Watch Greece

Genevieve Signoret

Macro Views

This week’s main macro market risks

China’s CPI inflation rate has fallen short of 2.0% since September 2014 and is expected to slowed down again in January. Analysts will be looking for signs that China faces the risk of falling into deflation. China’s central bank has been applying targeted stimulus to try to spur growth without fueling bubbles. Consensus: 1.0% y/y (from 1.5% in Dec).

A Greek exit from the euro area is a highly unlikely event. But as long as Greece and the Troika members continue to posture and play games, the resulting uncertainty will give investors the heebie jeebies.

For our full annotated events calendar, please scroll down.

Last week’s main global events

Greece and Greek banks can still fund themselves

Alexis Tsipras—the Greek prime minister—and Yanis Varoufakis—his finance minister—travelled to various countries of Europe seeking anti-austerity consensus. The Greek finance minister proposed a plan to replace Greek debt with bonds linked to GDP. The ECB announced that it will no longer accept Greece government bonds as collateral. Now Greek banks can only access ECB liquidity facilities using other eligible collateral or obtain Eurosystem ELA liquidity through the Bank of Greece. This should not cause Greece or Greek banks a funding problem.

France and Germany mediate in the Ukraine

Pro-Russia separatists continued their surge in eastern Ukraine. According to NATO, new Russian troops and equipment are crossing the Ukrainian border. Angela Merkel—the Chancellor of Germany—and Francois Hollande—the French President—met Vladimir Putin on Friday to discuss an exit from the conflict. Despite heightening pressure in Washington for arming the Ukraine, President Obama hasn’t made a decisive move yet. “The progress that Ukraine needs cannot be achieved by more weapons” said the German Chancellor on Saturday. Chancellor Merkel will be meeting President Obama tomorrow in Washington.

Peña Nieto launched an inquiry into himself

Mexican President Peña announced several executive orders against corruption. The first of those orders was to execute an investigation into conflict-of-interest accusations against him and members of his cabinet.

China manufacturing seems to be contracting

The official China Purchasing Manager Index (PMI) moved into contraction zone in January. Last month the NBS PMI was at 49.8 down from 50.1 in December. On trend, this indicator has been trending down since September 2014. Last week’s Markit PMI stayed below the contraction threshold for the second consecutive month.

Germany industrial output fell for the second consecutive month

In December Germany IP moved down to –0.7% y/y from –0.3% the previous month.

U.S. trade flows picked up

Imports were up 4.9% y/y from 3.5% in November. Exports also accelerated, they moved to 1.1% from 0.7%. The trade deficit widened to $505Bn from $496Bn the previous month.

Despite great U.S. jobs report, we hold to our Fed forecast

In January, U.S. nonfarm payrolls increased by a strong 257K. The unemployment rate rose by 0.1 percentage point to 5.7% as a result of a higher participation rate (62.9% from 62.7% in December). Nominal wages were up 2.2% y/y from 1.7% in December.

These results raise the risk that our forecast for a Fed rate hike in the second half of 2015 will prove wrong and it will come in June. While we perceive this increased risk, we hold to our forecast.

Our model[1] and client portfolio strategies remain unchanged. They already contain hedges against the risk of a June rate hike.

U.S. core PCE inflation slid farther from the Fed target

Core inflation continues to slow down in the USA. PCE core inflation slowed down in January to 1.3% y/y from 1.4% the previous month. The headline number was down to 0.7% from 1.2% in December.

In Turkey, annual inflation slowed down 1 percentage point to 7.2% while in Korea it remained stable at very low 0.8%.

Central banks are engaged in currency wars

Denmark. The Danish National Bank cut its monetary policy rate for the fourth time in three weeks. The Central Bank cut its interest rate on deposits by 25bp to –0.75%. The move has been interpreted as a new attempt to protect the Danish krone peg to the euro. The Danish krone has been under pressure since the European Central Bank announced their QE program extension. Charles Duxbury and Josie Cox from the WSJ explain the differences between the Swiss and the Danish peg: “Unlike the ceiling on the Swiss franc, which was imposed unilaterally by Switzerland, the Danish peg is supported by the ECB. A European Union agreement, known as ERM II, calls for the central bank to defend the peg if necessary.”

Switzerland. The Swiss National Bank unexpectedly abandoned its ceiling of 1.20 euros per franc on January 15. Last weekend, a local newspaper stated that the Swiss National Bank is now targeting an interval for the franc of 1.05–1.10 to the euro. The Swiss currency closed today at 1.05 euros per franc.

Czech Republic. The Czech National Bank warned that it may intervene on the market to keep the koruna weak against the euro.

Australia. The Reserve Bank of Australia cut its monetary policy rate by 25bp to 2.25%. The communiqué said that the decision was expected to “provide some additional support to demand, thus fostering sustainable growth and inflation outcomes consistent with the inflation target.” The AUD/USD exchange rate closed the week at a 5-year low.

Ukraine. The hryvnia plunged 30% against the dollar after the National Bank of Ukraine scrapped the currency auctions that were supporting the exchange rate and raised its monetary policy rate by 550bp to 19.5%.

India. The Reserve Bank of India left its monetary policy rate unchanged at 7.75%. On January 15, the Bank of India cut its monetary policy rate by 25bp during an unscheduled meeting held after the announcement of a sharp slowdown in inflation. Governor Raghuram Rajan said he did not yet understand the surprisingly strong 2014 fiscal year GDP numbers. This Thursday, India’s January’s inflation numbers come out.

China. The People’s Bank of China decided to reduce the deposit reserve ratio by 0.5 percentage points to 19.5% from 20.0% and undertake additional measures targeted to the micro and small enterprise sector. This cautious and targeted approach is the government’s attempt to deflate asset price bubbles without causing a growth collapse. We don’t know whether it will work. Our central scenario forecast assumes that it will—narrowly.

UK. The Bank of England left unchanged both its monetary policy rate at 0.50% and its asset purchase program at £375Bn. We’ll be attentive to the tone and projections included in the Quarterly Inflation Report, due next Thursday.

Next week: the details

Events in red are those most likely to shake markets.

During the week

  • India: International trade (Dec).
  • Greece versus Troika: A Greek exit from the euro area is a highly unlikely event. But as long as Greece and the Troika members continue to posture and play games and the issue remains unresolved, the resulting uncertainty will give investors the heebie jeebies.

Monday 9

  • Global: G20 Finance Ministers and Central Bank Governors meet in Istanbul (to Feb 10).
  • India: GDP (Q4).
  • Germany: Trade balance (Dec).
  • Turkey: Industrial production (Dec).
  • USA: Angela Merkel will meet U.S. President Barack Obama. See comments above.
  • Mexico: Consumer prices (Jan). Mexico’s inflation slowed down abruptly in the first half of January. Consensus: 3.1% (from 4.1% in Dec).

Tuesday 10

  • China: Consumer prices (Jan). China’s inflation has been below 2.0% since September 2014 and is expected to fall further. We’ve read some analysts express concern that China could even spiral down into deflation. China’s central bank has been applying targeted stimulus to try to spur growth without fueling bubbles. Consensus: 1.0% y/y (from 1.5% in Dec).
  • UK: Industrial production (Dec).
  • USA: Job Openings and Labor Turnover (JOLT) (Dec).

Wednesday 11

  • Brazil: Retail sales (Dec).
  • Mexico: Industrial production (Dec). Consensus: 2.7% y/y (from 1.8% in November).

Thursday 12

  • India: Consumer prices (Jan), industrial production (Dec).
  • Euro Area: Industrial production (Dec).
  • Germany: Consumer prices (Jan).
  • UK: Bank of England quarterly inflation report. We’ll be attentive to updated forecasts and the Bank’s opinion on recent UK ultra-low inflation.
  • USA: Retail sales (Jan). Watch the core number—which excludes gasoline an automotive parts prices. We expect falling gasoline prices to start boosting core retail sales. Consensus: –0.4% m/m (from –1.0% in Dec)
  • Mexico: Employment: IMSS affiliates (Jan).

Friday 13

  • Euro Area: GDP (Q4, first estimate). Euro area’s growth was anemic throughout 2014. Recent high-frequency data do suggest, however, that that growth is set to speed up in 2015. Consensus: 0.2% q/q (from 0.2% in Q3).
  • USA: U. Michigan consumer sentiment (Feb, flash). Consumer sentiment has been rising steadily over the past few months; we expect this trend to continue in February. Consensus: 98.2 (from 98.1 in January).

[1] Read descriptions of these portfolios here. Clients receive details on their composition in addition to individualized strategies and portfolio management services. To request more information, please write to

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