Wednesday, 08 March 2017

UK Budget, ADP Report, China Inflation

The main event today is the UK 2017/18 budget. It’s likely to be a bit less dramatic than previous episodes. Last fall’s Autumn Statement was an opportunity for the new Chancellor, Philip Hammond, to show his stance on fiscal policy and he used it to establish some new rules for borrowing and welfare spending. Now with borrowing now under control and the economy holding up well, there is no pressure on the Chancellor to make any major changes in either his rules or his fiscal stance.

The Budget will have new economic forecasts from the Office for Budget Responsibility (OBR) that may include an upgrade to the growth forecast and therefore a drop in the borrowing forecast. That should give Hammond a little extra money to play with. He’s likely to spend some of it and use the rest to increase his “rainy day” reserve fund for possible use if Brexit causes some economic disruption.

The upward revision to the forecasts and the optimistic tone that the Chancellor is likely to take might cause some people to close out their short sterling positions, sending the pound higher for the time being.

Aside from that, German industrial production will probably be out by the time you read this. It’s forecast to bounce back after on a mom basis after December’s plunge but be only slightly improved on a yoy basis. Still, the better performance could help EUR a touch.

Swiss CPI is forecast to rise further. That might help CHF to gain modestly, although I doubt if anyone expects the SNB to change rates before the ECB moves.

Then when the US day opens, we will get the much-awaited ADP employment report. This is the precursor to Friday’s nonfarm payrolls. As I point out every month, it’s not a great predictor of the NFP but it’s one of the best we have, or at least it’s the simplest to understand (the composite ISM employment component is probably a better indicator, but that requires some calculations.)

The market “consensus” forecast for the ADP is a robust 189k, more or less in line with the 6m average (183k). Remember that it was last August, seven months ago, that FOMC Chair Yellen said increases in payrolls of 180k a month were “unsustainable,” yet here we are! Moreover, the “whisper” forecast compiled from all Bloomberg subscribers who care to vote is an even higher 230k. That suggests the barrier for an upside surprise that would lift the dollar is rather high. Given that the market is braced for an upside surprise (if that makes sense), we could see some disappointment if the figure only comes in as expected.

The weekly US oil inventories are forecast to show yet another rise in inventories, albeit a relatively small one by recent standards. The oil market is swaying between hopes of OPEC cuts and fears of higher US inventories. Given expectations for today’s figure, the market may swing towards fear if inventories rise further and prices fall.

Finally, China announces its inflation data for February (CPI & PPI) Consumer prices are forecast to have fallen, but producer prices continued to skyrocket. The CPI may not be of that much concern, since it was no doubt greatly influenced by the timing of the Lunar New Year (mostly in January this year, mostly in February last year). However the sharply higher PPI is likely to raise fears of further inflation down the line. That could be USD-positive as the Fed is for now the only central bank reacting to higher inflation.


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