Weekly Fundamental Bulletin: Fed Likely To Maintain Status Quo

Last week’s highlights
Australia retail sales drop 4.2% in December
The latest retail sales report from Australia saw some bad news as the total value of retail sales fell 4.2% in December.

The data released by the Australian Bureau of Statistics missed the broader expectation of a 2.5% decline. This comes after retail sales rose by 7.1% in November.

Interestingly, retail sales from cafes, restaurants and food services rose, almost all of the rest of the categories fell during the period.

The biggest decline came from a 9% drop in household goods retailing. Food retailing fell by 2%, with the biggest declines from places like Victoria and New South Wales which saw stricter restrictions during the period.

New Zealand inflation rises 1.4% on the year
Consumer prices in New Zealand rose by 1.4% on the year during the fourth quarter of 2020.

The official data released last week saw an unchanged print compared to the previous period. The data also beat expectations of a 1% increase during the three months ending December 2020.

Housing and household utilities rose by 2.6% on the year with rentals rising 2.9%.

Food prices rose 2.5% while transport prices fell by 3.7% during the period. On a quarterly basis, New Zealand’s inflation rose by 0.6% beating expectations of no change.

However, the increase was at a slightly slower pace compared to a 0.7% increase in the third quarter of 2020.

ECB keeps monetary policy tools unchanged
The European Central Bank held its monetary policy meeting last week and left the key rates and its QE purchases unchanged. This was broadly in line with the market expectations.

The central bank also retained its forward guidance noting that it expects to see the interest rates staying low until inflation rises to 2%.

The January central bank meeting comes after the ECB extended its pandemic purchase program by 500 billion euros in December.

It also extended this scheme until March 2022. The central bank, in its statement, said that it remains committed to inflation and vowed that it would be ready to act.

Following the statement, the euro briefly strengthened intraday.

US housing starts and building permits jump in December
Activity in the housing sector picked up steam in December. New residential construction rose more than expected, according to data from the Commerce Department.

Housing starts rose by 5.8% to 1.6 million following a revised 1.578 million in November. Economists forecast an increase of just 0.8% for the period.

The bigger than expected gain pushed housing starts to the highest levels in 14-years.

In a separate report, building permits also rose strongly, surging 4.5%. The data, which is seen as an indicator for future housing demand, was in a slump for most of last year.

Bank of Canada keeps interest rates steady at 0.25%
The Bank of Canada held its monetary policy meeting last week. As widely expected, the central bank left interest rates unchanged.

In its statement, the BoC gave a rather optimistic view of the Canadian economy. The central bank expects Canada’s growth to rise by 4% in 2021 and 5% by the following year.

The bank pledged to keep interest rates unchanged at 0.25% until it saw evidence that the recovery was well-rooted.

Last Wednesday’s meeting came with some speculation that the central bank might cut rates from the current levels once again.

However, the overall tone from the BoC was seen to be rather hawkish.

Upcoming Economic Events
Australia inflation to rise 0.7% in Q4
Australia will be releasing its quarterly inflation data this week.

Forecasts show that the headline inflation will rise by 0.7% in the final three months of 2020. This comes at a slower pace after headline inflation rose by 1.6% in the previous three quarters.

On a year over year basis, Australia’s consumer prices are forecast to slow to a pace of 0.6%, following a 0.7% increase at the end of the third quarter.

While fuel prices rose during the period, retail gasoline prices remained subdued during the three months ending December 2020.

Fed decides on interest rates and QE
The Federal Reserve Bank will kick off its first monetary policy meeting for the new year.

The meeting also comes as the new Biden administration has taken over. However, investors do not expect any major surprises.

The Fed is likely to maintain the same tone that this is not the time for talking about policy exit. Fed Chair Powell will also be holding a press conference after the FOMC announcement.

Given the recent uptick in the economic data, the Fed’s statement is likely to reflect the same. However, it could offset the hawkish commentary by stressing the limited upside risk for inflation.

UK unemployment rate to rise in November
The monthly labor market data from the UK is due this week on Tuesday. Forecasts show that there could be an uptick in the unemployment rate.

From 4.9% in October, the UK’s unemployment rate is forecast to rise to 5.2% in November. The rise comes as a result of the indecision on the furlough scheme towards the end of last year.

Besides this, the partial lockdown in the UK is also one of the reasons for the rise in the unemployment rate.

The UK’s unemployment rate is expected to continue rising in the coming months before peaking around the second quarter of 2021.

US durable goods orders to rise 1.0% in December
The monthly durable goods orders report is due to show that the equipment investment rose in December quarter.

Economists forecast a 1.0% increase in the headline durable goods orders. This follows a similar pace of increase in the month before. Excluding transportation, the core durable goods orders are set to rise by 0.5%, marking a small pace of increase from 0.4% previously.

Non-defense capital goods shipments excluding aircraft are up by 16.6% on an annualized basis in the fourth quarter.

The growth in the durable goods orders report comes as economists expect to see a continued increase in the order growth through the fourth quarter.

German GDP to rise 0.7% in Q4
Germany will be releasing its quarterly GDP report. This data covers the final three months of 2020.

Forecasts point to the fact that German economic growth might have stagnated or slowed during the period. This is, however, the preliminary release. Further revisions could see data being changed.

Europe’s largest economy grew at a pace of 8.5% in the previous three months. The construction sector is likely to continue its performance from the third quarter, especially in the first two months of the fourth quarter.

The tighter restrictions during the fourth quarter period are also one of the reasons for German output to slow.

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