Trading with point and figure

- All eyes on Yellen testimony, but plenty more to consider: China & UK
inflation, German GDP & ZEW, CEE GDP, US PPI & NFIB; stack of other Fed
speakers

- China CPI / PPI: higher than expected, but unlikely to prompt further
tightening immediately, but underline need to defend CNY

- UK CPI: seasonal m/m fall to be offset by rising energy prices, upside
risks as retailers start to pass through impact of weaker GBP

- Germany GDP: strong domestic demand reined in by drag from net exports,
so what is everyone complaining about??

- Yellen: likely to stick to Feb statement and Dec dot plot on outlook,
markets will be very sensitive to any mention of balance sheet reduction

- US PPI: expected to be well contained, but watch intermediate prices

..........................................................................

********************
** EVENTS PREVIEW **
********************

There is no disputing that today marks the high water mark for the week in terms of the volume of economic and policy inputs. Pride of place goes to Yellen's semi-annual testimony to the House Financial Services Committee, however the run of inflation data from China, UK and US and the raft of Q4 GDP readings in Europe will likely have some market impact. Germany's ZEW and the US NFIB Small Business Optimism surveys are also due. In passing, one rather more philosophical observation in respect of what now has traction in 'popular' political discourse: if the two barbaric World Wars gave transient hegemony to Voltaire's maxim 'I disapprove of what you say, but will defend to the death your right to say it'; then the post-peace dividend era (which was sadly also the mother and father of the Global Financial Crisis) has managed to pervert the Cartesian principle of 'I think, therefore I am' to 'I believe I am right, therefore you must be silenced'. Perhaps this highlights that the post World War II era was but an aberration in the long history of man's pugilism and inhumanity.

** China - January CPI, PPI **
- While both CPI and PPI were higher than expected, some care is needed in extrapolating the underlying trend. In respect of CPI food and fuel prices paced the 1.0% m/m 2.5% y/y rise, with the food price rise at least partially driven by the Lunar New Year holidays, and base effects in energy also contributing to the y/y rise. As for PPI a very sharp jump in coal prices (31.0% y/y) was the overriding contributor to the 6.9% y/y (vs. Dec 5.5%) rise, and while the 0.8% m/m rise was sharp, it was considerably slower than December's 1.6% m/m. As such, the data will probably not be the trigger for further PBOC tightening, which is currently rather more directed at reining in leverage and containing bubbles than heading off inflationary pressures. That said today's data underline that the Chinese authorities can ill afford another bout of CNY weakness above all versus the USD, regardless of whatever may emanate from the Trump administration about currency manipulation or threats of trade sanctions. In respect of German GDP, the slower than expected 0.4% q/q 1.7% y/y was due to a larger than expected drag from Net Exports, which offset continued strength in domestic demand, paced by private consumption, construction investment and govt spending, in other words the breakdown of Q4 GDP was in fact paced by exactly those components, which Germany's army of critics say it is not doing enough of - perhaps they should look after their own deficient economies, before criticizing others.

** U.K. - January CPI, RPI, PPI **
- Given that growth aggregates in the UK continue to confound the immediate post-Brexit referendum narrative of instant gloom and doom (obviously somewhat contingent on this week's run), the focus today is on the myriad signs of building inflation pressures. While seasonal discounting and the usual slide in airfares is expected to see UK CPI drop 0.5% m/m, base effects (particularly energy) will see the CPI y/y rate push up to 1.9% from 1.6%, with RPI seen at 2.8% and RPIX at 3.1%. The risks look to be heavily skewed to the upside, despite the highly anomalous BRC Shop Price drop, with my own personal anecdotal evidence showing supermarkets putting price increases of 10/20% for numerous products, leaving aside supply related problems for some fruit and vegetables. Pipeline pressures are expected to remain very elevated, with PPI Input seen posting a 1.0% m/m to push the y/y rate up to 18.5% y/y, the highest since September 2008's 24.8% y/y, even if the pass-through to Output prices is forecast to remain modest at 0.3% m/m for a 3.2% y/y rise (highest since April 2012). Anything higher than expected on CPI, which still faces upward pressures from Utilities prices (from March) and Council Tax hikes (April), would offer plenty of reason to doubt both the level of the BoE's projected CPI cyclical peak (2.8% y/y) and the timeline (i.e. higher much sooner). The BoE's neutrality on the rate outlook would be called heavily into question in such a scenario, the more so if tomorrow's wages data were to beat expectations.

** U.S.A. - Yellen testimony **
- That Yellen's testimony is much anticipated is obvious, that the prepared semi-annual testimony tends to stick to the FOMC's statement at its last meeting is also a fact... and the latter was anodyne, and the Fed has been 'data dependent' and largely 'guidance' free for much of the past 3 years. Perhaps the key point is that market expectations are skewed to a neutral / dovish stance, with a large dose of scepticism applied to anything that appears hawkish, predicated unsurprisingly on their post-GFC experience, hence markets are discounting 2 rate hikes for 2017 (the first in June), while recent Fed speakers have largely adhered to the December 'dot plot' of three hikes; a position Yellen will adhere to, stressing that all meetings are 'live'. It should be added that neither the Senate or the House committees tend to ask specific questions about policy implementation timelines, they will however ask about the need for / appropriateness of fiscal stimulus, on which Yellen will initially defer to Congressional discretion / decision, but if pressed, will say that there is no pressing need, outside of a rejigging of fiscal stimulus to boost productivity (which all Fed speakers have underlined in recent years). She will almost certainly underline Fischer's point that the Fed is very close to its dual mandate targets for employment and prices, which it will adhere to. While the prepared statement will either avoid any reference to, or stick to the statement's language on Fed balance sheet reduction, the Q&A may throw up one or other question, above all in the context of fiscal stimulus; any suggestion that this could be a near-term (over the next year) consideration would inevitably spark a very sharp (negative) market reaction. As previously noted, there is also a high risk that the testimony is hijacked by a discussion around repealing parts of Dodd-Frank, the more so given Tarullo's resignation from the Fed's board of governors. It should also not be forgotten that there are a raft of Fed speakers today, who follow on from a hawkish sounding Kaplan yesterday, who said the Fed should raise rates gradually, but soon, and should also start to discuss how to reduce the size of its balance sheet as it raises rates... we have said it before, and will say it again financial markets are simply not ready for this.

** U.S.A. - January PPI **
- As with tomorrow's CPI and last week's Import Prices, energy prices are likely to be a key, though moderate driver of an expected 0.3% m/m rise in headline PPI, which would see the y/y rate slip to 1.5% from 1.6%, with core PPI seen rising 0.2% m/m due to annual price hikes, but the latter would in fact be markedly slower than January 2016 and, if correct, the y/y pace would drop to 1.1% from 1.5% in December. Both would fit with a relatively benign trend seen in Intermediate PPI in recent months, this despite the ISM Prices Paid index being at it highest level (69.0) since May 2011, which should point to a short-term pick-up in the former.

from Marc Ostwald
 
trend started on 3rd Feb
a big deviation from the trendline

that does not mean its a screamin short...lol
 
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