RBC Capital Markets

Week ahead: This week features the FOMC meeting (see USD) and the WEF. In terms of the economic data schedule, fourth quarter GDP reports from the US, South Korea, Germany and France are forthcoming, as are Germany CPI, UK labour market data (see GBP), Australia CPI (see AUD) and Canada November GDP (see CAD). Earnings reports from many of the key tech bellwethers like Apple, Facebook, Tesla and Microsoft are also due.

USD: We see little impetus for any material adjustments to Fed policy in the FOMC meeting (Wednesday). Certainly it will mention that the economy is going through a rough patch, but that reality should be obvious to most observers. Chairman Powell recently emphasised that the Fed is going to remain accommodative for quite some time. We expect much the same at his post-FOMC press conference. But Powell’s sticking to his script does not change the fact that his top lieutenant (Clarida) and other members have already started talking aloud about scaling back accommodation at some point. That was not by accident, in our view. We think the Fed is trying to plant that seed now in order to try to buffer any volatility later, even if that tree grows slowly. The US Q4 GDP report (Thursday) is also on tap.

EUR: Germany advanced January CPI inflation (Thursday), and Germany and France Q4 GDP reports are the key data releases from the Eurozone this week.

GBP: The latest ONS labour market report (Tuesday) will cover the period through November, or through the end of the UK’s second lockdown. We expect the latest estimate to show the unemployment rate increasing to 5.1%. According to the more up-to-date ONS’ Business Impact of Coronavirus Survey, the proportion of furloughed employees rose from 9% at the end of October to 16% by the end of November, dwarfing what the official unemployment estimates are showing. Clearly the BoE is also looking beyond the official unemployment rate, as indicated by Governor Bailey's recent comment that he thought that unemployment was “probably closer to 6.5%”. The true level of unemployment won’t reveal itself until the furlough scheme is wound down.

AUD/NZD: After two extremely volatile pandemic-affected quarters, we expect a more ‘normal’ Australia Q4 CPI report (Wednesday). The substantial deflationary effect of the temporary childcare subsidy has passed, and volatility in fuel prices has also subsided. Our 0.8% q/q forecast leaves the y/y reading at 0.8% too. We expect core inflation to remain steady at 0.35% q/q, or 1.2% y/y, well below what the RBA would like to see, though we note that its trimmed mean forecast for the quarter is only 1.0%, and hence its focus is more likely on the trajectory of later reports, as it expects a pickup to 1½% by late 2022.

CAD: RBC Economics is forecasting a gain of 0.2% m/m in November GDP (Friday), half of the 0.4% increase in the earlier StatsCan nowcast. A sharp pullback on the hospitality side—not specifically mentioned in the nowcast—is behind our lower estimate. We expect StatsCan’s GDP nowcast for December to print at -0.4% m/m, with further declines expected in the hard-hit hospitality sector. Our current forecast for Q4 as a whole is +4.5% annualised, just below the BoC’s revised +4.8% from the January 20th MPR. Growth should slow markedly in Q1 on increased COVID-19 cases and lockdown restrictions (RBC 0.0%, BoC -2.5% annualised).

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