Highlights
Core bonds hit again
Periphery: corrective action
Graph of the week
Eonia strip curve: shifts higher and steepens, also after LTRO repayments. Uncertainty will reign, as the pace of repayments is subject to wild guesses.
Economic Data
Review: The Good & The Bad
US
Good News
Initial jobless claims
In the week ending the 19th of January, initial jobless claims dropped unexpectedly, from 335 000 to 330 000, while a significant increase was expected. The Labour Department added however that claims could still be distorted.
Bad News
Richmond Fed index
In January, the Richmond Fed index weakened sharply, falling from 5 to -12, while a stabilization was expected.
Existing home sales
For the first time in three months, US existing home sales dropped in December, while a further increase was expected. Existing home sales fell by 1.0% M/M.
New home sales
In December, US new home sales dropped unexpectedly, by 7.3% M/M to 369 000, while the previous figures were upwardly revised.
EMU
Good News
German ZEW survey
For a 2nd straight month, the German ZEW index posted a strong increase in January. The headline index jumped from 6.9 to 31.5, while a limited increase was expected.
Consumer confidence
European Commission’s consumer confidence picked up in January, rising from -26.3 to -23.9, while only a marginal increase was expected.
Manufacturing PMI
Euro zone manufacturing PMI picked up from 46.1 to 47.5 in January, while a more limited increase was expected.
Services PMI
According to the first estimate, euro zone services PMI rose from 47.8 to 48.3, the third consecutive increase while only a marginal rise was expected.
German IFO indicator
The German IFO indicator rose in January for a third straight month. The IFO jumped from 102.4 to 104.2, beating expectations.
Preview: key US data on the agenda
US
After a thin agenda last week, the economic calendar is well-filled this week with some key data releases as the first estimate of US Q4 GDP, the payrolls and manufacturing ISM, while also consumer confidence will be interesting.
On Wednesday, the first release of US fourth quarter GDP is forecast to show a significant slowdown in economic growth. During the final three months of the year, the US economy is forecast to have grown by 1.2% Q/Q (annualized), significantly down from an annualized growth rate of 3.1% Q/Q in the third quarter. Growth in both residential and non-residential investment and private consumption will probably be offset by weakness in netexports and a drag from inventories. Overall however, we believe that the risks are for a slightly stronger outcome.
On Friday, besides the payrolls report, also the manufacturing ISM will be released. In December, the manufacturing ISM picked up from 49.5 to 50.7, but a slight drop is expected for the start of the new year. The manufacturing ISM is forecast to show a drop from 50.7 to 50.5, but we see risks for a downward surprise. The already released regional business confidence indicators were all very poor, falling back into negative territory as the fiscal cliff deal failed to cause some relief. The regional business confidence indicators are however more volatile than the overall ISM reading.
Even more attention than the manufacturing ISM will probably go out to the January payrolls report, published on the first day of the month. According to the consensus, the start of the new year won’t mark a major change on the employment front. The January payrolls report is forecast to show a gain in nonfarm payrolls by 160 000, marginally up from the 155 000 seen in December and exactly matching the average gain seen during the second half of 2012. We believe however that the risks are for a weaker outcome as business confidence seems to have weakened at the start of the new year, which might have curbed hiring. After a cautious start of the year, hiring is however expected to pick up during the course of the year. Friday’s payrolls report will include benchmark revisions, which might brighten the overall picture. The unemployment rate is forecast to have stayed unchanged at 7.8% in January. We have no reasons to distance ourselves from this consensus. Ahead of the payrolls, as usual, we will have the ADP report, which might give further indications about what to expect from the January payrolls.
Another interesting report this week will be today’s Conference Board’s consumer confidence. After reaching a multi-year high in October, Conference Board’s consumer confidence weakened in both November and December, probably due to consumers’ uncertainty on their fiscal situation. Although a last-minute fiscal cliff deal was reached, it was apparently unable to cause some relief as consumers probably focused on the payroll tax cuts, which were not extended. Both University of Michigan consumer confidence and the weekly Bloomberg consumer confidence indicator weakened significantly. For the Conference Board’s reading, the consensus is looking for a drop from 65.1 to 64.0, but we believe that the risks are for a weaker outcome. On Friday, the final figure of University of Michigan consumer confidence is expected to show a marginal upward revision, from 71.3 to 71.5.
EMU
Last week, the euro zone eco calendar was well-filled with the focus on the confidence indicators. Surprisingly, all confidence indicators, both on consumer and business sentiment, surprised on the upside of expectations, showing a significant pick up at the start of the new year. This week, the confidence indicators from the European Commission, the first estimate of euro zone CPI inflation for January and the unemployment rate will be released, while Belgium will already publish a first estimate of Q4 GDP.
European Commission’s economic confidence is forecast to rise for a third consecutive month in January. The consensus is looking for an increase from 87.0 to 88.1, which if confirmed would be the highest level since June last year. After last week’s data, we believe that an upward surprise is highly likely. Interesting will also be the national data to see whether besides the core countries also the peripheral countries are showing further signs of improvement.
Less positive news will probably come from the unemployment front. In December, the unemployment rate is forecast to extend its upward trend, rising to a new record high. The consensus is looking for an increase from 11.8% to 11.9%. It will also be interesting to see whether the increase in number of people unemployed slowed further in December, which would be an encouraging sign. Although a further increase in the unemployment rate is the most likely scenario, we believe that a positive surprise, or a stabilisation at 11.8% is not excluded.
On Thursday, the first estimate of euro zone CPI inflation for January will be released. Euro zone CPI is forecast to have stabilized at 2.2% Y/Y in January. We believe that the risks are for an upward surprise, but the earlier released national data might provide us with more evidence. Exceptionally, there will be no German state data available.
