ECB to consider tapering further in late Q3 or early Q4 - BBH

Analyst at Brown Brother Harriman noted, "We suspect that the economies and prices will evolve to allow the ECB to consider tapering further in late Q3 or early Q4. The eurozone also reports its first estimate of Q4 GDP.  The data suggests growth of 0.4%-0.5%, which would keep the four quarter pace steady in the 1.8%-1.9% range that has been sustained since the middle of 2015. Growth is not spectacular, but it is solid and above what economists estimate to be the trend pace. The PMIs suggest the momentum has been sustained into early 2017. Unemployment is stubbornly easing in Greece, Italy, and Spain, but in the aggregate, the unemployment area in EMU is expected to have remained at 9.8% in December for the third consecutive month." 

Key Quotes

"The EUR/USD pair was bid to $1.0740 initially in thin Asian turnover and had fallen back to $1.0690 before the European session began in earnest. The intraday technicals suggest the first move in North America may be higher. Re4call that last week, the euro was blocked several times in the $1.0770 and recorded the lows for the week just below $1.0660 last Thursday and Friday."

"Headline eurozone inflation is rising.  It rose 1.1% year-over-year in December after a 0.6% pace in November. The first estimate for January is expected to be 1.4%-15%.  The ECB target is near but below 2%, but Draghi has been emphasizing the core rate, which is expected to remain unchanged at a subdued 0.9% pace. It bottomed at 0.6%. He is opposed to reconsidering the decision made last month to extend the asset purchases through the end of this year but at a 60 bln euro a month pace rather than the current 80 bln that runs through March, based on the recovery in oil prices." 

"We have made the point before, and it is worth making again: In lieu of offsetting stimulus policies by Germany, or the structural reforms that Draghi repeatedly demands, German inflation running a bit above the periphery is helpful in boosting the competitiveness of the periphery. That said, ideas that an Italian election could be held in June, now that the Court ruling leaves both chambers with a proportional representation system, suggests Italian bonds will continue to underperform."

"EM FX was mixed last week and that continues into this week, though some markets remain closed today for the Lunar New Year holiday.  MXN, BRL, and ZAR were the best performers last week, while TRY, HUF, and RON were the worst. MXN continues to gain despite signs that Trump will maintain a bellicose stance towards Mexico, but we think the peso remains vulnerable to further selling."  

Big Data and Event Filled Week!

"Although the Lunar New Year holiday runs through the week, China will report the manufacturing and the non-manufacturing PMI, and Caixin will report its manufacturing PMI. The manufacturing surveys are expected to soften slightly (0.1-0.2 points) with little significance. Both are expanding, with readings between 51-52. The non-manufacturing PMI rose 54.5 in December, which was the second best reading (after November 54.7) in a couple of years. Officials in Beijing are likely watching the new US Administration closely, perhaps through the prism of the Chinese saying about killing a chicken to scare the monkeys."  

"The onshore yuan has appreciated by almost 1.0% this month, and the onshore yuan has risen by 1.5%. Since the squeeze that appears to have been engineered by the PBOC at the start of January, the offshore yuan is trading at a premium to the onshore yuan, suggesting speculative pull has been neutralized, at least for the time being. The evolution of the relationship in a stronger US dollar environment may be an important test."

"Several EM countries were either downgraded or had their outlooks cut last week, including Turkey, Nigeria, and Chile. S&P affirmed China’s AA- rating but maintained a negative outlook due to rising financial risks. Our quarterly EM and Frontier Sovereign ratings models warn of a continued bias towards downgrades this year."  

The dollar is floppy, at least against the euro