The Global Week Ahead: Scotiabank

The next week's economic risk dashboard includes:

US nonfarm payrolls...liquidity constrained Good Friday Other US macro risksFOMC speakCanadian GDPEurozone CPIEurozone consumer spendingChina's state PMIUK PMIUK Party Leaders debate.

If non-farm hiring falls will anyone hear it?

The Scotiabank has presented its views as follows on the next week's economic data:

Canada - Front-Loaded Shocks

The first quarter is shaping up to be very soft for Canada in support of the Bank of Canada's argument that the effects of the oil price shock will be front-loaded. Very little if any growth is on track to be registered in Q1. Nothing can be done about that now, but that doesn't mean the resulting slack should not be countered with greater monetary policy stimulus. That's where the debate lies now with markets still pricing in decent odds of another rate cut by mid-year or later notwithstanding Governor Poloz's latest remarks.

We'll get a reminder of all of this in Tuesday's GDP print for the month of January. While it's just a monthly figure, Ottawa's statisticians have been digging a deep enough hole that it will be tough to salvage growth in Q1. Enter chart 1. This is what we are tracking by way of annualized and seasonally adjusted contractions in the first quarter for key types of economic activity amid few and small expansions in some indicators based upon what we know of the Q4 hand-off and the first month of 2015Q1. For just the first month of the new year, activity was uniformly lower and that has us expecting a sizeable drop in January GDP.

Let's start with the positives. Recall that hours worked were up 0.1% m/m as a surge in part-time jobs outweighed a drop in full-time employment. Housing starts were also up by 4.5% m/m but this was due to longer-lived multis that were up 13% and that are particularly made up of condos while single housing starts that are more impactful on nearer term construction activity fell 4.2% m/m. 

Now for the negatives. Home sales fell 2.4% and that could negatively affect industries providing ancillary services to housing like professional and financial services. Retail sales volumes fell 1.2% m/m for the second consecutive month, wholesale sales were down 3.3%, vehicle sales fell 7% m/m, and manufacturing shipment volumes slipped by 1% m/m.

Trade was also a negative with export volumes down 1.4% m/m and import volumes down by a lesser 0.1%. We'll get the February trade update on Thursday next week but recall that Statistics Canada assumes much of the energy side of the trade picture until hard company data arrives later, so treat the first pass at the trade figures as a 'draft'.

US - Respect The Good Friday Effect

The latest nonfarm payrolls print will land on Good Friday when most global markets are shut. Oops, someone didn't get the memo. It is expected to exhibit a cooler pace of hiring compared to the 295k pace of the prior month as temporary (we think) distortions to growth may interrupt the pace of hiring. The day is not a Federal holiday in the US. US equity cash markets will nevertheless be shut including the NYSE and Nasdaq that reopen on Monday, although equity futures will be open briefly that morning and bonds will be open for a half day on Friday. Many European markets will be closed for both Good Friday and Easter Monday. Chinese markets will be shut by the time the Friday morning figures are released, and then shut again on Monday for the separate Qingming Festival otherwise known as Tomb-Sweeping day so they'll have to wait until Tuesday to react - much like Europe. Canada is closed on Friday but will react to nonfarm spillover effects on Monday.

Nonfarm landing on Good Friday actually has plenty of precedent and last happened in 2012. There were 10 times when the change in nonfarm payrolls was reported on Good Friday dating back to 1980 and what happened to 10 year Treasury yields from the close on the day before until the close of the following Monday to capture most of a market move through scattered global market closures. Ideally we would want the surprise to consensus but this is not available over the whole period. That said, there are times when soft payrolls coincide with significant rallies (like 1980) and times like 1994 and again in 1996 when the opposite happens. There is about a 75% directional correlation between nonfarm prints and movements in US 10 year yields on these days. Don't fully discount Good Friday distortions, in other words, but don't take them to the bank either. The Good Friday landing will mean that some markets may be advantaged over others and that any global market effects will be spread out over multiple days. Usually it doesn't matter much, but market participants with a few grey hairs - or fewer period - may recall that when nonfarm landed on Good Friday in 1994 the effects were rather calamitous over a few days. Recall that back then job growth smashed expectations by about 236,000 jobs above consensus and the final estimate for job growth in March 1994 came in at 465,000 which accelerated Fed Chairman Alan Greenspan's path toward 300bps of hikes. It would take a large surprise to again matter much to markets this time around as the Federal Reserve's dual mandate has been shifted toward inflation underperformance such that jobs really only seem to particularly matter right now if the trend sharply disappoints. 

Several other macro releases will be on tap including first, second and third tier reports like February's consumer spending and incomes plus pending home sales on Monday, S&P Case-Shiller home prices and consumer confidence on Tuesday, ISM manufacturing and ADP payrolls and vehicle sales on Wednesday, and international trade and factory orders for February on Thursday.

Federal Reserve communications will also be fairly intense including from the top of the house. Chair Yellen provides opening remarks at an economic mobility conference on Thursday, and Vice Chair Stanley Fishcher speaks on monetary policy and financial stability on Monday. Three voting regional Fed Presidents will speak (Lacker, Lockhart, and Williams) two alternate voters will also speak (Mester, George), and so will Kocherlakota who is nonvoting this year.

Europe - Reflation Coming?

Few obsessions rank as highly in economics these days as watching inflation figures. It often seems that the forward-looking conduct of monetary policy actions includes a great deal of time looking at the latest rear-view inflation assessment with some explicitly framing this in the context of data dependency that connotes a backward-looking policy bias. That's less so in the Eurozone these days by contrast to, say, the US and UK as the latter two countries' central banks ponder exit timing. Or the Bank of Japan where the possible persistence of inflation downsides beyond transitory matters may influence the debate over whether to apply additional stimulus. The ECB, however, is more likely treating inflation figures as stale compared to the 6-12+ month policy lags of expansionary monetary policy on inflation readings.

With that in mind, inflation figures from German states and the national add-up will combine with a few more state level inflation releases from countries like Italy and Spain to add-up to the Eurozone composite on Tuesday. Markets may be more focused upon near-term signals that inflation rates are lifting off a bottom while the ECB will remain focused upon hopes for reflationary evidence in future by way of a possible manifestation of policy success. It's highly possible that the euro area is back above 1% y/y headline CPI by the first quarter of next year while headline US CPI will climb back above 2% by then and ditto for Canada. This push toward global reflation is under-appreciated in the markets right now.

Gilts and pound sterling, meanwhile, will be watching Eurozone figures from a distance while being more focused upon two other factors. One will be limited data risk in the form of Q4 GDP revisions on Tuesday (none expected) and the manufacturing PMI on Wednesday that is expected to be flat in expansionary territory. Second will be the first UK Party Leaders election debate on Thursday after parliament dissolves on Monday March 30th ahead of the May 7th general election.

Less significant local market releases will include consumer spending figures out of France, Germany and Spain, as well as unemployment rates from Italy (12.6% in January) and Germany (6.5% in February).

Asia - Tough To Read Chinese PMIs

The key question for Asian markets next week will be whether the state's purchasing managers' index for the manufacturing sector will follow the already-released private PMI lower and thus signal possible further weakening in China's economy. Recall that the private PMI fell from 50.7 in February to 49.2 in March and thus slipped below the 50 dividing line between expansion (above) and contraction (below). Our desk's bias is that the data coming out of China is tough to read so far in 2015 due to the later-than-usual Lunar New Year holiday that may be distorting activity readings in ways that are not fully controlled by standard seasonal adjustment factors that are more weighted to the typically earlier arrival of the Spring Festival. This year's New Year and Spring Festival arrived on February 19th which was the latest since way back in 1996. Regardless of the print, we'll reserve judgement on underlying economic activity until we get cleaner data into Q2.

A challenge facing manufacturers has been funding pressures so far this year. As the accompanying chart depicts, Chinese interbank rates climbed significantly in February over January before falling back in March when the PBOC announced a debt swap. Indeed, Chinese interbank rates have been elevated since December compared to much of 2014 and this may help explain pressures on smaller firms. It may be that the effects of the debt swap will begin to stabilize PMI readings over the next couple of months which on top of the seasonal distortions noted above may mean that the data tone could improve over coming months.

A round of macro hits of primary consequence to regional markets will include Australian new home sales; CPI from Indonesia, South Korea and Thailand; exports from Malaysia, South Korea and Thailand; industrial production from Japan and South Korea; the Q1 Tankan manufacturing report from Japan along with industrial output and housing starts; and Hong Kong retail sales.