Janet Yellen, chairwoman of the Federal Reserve, will give her first testimony to Congress this week
Two central bankers will dominate market thinking this week, with “forward guidance” in both the US and UK under review.
Janet Yellen, new chairwoman of the US Federal Reserve, gives her first testimony to Congress this week – to the House of Representatives on Tuesday and to the Senate on Thursday – while on Wednesday Bank of England governor Mark Carney will present the BoE’s latest quarterly Inflation Report.
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Markets had been assuming that the Fed’s tapering of stimulus was on “autopilot” this year – a reduction of asset purchases by $10bn per month, eventually ceasing altogether by the final quarter of the year.
However, after last Friday’s US labour market report showed slow employment growth in both December and January, Ms Yellen will have to field questions on the strength of the US recovery, and will be quizzed on what economic indicators – if any – might replace the unemployment rate in the Fed’s forward guidance, as the rate came in at 6.6 per cent in January, only just above the 6.5 per cent threshold.
In the UK the Inflation Report will show a significant change in the forecast for unemployment. In August, the BoE’s Monetary Policy Committee stated that interest rates would not rise, assuming inflation remained under control, until the unemployment rate reached 7 per cent. At the time the rate stood at 7.7 per cent and was not expected to approach the threshold until 2016, but the fall has been much faster than anticipated and the rate has possibly already passed the threshold, standing at 7.1 per cent in the three months ending in November.
The BoE could lower the threshold, perhaps to 6.5 per cent, switch to other measures, perhaps wages growth, or simply reiterate and emphasise that a rise in rates is some way off, particularly as the outlook for inflation remains benign. The BoE may also raise its forecast for economic growth this year.
The main data highlight of the week will be initial estimates of gross domestic product in the eurozone for the final quarter of last year, out on Friday. Some acceleration is expected, with Germany maintaining expansion of around 0.3 per cent and France resuming growth after a decline in the third quarter. With growth also forecast in Italy and Spain, this could be the first time that the big four eurozone economies all expanded in the same quarter since early 2011.
Eurozone industrial production figures for December are released on Wednesday, with lower growth anticipated after a surprisingly strong November figure which was largely driven by Germany. French production growth, out on Monday, is expected to show a significant slowdown.
In China, monthly trade data for January are out on Wednesday. Analysts expect a fall in the growth of imports compared with the December level, to be outweighed by an even sharper fall in export growth, giving a smaller trade surplus for the month. Chinese consumer price inflation, due on Friday should show annual inflation of 2.4 per cent, down from 2.5 per cent in December.
Two US releases during the week may be of interest – retail sales figures for January, published on Thursday, are expected to show flat or declining sales during the month, with bad weather keeping shoppers at home, while January industrial production data, out on Friday, are likely to show a slowdown, following the fall in the ISM manufacturing index last month.
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