BRICs dominating the news-flow…some good, some overrated, some awful. Let’s also highlight key events for the week, not least the US Payroll number on Friday.
China (FXI, quote) cuts rates while manufacturing and non-manufacturing show improvement, India delivers auspicious budget, and Russia simmers (to a boil?).
On China: The PBoC cut benchmark interest rates by 25 bps, effective on March 1. This rate cut is in line with expectations we got 2 weeks ago when they cut right before lunar new year. We expect at least one more cut, possibly 2 in Q2. The rate cut seems to have scared people implying “things are worse than we thought”. We don’t think so. Liquidity is part of the approach to manage the process of keeping money in the system without going down old school stimulus roads. We always say that China will rally on liquidity not necessarily macro. CPI also has been stubbornly low, yes, even for China. Sunday’s official PMI came in just shy of expansion at 49.9(49.7 last) and non-manufacturing came in at 53.9. We believe we are in safe landing mode right now in China. The media is overdoing the rate cut as a signal things are far worse than we think (see Reuters http://uk.reuters.com/article/2015/03/01/uk-china-economy-pmi-idUKKBN0LX10X20150301
India: Saturday’s budget delivered on expectations. As expected, the FY15/16 budget maintained the government’s ongoing push toward supply side reforms, a business friendly tax environment, and infrastructure spending boost, while slightly relaxing the deficit reduction plan. This is why the market has played into this event. On structural reforms, there was some good stuff on bankruptcy court, tax cuts, a monetary policy committee for the RBI to deal with a formally mandated inflation target, and incentives for reducing black money in the economy. The budget may be broadly realistic and meets expectations, but it still lacks the quality of adjustment we think is needed to put India’s fiscal path on a robust and sustainable path. Still lots of talk and we need to see action. But at least the talk is great.
Russia (RSX, quote): Nemtsov murder brought depending on who you ask, thousands or tens of thousands to the streets in Moscow. The murder has widened a split in society where there are risks that this escalates. If not for the extreme popularity of Putin and the Ukraine war, this might be a bigger focus for markets right now. I will say when the Arab spring spread to Moscow in 2012 the protests were squashed by the Kremlin. If not for this flawless Teflon job I would be more concerned right now for volatility in the streets. One thing most folks don’t know about Russia and Russians: they are incredibly fatalistic and resilient folks. They are not quick to take to the streets even if they do feel there is injustice around them.
Week Ahead: Focus on US Payrolls. Fed in play in our view and the last few labor reports have been HOT. Market may not be ready for more wage growth. You can be sure the bond market will react.
- Monday-Merkel speaks at EIB conference in Berlin. Eurozone unemployment rate January. Eurozone PMI mfg final February. UK Nationwide house prices February. UK PMI mfg February. UK mortgage approvals January. US personal income and spending January. US construction spending January. ISM mfg February. Fed’s Plosser (non-voter) speaks.
- Tuesday-Australia interest rate announcement. Australia current account 4Q14. Turkey CPI February. German retail sales January. Canada GDP December. Janet Yellen speaks on “Bank Regulation and Supervision”.
- Wednesday–Interest rate announcements in Brazil, Canada and Poland. Australian GDP 4Q4. Eurozone PMI services final February. ISM services February. ADP private sector employment February. Fed’s Evans (voter) speaks, George and Fisher (non-voters and hawks) speak. Fed publishes Beige Book.
- Thursday– interest rate announcement in Malaysia. BoE and ECB policy announcements. Australian retail sales January. German factory orders January. Greece unemployment rate December. Fed’s Williams (voter) speaks. US initial jobless claims 28 February. US factory orders January. Fed publishes Dodd-Frank bank stress tests.
- Friday–German industrial production January. US nonfarm payroll employment February. US trade deficit January. US consumer credit January.
- Saturday: China trade surplus February.
- Market comment: a lot going on this week and much depending on the US jobs report as far as the Fed’s policy intentions are concerned. A strong report will compel the Fed to move ahead with the first rate hike. The markets would obviously prefer the Fed to remain dovish though the Fed could both rate hikes and send a message that further rate hikes would not be quick or aggressive. From the point of view of the US economic recovery, a disappointing US jobs report would be a surprise given the strength of US consumer spending and the increase in business investment. The downward revision in last week’s revised US GDP data was mainly due to the impact of a stronger dollar on imports as well as a reduced inventory build.