaks in ECB and European Commission conference.

Eurozone GDP – Quarterly GDP growth is expected to come in at 0.4% q/q, from 0.3% in the previous quarter and with a slight upside risk. Growth is broadening and confidence indicators suggest ongoing improvement in economic activity ahead, helped to a large extend by consumption and domestic demand. Risks remain tilted to the downside and come mainly from the political sphere inside and outside the Eurozone. For now, though the recovery remains on track.

US ECI & Consumer Confidence – Employment cost data expected to come in at 0.6%, matching the pace of growth that we have seen last time. The y/y pace of growth should tick up to 2.4% after holding at 2.3% for the past two quarters. January consumer confidence is expected to edge higher to 114.0 from 113.7 in December and 109.4 in November. Since the election various confidence measures have been topping highs set last winter during the oil price plunge.

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