E Markets: Pendulums

Thursday, January 17:BOJ Kuroda, Indonesia, South Africa rate decisions, final Eurozone HICP, Philly Fed

  • 0630 pm Australia Jan consumer confidence 104.4p 104.0e
  • 0730 pm Australia Nov home loans (m/m) 2.2%p -1.5%e
  • 1020 pm BOJ Kuroda Speech 
  • 0200 am Indonesia central bank rate decision – no change from 6% expected.
  • 0440 am Spain sells 3-5Y Bonos
  • 0500 am Eurozone Dec final HICP (m/m) -0.2%p 0%e (y/y) 1.9%p 1.6%e / core 1%p 1%e
  • 0500 am Eurozone Nov construction output (y/y) 1.8%p 1.5%e
  • 0545 am UK sells 5Y Gilts
  • 0800 am SARB rate decision - no change from 6.75% expected
  • 0830 am US weekly jobless claims 216k p 220k e
  • 0830 am US Jan Philly Fed manufacturing 9.4p 10e
  • 0100 pm US sells 10Y TIPS

Friday, January 18: Japan CPI, OPEC monthly, IEA monthly, UK retail sales, US industrial production, US Univ. Michigan consumer expectations, G20 meetings in Japan

  • 0430 pm New Zealand Dec Business NZ PMI 53.5p 52e
  • 0630 pm Japan Dec CPI (m/m) -0.2%p 0%e (y/y) 0.8%p 0.6%e / core 0.9%p 0.8%e
  • 1130 pm Japan Nov final industrial production (m/m) 2.9%p -1.1%e (y/y) 4.2%p 1.4%e
  • 0430 am UK Dec retail sales (m/m) 1.4%p -0.7%e (y/y) 3.6%p 3.5%e / ex fuel 3.8%p 4%e
  • 0830 am Canada Dec CPI (m/m) -0.4%p -0.4%e (y/y) 1.7%p 1.7%e / core 1.5%p 1.5%e
  • 0905 am NY Fed Williams speech 
  • 0915 am US Dec industrial production (m/m) 0.6%p 0.2%e (y/y) 3.9%p 3.0%e / manufacturing 2%p 1.8%e
  • 1000 am US Jan preliminary Univ.Michigan consumer sentiment 98.3p 97e

Conclusions: Is the US inflation scare over?  

The key to FOMC patience and the return of a Goldilocks trading environment is tame inflation.  Boring economic data just over potential growth with no sign of inflation means equities up, bonds stuck and FOMC waiting for global clarity. The Advisor Perspectives CPI analysis is worth considering here as it shows the key turns over the last 2 decades using the underlying inflation set as a predictor.  

The key problem for investors also comes from the drop in confidence and the feedback to the business cycle. The ECRI weekly highlights this collision with its own indicator suggesting the 2015 call is like that of 2018.  

The problem for next week and beyond rests with the increased noise in the economic data that central bankers are using for guiding their policy.  Reactive policy with increased uncertainty breeds volatility. Higher volatility with out higher returns punishes investors. Theoretically we should see pain trades in passive and better returns in active managers. 1Q will be a key test for this as the expectations for yields in bonds and stocks trend lower again. Perhaps the best week of 2019 was last week or perhaps this is just another pendulum moment and we can swing more widely back and forth in the year ahead. 

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