Trading with point and figure

- US data deluge and more Yellen testimony dominates schedule; Riksbank
rate decision, UK labour data and I-L Gilt auction and EIA oil
inventories provide the accompaniment

- Riksbank: likely to adopt neutral policy stance, underline concern
about SEK strength putting renewed downward pressure on CPI

- UK labour data: focus on expected steady growth in Average Earnings,
Employment seen posting modest rise

- US CPI: headline expected to reach 5-yr high, paced by gasoline prices;
PPI jump points to some upside

- US Retail Sales: autos to restrain headline, core measures seen posting
solid gain

- US Industrial Production: Utilities / Mining to weigh on headline, surveys
suggest some upside risks to Manufacturing Output

- Charts: EUR/SEK, WTI future, Fed rate probabilities

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

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

The US dominates the day's proceedings with a raft of data - CPI, Retail Sales, Industrial Production, NAHB Housing Market Index, Business Inventories & TIC Portfolio Flows - and more testimony from Yellen, and Fed Speak via Harker and Rosengren, along with whatever (melo-)drama that might be prompted by Trump and his 'team'. Ahead of that, the world's inflation turbo-nutters, aka Sweden's Riksbank hold a policy meeting, the UK publishes its labour data and South Africa CPI, and the UK also sells £1.25 Bln of 2026 Index-Linked Gilts. In respect of Yellen's comments on the Fed's balance sheet yesterday: it does mean markets are now "on notice". No, it does not mean immediately, and yes it will be very, very gradual (even glacial), and in the first instance nothing more than not reinvesting maturing debt, and initially probably only MBS. The point however is that there is already no more EM FX reserve accumulation QE (indeed there are many active sellers), and once the Fed is not reinvesting, there will be more and more supply for markets to take down, and that means there will be less and less for other 'riskier' assets, especially if there is more Treasury issuance to finance the mooted infrastructure spending.

** Sweden - Riksbank policy meeting **
- The consensus looks for the Repo Rate to be held at -0.50% and for no additional QE, which is hardly surprising in so far as December's decision to extend its QE programme was only carried by governor Ingves using his casting vote with the policy committee deeply split. Indeed with CPI (Jan due at end of week) at 1.7% y/y in December and core CPIF at 1.9% (a six year high), GDP running at 2.5% and expected to hit 3.0% in 2017, the case for tightening policy looks to be strong. However it is expected that at most the Riksbank will ditch its easing bias, with Ingves and his fellow doves voicing concerns about the relatively sharp rise in the SEK vs the EUR since the last meeting, which would likely be exacerbated if SEK rates were to rise at a time when the ECB looks to be on hold in rate terms for a protracted period, and per se jeopardize the rebound in inflation. While the Riksbank will be keen not to signal a rate hike this year, the chances of a move before year end look to be rather high.

** U.K. - Dec/Jan Unemployment / Average Earnings **
- As has been well documented, labour demand has been solid since last year's referendum, and while wages have ticked higher in recent months, the increase owes much to base effects, i.e. the setback in Average Hourly Earnings in Q4 2015. Today's labour data follows on from yesterday's inflation data, which markets appeared to view as being a little more benign than expected, despite the fact that the headline CPI 'miss' was almost exclusively due to seasonal discounts on Clothing (-4.2% m/m), and that all the PPI measures underlined increasing pipeline pressures. Last month's labour data saw an unexpected drop in the Claimant Count, even though the FLS Employment measure saw a small 9K drop, with today's report forecast to show no material change in the former, and a modest 22K rebound in the latter, with the ILO Unemployment Rate unchanged for a fourth months at a cyclical low of 4.8%. It will be recalled that the Q1 Inflation Report saw the BoE cut its 'Equilibrium Unemployment Rate' to 4.5% from 5.0%, per se suggesting that there is more 'slack' in the labour market than previously assumed, even if this looked to be a manipulation to allow them to stick to a neutral policy bias. As for Average Weekly Earnings, these are seen unchanged at 2.8% y/y headline and 2.7% ex-Bonus, which would chime in with anecdotal evidence suggesting little or no evidence of any acceleration in wages; the big question is whether, and how far, the rise in CPI in coming months pushes real wages into negative territory.

** U.S.A. - January CPI, Retail Sales, Industrial Production **
- Today's run of major US data will likely present markets with a dilemma, namely: will the Fed once again run scared of any downside miss on spending and output, as it has done so often in recent years, or is it serious about sticking to its dual employment and price mandate. While January PPI data have often disconnected from the accompanying CPI data, yesterday's upside surprise on PPI contained a number of sizeable increases, beyond energy, in consumer related items, which imply some risk of an upside surprise for CPI. As previously noted, energy price base effects are seen pacing a projected 0.3% m/m 2.4% y/y rise in in headline US CPI vs. December's 2.1%, though food prices should provide an offset if food PPI is any guide. Core CPI is seen up the usual 0.2% m/m, which would see the y/y rate slip to 2.1% from 2.2%, with housing (OER), health care and apparel prices likely to be the key swing factors. It should also be noted that if headline CPI is as expected, then the real yield on the US 10-yr Treasury would be zero, this seems wholly inappropriate when GDP is growing at the underlying trend rate. In contrast to December, auto sales are expected to restrain headline Retail Sales to a modest 0.1% m/m rise after fuelling last month's 0.6% m/m gain, and by contrast to December's tepid gains, core measures are seen picking up to 0.3%/0.4% m/m, though there are some questions about how much gasoline sales are boosted by rising prices, given some evidence of a slowdown in sales volumes. Be that as it may, if the headline sales rate turns out as forecast, then the y/y rate will accelerate to 4.6%, which is more than respectable. Industrial Production is seen flat m/m, restrained by unseasonably warm weather damping down utilities output along with a drop in resource output (mining extraction), while Manufacturing Output is forecast to post a 0.2% m/m rise, which would fit with the modest rise in Average Weekly Hours, though still not living up to the strength seen in manufacturing surveys (NY Fed due today) over recent months, which imply some upside risks relative to forecasts. Business Inventories are also due and expected to rise 0.4% m/m, but it is the accompanying Sales data which require most attention, with the already reported factory shipments and wholesale sales data posting gains in excess of 2.0%. The latter implies a further drop in the Inventory / Sales ratio to something in the region of 1.35, still above long-term averages for this stage of the business cycle, but on a rapidly declining trend.

from Marc Ostwald
 
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