Week Ahead: Stimulus battle continues

A lively start to the year

It’s been an surprisingly lively start to the year, with recent weeks being dominated by retail traders taking on hedge funds and showcasing the power of social media. While that looks to have gone quiet, a repeat performance may not be far away. With the data calendar a little light next week, focus will remain on US stimulus, the vaccine rollout and earnings.

Country

US 

The US economy continues to make progress in the fight against COVID as daily cases have declined for almost a month and vaccination efforts accelerate.  The nonfarm payroll report showed that the case for more stimulus remains elevated.  On Wednesday, the US consumer price index is expected to show price pressures are mild.  The reflation trade at one point will trigger a surge with prices, but that should not derail the Fed’s avoidance in tapering stimulus.    

US Politics

President Joe Biden is interviewed on CBS in his first network TV interview since his inauguration.  The focus in the US will remain on COVID vaccine rollouts.  

On Monday, the US Senate begins former President Donald Trump’s second impeachment trial. Last month Trump was impeached in a bipartisan vote in the House of Representatives on a charge of inciting the January 6th insurrection at the US Capitol. 

EU

Next week is looking a little quiet on the data side, with the most notable release being the new economic forecasts on Thursday. The region is continuing to struggle on the vaccine rollout which could mean longer lockdowns and a slower recovery.

The political story continues to centre around Italy and whether Mario Draghi can form a government at a time of crisis for the country. The country is used to political uncertainty but now is not the time to be without a functioning government. Markets have responded positively to Draghi taking on the job but if he fails to form a government, Italian assets take a hit. 

UK

No major surprises from the BoE at its February meeting. The first quarter will see less growth – as you’d expect during the country’s third and longest lockdown – but the recovery will pick up after with growth returning to pre-Covid levels in the first quarter of next year. Negative rates remain a possibility later this year but still an unlikely one with any further easing likely to come from asset purchases and the Term Funding Scheme.

We’ll hear from Governor Andrew Bailey next week, with the most notable data being the GDP reading for the fourth quarter, alongside other lower impact releases.

Turkey

The lira rebound continued this week as the CBRT stressed its commitment to retaining tighter monetary policy until inflation is back within target, something that will take at least two years. This continues to go against the views of President Erdogan. At this time, investors are at ease with this but there always remains the risk that Erdogan will lose patience over time as the economy suffers from higher rates.

China

China Inflation and Balance of Trade released Wednesday. Inflation will be closely watched after higher readings from other parts of Asia, Europe and the US. Higher print being equities negative. PBOC continues to subtly withdraw liquidity via the repo rollover supporting the Yuan.

PBOC is confining USD/CNY to a 6.4000/6.5000 range ahead of Lunar New Year. China on holiday for a week starting Thursday.

India

RBI surprises the market and leaves rates unchanged after the expansionary budget this week. India equities nearly 10% higher this week post-budget. Quiet week ahead with India Inflation and Industrial Production on Friday. 

With most of Asia on holiday, the market will remain fixated on the budget-driven equity rally. INR to remain steady on unchanged RBI.

Australia & New Zealand

Australian NAB Business Confidence and New Zealand Food Inflation unlikely to move markets. 

The technical picture suggests Australian and New Zealand Dollars at risk of a material downward correction next week due to rising US yields and US Dollar strength. Both have the potential to fall by between 200-300 points. 

Japan

Japan Current Account and Machine Tool Orders won’t be market-moving. PPI could show signs of imported energy inflations increasing pressure on the JGB’s.

Domestic consumption, constrained as the Covid-19 state of emergencies are extended and expanded. Tokyo Olympics to go ahead with restrictions, removing a key negative risk factor for the domestic economy.

USD/JPY has broken higher through its 100-day moving average at 104.50, for the first time in 7 months. A rise in US yields next week could see USD/JPY rise to 107.00 next week if US Employment data is strong this evening.