Key events in developed markets next week

Virtually all surveys since December’s UK election have shown a rise in sentiment. But will this translate into a faster pace of growth? Markets will be taking their cue from a range of data next week.

We suspect it's too early to see evidence of any post-election bounce in Tuesday’s jobs numbers. Hiring indicators towards the end of 2019 were increasingly pointing to reduced demand in the jobs market, and for the time being this may show through in a slower pace of employment growth.

Inflation will get a boost on Wednesday by higher petrol prices, but that won’t last. Household energy costs are set to fall in the spring, dragging inflation lower. Higher real wage growth should be good news for consumer spending, although we suspect it’ll be too early to see the results in January’s retail sales figures.

But the one to really watch is the PMI. We saw a big increase in January, particularly in services as firms reported higher optimism and faster growth in new orders. Can this last? Well don’t forget the PMIs and other surveys haven’t always been as accurate around political turning points. Bank of England policymakers will remember back in 2016 when the PMIs plunged after the referendum, only to rebound in the months shortly after. We see the reverse effect to some extent this month, and the manufacturing PMI, in particular, may begin to feel the early effects of coronavirus, given firms globally are reporting supply chain difficulties.

In short, we’re looking at a slightly dovish tone to the data next week, but will it move the dial closer to a rate cut? We suspect it won’t, and we continue to expect monetary policy to remain on hold this year barring a material deterioration in growth conditions.

We’re still a few weeks away from the UK budget in March, but the surprise resignation of Sajid Javid as Chancellor has prompted a move in markets to price more fiscal stimulus.

The logic, we suspect, is that Number 10 will try put pressure on new Chancellor Rishi Sunak to loosen the purse strings. In reality, we think investors could be disappointed. While we would expect some fiscal stimulus, it’s unlikely the government will want to use all of it’s ammunition with the next election so far off. There’ll be lots of focus on infrastructure, although often this takes time (potentially a few years) before it translates into additional economic activity.

It’s a holiday-shortened week in the US, populated mainly by housing statistics. These, by and large, should show that this area of the economy is performing very strongly. The plunge in mortgage interest rates coupled with low unemployment levels and close to record high consumer confidence indices means lots of potential buyers in a market that has seen very limited new home building over recent years. Strong demand has already led to a pick-up in construction with home builder confidence having surged in recent quarters. After a few lean years, residential investment is likely to be a key driver of US growth in the first half of 2020.

There are also several Fed speakers scheduled to make an appearance with the tone set to largely repeat the cautiously optimistic sentiments expressed by Fed Chair Jerome Powell in his recent testimony to Congress. Nonetheless, they are likely to be increasingly focused on the global economic impact from the coronavirus, which is a key factor behind our sub-consensus US growth view and our prediction of one more rate cut from the Federal Reserve.

Next week’s survey data have been eagerly awaited as they should present the first evidence of corona impact on Eurozone businesses and consumers. Some loss of confidence should be expected, even though business confidence has been on the rise in recent months on the back of somewhat improved trade outlook.

Warmer weather and the resulting lower energy costs will keep Swedish inflation below target next week. We expect it to come in at 1.7% YoY but the risks are skewed to the downside. The Swedish central banks expect it even lower although they remain fairly upbeat on CPIF ex-energy. We’ll also get the Prospera Swedish inflation expectations survey, and it will be interesting to see whether a downward trend in inflation expectations amongst money market participants continues. This is relevant given the ongoing wage negotiations, which will set the tone for pay rises over the next few years.

None of next week’s data should faze the Riksbank, who are widely expected to remain on hold for the foreseeable future.