Correction in choppy trading
EUR/USD: correction, at last! Thanks to ECB president Draghi
Graph of the week
Irish yield curve (Wednesday close and today): yields 20 to 30 bps lower following deal on promissory note.
Review: The Good & The Bad
The US non-manufacturing ISM fell back slightly in January, from 55.7 to 55.2, but remains at decent levels, well above the LT average.
The US trade deficit narrowed sharply in December, reaching its lowest level since January 2010, which will lead to an upward revision in the GDP data.
US factory orders increased by 1.8% M/M in December, less than the expected 2.3% M/M increase due to a drop in orders for non-durables.
Initial jobless claims
US initial jobless claims dropped from an upwardly revised 371 000 to 366 000 in the week ending the 2nd of February, while a decline to 360 000 was expected.
The final reading of the EMU January services PMI showed an upward revision from 48.3 to 48.6, but national details showed a more mixed picture.
Euro zone retail sales remained poor in December, falling by 0.8% M/M, slightly more than expected and also the previous figure was downwardly revised.
Preview: euro zone Q4 GDP data in the focus
Last week, the US eco calendar was thin and this will remain so during most of this week. Nevertheless, small business confidence, the retail sales, Empire State manufacturing index, Michigan consumer confidence and the industrial production data will still be interesting.
The eye-catcher of the week are the retail sales on Wednesday as it will be interesting to see whether the tax increase, due to the payrolls tax cuts which were not extended, will weigh on consumer spending. The headline figure is forecast to increase for a third consecutive month, although at a fairly meagre 0.1% M/M, down from 0.5% M/M in December. Both retail sales excluding autos & gas (0.4% M/M) and the “control group” (0.3% M/M) are forecast to show a stronger gain in January. We believe however that a weaker outcome is likely, especially in the core readings, but maybe also in the headline one. Gasoline station sales are forecast to have dropped, while vehicle sales probably remained strong in the aftermath of Sandy.
Nevertheless, after the Christmas shopping season and due to the sharp drop in consumer confidence, we believe that the risks are on the downside of expectations.
After a sharp drop in November, US NFIB small business optimism picked up slightly in December, although the index remains at historically low levels. For January, the consensus is looking for a more significant improvement, from 88.0 to 89.0, as also the manufacturing ISM improved sharply, while the non-manufacturing ISM remained at lofty levels. We believe that after the strong ISM’s small business confidence might surprise on the upside too.
Especially on Friday, the US eco calendar heats up with the Empire State manufacturing index, Michigan consumer confidence and industrial production. The Empire State manufacturing index remained very poor early January, contrary to the ISM reports. For February, the consensus is looking for an increase from -7.78 to -2, bringing the index again more in line with the overall US business confidence indicators. We hope to see a stronger rebound.
In January, US industrial production is forecast to have increased for a third consecutive month. The consensus is looking for a limited 0.2% M/M increase. Weather conditions remained unusually warm in January, probably depressing utilities output, which is expected to be offset by strength in manufacturing led by vehicles production. Still, we believe that a slightly weaker outcome is not excluded.
Finally on Friday, also the first estimate of February Michigan consumer confidence will be released. In January, the index picked slightly up and a further increase is expected for February. The consensus is looking for an increase from 73.8 to 74.8. While we don’t expect a strong rebound, we believe that a small upward surprise is not excluded as the first impacts of the tax increase might start to fade.
Finally, initial jobless claims are forecast to have dropped slightly in the week ending the 9th of February. The consensus is looking for a decline from 366 000 to 360 000.
The distortions due to the end of the year holidays seem to have faded, bringing the claims again to more reliable levels. We expect the previous week’s data to be upwardly revised, but the claims might edge again somewhat lower in the coming weeks as labour market conditions seem to have improved. Therefore, we believe that a slightly lower outcome is not excluded.
Last week, also in the euro area, the economic calendar was rather thin with only the retail sales and several national industrial production figures, together with the final reading of euro zone services PMI. This week, the focus will be on the first reading of the euro zone Q4 GDP data, while also the December production data will be released.
During the final three months of 2012, the recession in the euro area is forecast to have deepened. The consensus is looking for a contraction in Q4 GDP by 0.4% Q/Q, down from 0.1% Q/Q in Q3. The Spanish and Belgian data were already published and the German full-year GDP data.
Ahead of the euro zone release, we will still receive the French GDP data and the German data for the fourth quarter, which should give further indications on what to expect from the euro area as a whole. For now, we have no reasons to distance ourselves from the consensus. The details will only be released with the final reading.
On Wednesday, also the euro zone industrial production data will be interesting. After three consecutive monthly declines, euro zone production is forecast to have increased slightly in December. The consensus is looking for a slight 0.2% M/M pick-up, but we believe that the risks are for a stronger outcome as the available national data surprised almost all on the upside of expectations, showing a limited rebound in December.