Key events in developed markets next week

The US data has continued to soften over recent weeks. Both the manufacturing and service sector ISM indices are in contraction territory, CEO confidence is at its lowest level since the Global Financial Crisis, retail sales have fallen by 1% or more for the past two months, industrial production has fallen for the past three and residential construction has posted six consecutive monthly declines. Despite this, the fourth quarter GDP report is expected to show that the economy expanded at a rate in excess of 2% annualised. Consumer spending should be an important driver given the strong performance in October, but aside from that, the growth will largely be focused on net trade and inventory building. This is not “good” growth. Imports are falling because of the deteriorating domestic growth story while inventories are increasing, partly because of improved supply chains, but also because demand is not as strong as many businesses expected. The GDP growth figures over the next few quarters will be much weaker.

Aside from this report, durable goods orders will be strong given Boeing received orders for 250 aircraft in December (led by United Airlines' order for nearly 200 Boeing 737 Max and 787 aircraft), up from 21 in November. Strip this one-off story out and the underlying picture is significantly weaker. Meanwhile, new home sales will suffer as a lagged response to the downturn in mortgage applications. Also watch out for the Fed’s favoured measure of inflation, the core personal consumer expenditure deflator. We expect it to show a relatively benign 0.2% month-on-month reading, which would confirm the easing trend in price pressures. There are no scheduled Federal Reserve speakers due to the proximity to the upcoming FOMC meeting and the self-imposed “quiet period”. We expect a 25bp interest rate increase on 1 February.

The Bank of Canada is getting close to the end point of its interest rate hiking phase. Inflation is showing signs of coming off, but the jobs market remains hot and as such we expect a final 25bp interest rate hike on 25 January. The BoC will likely characterise this as a pause, but we expect it to mark the peak as global recessionary forces are increasingly felt within Canada and inflation numbers continue to subside.