The Week Ahead - Whack-a-mole

US President Donald Trump has warned Iran that time is running out over nuclear talks saying that the next attack will be far worse. This follows the arrival of the USS Abram Lincoln aircraft carrier and other warships to the region. Hello and welcome to the week ahead on Nomura Podcasts. I'm your host Andrew Tysus from our global markets research team and today is Friday the 30th of January. Well the first month of the new year is now almost behind us and it has certainly started with a bang. Trump headlines have come thick and fast with markets now considering the situation with Iran as noted there by Anya Cooper's McKinnon from DW News. Just as one issue seems to die down another pops up a tricky whack-a-mole game as it were. And while the headlines from Trump continue politicians elsewhere and markets too are responding. In the short run the market is a voting machine that Benjamin Graham said many years ago and US dollar has moved lower and golden silver sharply higher. Not entirely a sell America theme with US equities holding up in US bond yields pretty steady too but some concern evident there nonetheless. So this week we'll chat with Jeremy Schwartz from Nomura's research team in New York. I want to ask him about that weaker US dollar as well as this week's FOMC meeting and payrolls data ahead. I should flex some risk by the way that a partial US government shutdown which would actually include the Bureau of Labor Statistics could delay release of that payrolls report. Now we've also seen the announcement this week of an historic India-Europe trade deal following an incredible 20 years of negotiation and perhaps pushed across the line by Trump himself. An unintended consequence. So Surnal Varma will be a long to talk about that and to talk matters monetary and fiscal in India with a budget and central bank policy meeting that coming up. But let's not forget Europe. We have central bank meetings to look out for there both from the Bank of England and the ECB with a stronger euro making things a little more interesting too. So I'll chat with Andres Japaniac from our London based research team to get the low down there. And finally on central banks I'll squeeze in a quick word at the end. We now have the Reserve Bank of Australia delivering a 25 basis point rate hike next week following stronger than forecast court inflation data this week. So I think that's worth a mention. A lot to get through so let's dive in. The dollar plunges to its lowest level in nearly four years after President Trump says he is not concerned about its decline. Okay, so let's kick things off in the US and we have Jeremy Schwartz senior economist from our New York based research team here with us. Hey Jeremy, welcome. I hope you're keeping warm over there. Yeah, it's great to be back. Okay, excellent. Hey, let's start with the US dollar. It's had a move lower this week as noted there by Jumana Bessicce from Bloomberg. But Mr. Trump seems very relaxed. So I wanted to ask what should take is the administration seeking a week of dollar and does that have any sort of impact on macro thinking? Yeah, so I mean we had some back and forth the administration with Trump seeming to talk down the dollar or at least sounding comfortable with a weaker dollar. Before Treasury Secretary Bessence reaffirmed the strong dollar policy, which has been a mainstay of the Treasury for many years now. But I think if you listen carefully to what Bessent was saying, he's really defining down the the strong dollar policy essentially saying we'll do what's good for growth in the US domestically. And over time that should work out the money will come in due time. I think that suggests that while the administration might stop short of actively seeking the week in the dollar, there's certainly comfortable with a little extra stimulus for domestic manufacturing, a little bit of easing and financial conditions. And really it's been a consistent theme for Trump for throughout both terms of his presidency that he's often spoken positively of the benefits of a weaker currency and sometimes complained about trade partners doing too much to devalue their currencies as if that were giving an unfair advantage. So, you know, we do think that they're going to try to stimulate the economy, however they can. We've seen that in attempts to pressure the Fed. We've seen that with fiscal stimulus and attempts to use financial conditions. And I think some tolerance of a weaker currency is really in a vein with that run at hot policy. Okay. That's really great, Jeremy. I think that's a great answer. Really good. Helpful to get you take on that. Hey, another highlight this week was the FOMC meeting. Of course, there were no particular fireworks, I guess, but could you give us a quick recap? What did you see there and watch your outlook for the Fed? Yeah, so as you mentioned, no fireworks on the big policy decision, a hold was widely expected to have been well telegraphed. You know, we saw the committee, I think, do the bare minimum to mark to markets based on some recent general positive data. So we've received, you know, there was some upgrade to the growth outlook, some upgrade to how they were assessing the labor markets. But I would say, our takeaway from this meeting is that Powell is still quite dovish, you know, he, he did say the labor day was getting better, but then he kind of went on to emphasize some, I'd say more niche or second tier indicators, which are continuing to show some signs of weakness. Things like the conference board labor differential or you six under employment. So they still seem to be very sensitive to any signs of cracks in the labor data. At the same time, he seems quite optimistic on inflation, saying that we're not for tariffs, you'd effectively be at the 2% target already saying you were getting a disinflation in every category of services prices. The characterization, which we would dispute and certainly isn't as clear as he made it out to be expressing a lot of optimism that inflation does cool through the year. So, you know, our call on the Fed remains unchanged. We think they're on hold through the remainder of Powell's term as chair through May. But that's largely a call based on the data. I think the reaction function is still quite dovish. It's still very sensitive to any kind of labor market weakness. At asymmetric risk there, where if you've got a downside surprise in the labor market, they'd be a lot quicker to react to that than if you've got a upside surprise on growth data or on inflation. Okay, got it. So I guess patient near term, but on the Davish side with that downside reaction, as you say. And look, finally, Jeremy, just turning to the week ahead, there's a number of data releases, but payrolls is probably the highlights. Could you share some quick thoughts with us on that one? Yeah, so, you know, we've seen lead indicators for the labor market broadly improving over the past couple of weeks, you know, initial and continuing jobless claims have trended lower. We've seen service sector surveys, generally showing better employment growth. So we're thinking that you do get some modest acceleration and headline payrolls up into the high double digit range. Something around 85 K overall, that would be the fastest pace since September of last year, and it would bring the three month average up to the highest since the first half of last year. So we do think fundamentally the labor market is stabilizing and beginning to pick up some momentum. We think the unemployment rate is a close call this month. We think there's a good chance that it ends up rounding down to to 4.3. It's on the cusp already, and even though some of the data on labor demand is a little bit soft, things like that labor differential. The slowdown in in jobless claims makes us think that the trend there should be lower, kind of over the near to medium term. We think wage growth stays solid at 0.3, which is really consistent with the past 12 month trend. We haven't seen wage growth really going anywhere. It's running at a pace that's a little bit higher than the Fed should be comfortable with. And then just a flag, there are a couple of technical adjustments that are going to be happening in this report. Most importantly, this will be the final announcement for the annual benchmark revision for last year. We expect that's going to bring the average run rate for NFP through March of 2025 down by around 75 K per month. So that was well telegraphed by the announcement in September of their preliminary estimate for the benchmark revision, but in this report is actually going to finally be incorporated into the data. Okay, Jeremy, that's great. Thanks so much. Hope you have a great week ahead. Yeah, you as well. Now let's move to Asia, and I'm joined here by San Olvama, namoris chief economist for India and AEJ. San Ol, thanks for making the time. Thanks a lot, Andrew. Excellent. I thought we'd start with this historic India EU trade deal. I believe Ursula of underlie and called this the mother of all deals. I'm not caught my attention, but can you sketch out some contours of this deal for us? Yeah, so actually this deal has been two decades in the making and finally cleansed as I think both India and EU are clearly trying to diversify the export partners and hedge against the US. Now the ratification actually of this deal will take up to one year. So we're looking at implementation timeline of roughly 2027. But the deal yet involves substantially lower tariffs by both sides on the goods. It also includes opening up services sector. There's a defense partnership that has been signed from India's perspective. Actually, it opens a wide market for its labor intensive exports. So it allows actually India to integrate into the EU centric global supply chains. And from EU's perspective, it provides them access to a large and growing market in India. So lower auto tariffs will actually benefit the European firms. So we've made some estimate on this for India. We think the deal can add about 0.1 percentage points to India's GDP growth in year one with this boost potentially increasing to 0.2 to 0.3 percentage points by the fourth year. From EU's perspective, our European teams estimators, it can raise the level of EU GDP by about 0.1 percentage points. So yeah, it is the mother of all deals. Hey, that's great. Yeah, it looks like a nice win-win gains from trade. Hey, I'm sticking with India. There seems like there is a lot going on, monetary and fiscal. You've got an RBI policy meeting coming up in the budget soon too. Could you share some quick thoughts on those? Yeah, so the fiscal will be in focus first. We have the budget this Sunday. That's first of February and RBI policy is later during the week. So on the budget, actually, this is the first year where we move from deficit to debt targeting. And we think the government will show a lower central government debt target of 55 percent of GDP from 56 percent this year. And also some fiscal consolidation. So a target fiscal deficit of 4.2 percent of GDP from 4.4 percent. Now, there are many things to watch in the budget, depending on who the investor is. So from bond markets perspective, the focus will be on gross market borrowings, which we think will be on the higher side. Equity investors will focus on the sectoral focus areas. So we think, for instance, capital expenditure of the government that will be maintained at 3.2 percent of GDP. And there will be other focus areas. So focus on boosting manufacturing through an expansion of what is called the production intent center scheme larger capital outplace for defense for the push on critical minerals supply chain resilience. And also we're looking for rationalization of custom duty slabs. And finally, I think we could get some announcements on reforms around either ease of doing business regulatory reform. And so on the whole, we think the budget will show will show a gradual fiscal consolidation. And in general, it will be more medium term focused and stability focus. So that's the budget. And then during the week, yes, we do have the RBI where we and consensus are looking for the policy reparate to be on hold. We think it's going to be a damage to a neutral hold with the RBI's focus essentially showing inflation at target and growth closer to potential over the one year horizon. I would say actually more than the policy decision is the other stuff, which is going to be important. So, you know, our focus will be on what kind of durable liquidity injection measures the RBI announces because policy transmission has been a major issue. So we are expecting durable liquidity injection worth about one and a half trillion INR to be announced through a variety of instruments, such as through open market operations, i.e. government bond buying and also through long dated rep or operations. The other thing will be focused on is the RBI's communication on effects because, you know, INR has been under deprecation pressure. So whether the RBI is happy with that or they think we're already at fair value. So I think any comments around that would actually be quite interesting. Okay. Good one. Thank you. You covered a lot of ground there. I guess there is a lot of going on. And the FX is a bit of a theme this week for us as well. So great to get your thoughts on that one. And so I'm going to look just finally stepping back a little bit from India looking across the broad Asia region. I guess there's a few things on the calendar we could chat about. But one that caught my eye is inflation data. There's a number of releases across a number of countries. So I did want to ask, are there any themes there or any particular countries which look interesting to you? I mean, broadly speaking, I think there's actually a lot of data that's coming out, but one thing is we need to be careful on Jan data interpretation. Because we're getting into this Jan Feb period where you have data distortion because of the lunar new year effect. So it basically falls entirely in February this year, but it fell across Jan and Feb last year. So there is a change in the working days. So essentially our estimate is that the Jan readings of CPI inflation for many countries will be biased down. Whereas activity data like exports and industrial production will be biased up in Jan. It's going to be the reverse in February. So with that in mind, the Jan CPI numbers that we will be getting next week for a number of countries. We think we'll show a moderation and of course the underlying trend has anywhere been benign, but the lunar new effects will exaggerate the numbers on the downside. So that's one thing to keep in mind. I think one of the standouts in the region, we think will be Thailand where deflation we think is going to deepen. So we're expecting CPI to go from minus 0.32 minus 0.8% on a year of your basis. And the boost to exports should also be visible in couriers, Jan export numbers. So that we think will be up almost 35% on a year of your basis. So that's massive. So couriers, of course, benefiting from the chip up cycle, but again the higher working days will also exaggerate that boost. So that's that I would say Indonesia is also in focus. We saw some huge market moves this week on the macro front, you know, unlike the countries, most other countries in Asia, we actually think CPI inflation will pick up in Indonesia next week. So we're looking for headline pick up from 2.9 to 3.6% it's more technical in nature. So it's essentially reflecting the fading of the electricity tariff discount from last year. And we'll also be getting the fourth quarter GDP numbers in Indo expecting a slight improvement to 5.1% from 5% mainly because of government spending. And the final thing to watch actually will be we have the general elections in Thailand next Sunday. So that's 8th of February. So polls currently show the opposition people's party in the lead. But we think that, you know, it'll be unable to form the next government. So we see political uncertainty actually weighing on growth in Thailand. Wow. So that's great. So much going across the region, but you're obviously across it. Hey, thanks so much for coming on the podcast. Now let's turn to Europe. I'm joined here by Andres, Japan, from Nomura's London research team. Hey, Andres, thanks for joining. Hey, Andrew, good as always to chat with you. Excellent. Thank you. Look, I thought we'd start with currency. I've been noting the weaker US dollar, but stronger euros, the flip side of that or one flip side of that, I guess. And we've just touched 120. What does the stronger euro mean for Europe? I mean, obviously a stronger euro versus the dollar is certainly important in the euro air for inflation perspective. It certainly adds to the sort of disinflation of crashes we could see. Recall you had euro dollar appreciation during the first half of 25. We sort of still seeing that feed through into co goods prices. I mean, this sort of 120 level you mentioned. I think it's quite important in investors minds because windows, so the current vice president of the ECB, he actually mentioned this as a level at central loss July, July 25 and he said essentially 117 120. They're sort of challenging, but acceptable anything beyond 120 and that could make things tricky for the ECB from that perspective. And likewise, earlier in the week, we all said, cocker, the Austrian central bank governor who spoke about the fact that essentially if the euro dollar keeps on rising, it might forced ECB's hand. Obviously, they don't target the exchange rate. Lagarde has made that clear time and time again, but a meaningfully stronger euro dollar could obviously result in a quite hefty downside of price and inflation over their forecast horizon. And that's what could induce them to potentially cut rates further if you're sort of thinking down that some framework. It is worth noting we did actually launch in the investor survey and we asked essentially the question at what level of euro dollar do you think the ECB would consider cutting interest rates again about 28% of respondents said 125. So we're a fair bit away from that given the fact that it seems to be capped at 120 to the moment, at least our effects strategist, the baseline forecast is 120. And then 23% said 130 is the level the ECB would really have to concern about that said, obviously, it's not just the effects that's moving you do as well have the rally and oil prices that we've been seeing. And it's worth noting actually from the ECB perspective, at least looking at their rules rules of thumb, I mean, it almost feels sort of all classic economist thing, but so on the exchange rate, they say a 10% appreciation in the euro will lower headline HICP inflation by around 0.4% within a year. So basically a 10% has a 0.4% for impact inflation. And then in terms of oil, they estimate a 10% change in the oil prices leads to 0.4% for impacts on headline HICP inflation directly through energy components and then an approximate point to in the two to three years afterwards on call goods prices. But so just taking a sort of headline figures, it does seem that the recent moves in oil and effects, certainly when you compare to the baseline expectations in the ECB's December forecast net each other out. Okay, so that is interesting. So yeah, we are looking at substantial swings in currencies and in commodities. And yeah, with that ECB meeting next week, this will be interesting to see what they, what they make of all of this. But just to square this off, we Andre Kinney confirmed we're looking for no change from the ECB and in terms of the communication to think it will be like rubbish or hawkish. Look in terms of the ECB you're very right with forecasting no change in policy whatsoever. We actually have essentially no change in policy penciled in this year and next year. In some sense that the ECB should touch would be pretty boring. It's not a forecast meeting, but clearly you're going to get a lot of questions from the journalists in the press conference about the euro dollar about news and oil. And we think like all we very clear that the ECB does not target exchange rates and obviously in terms of oil, it'll impact their March forecast, but you'll clearly say we have to wait for those to occur. Look in terms of guidance, they can sort of emphasize the independence, they can sort of maintain their meeting by meeting approach. I mean, if you could say the ECB speaks since this and the meeting almost every single governing council member has basically said that the ECB is in a good place, rates can remain on hold. And actually, even one of the, I said, Lane, it was one of his chief economists, he said the other day, the current rate level delivers a baseline for the next several years. Obviously you can't forecast a shock, but if basically you have growth at trend or pre-pandemic trend rates, if you have inflation hovering around the ECB's 2% target and that's your forecast for the end of the forecast arise in the ECB case until end of 2028. And there's no reason to change policy in their view, at least over those three years. Yeah, okay, growth at trend inflation at target, it sounds pretty nice for a central bank, but I guess there's a few extra things to look out for there as you noted. Hey, Andre, finally, last question. Let's just jump across the channel. Bank of England is also out next week. What are they going to say? Look, in terms of the bank of England with forecasting, no change in policy, so generally speaking, expecting a 72, so seven in favor unchanged, twin in favor of the rate cuts. That's also is a forecast meeting, so they'll be watching that fairly closely. But generally speaking, the bank of England's perspective, our view is the next time they're going to cut rates, and we think we do pencil one further cut, that's April. So basically, they'll remain on hold until the April meeting and bring bank rate down to 3.5%, the sort of upper end of where we sort of see neutral in the UK, at least. Okay, so that is pretty interesting, real diversion. So I guess going on, we've still got the ECB on hold, but bank of England to cut and a couple of cuts from the Fed too, while others precious clearly upwards. I guess it keeps things interesting for us. Hey, Andre, let's leave it there. Thanks so much. Andre, good as always. Talk to you soon. And finally, just a quick word on Australia with the RBA's policy meeting next week. This week down here, we saw core inflation print above its expectations, and this follows stronger than forecast GDP and an unemployment rate, which is lower than the RBA had been expecting. We think that CPI data is going to tip them across the line, such that they will now feel compelled to deliver a 25 basis point rate hike next week. This flow of data, I think, will add to its concerns that policy is not as restrictive as it had earlier thought. But I don't expect this to come across as a hawkish hike, and we don't think it will give a lot of forward guidance, suggesting that more hikes are likely. More recent Australian data seems to have turned a bit more mixed, and I think this hike will come as an unwelcome surprise for consumers following a couple of rate cuts last year, which had left them hoping for more. RBA's updated forecast, too, while reflecting a stronger starting point, will also reflect a higher exchange rate and a much higher market path for the cash rate, and first principles would tell you that that should pull down their longer term growth and inflation forecasts as well. Okay, so there you have it. Our views on major market themes and what to look out for next week. This podcast has been written by Andrew Tyses, and the Global Markets Research Team, and expertly edited and produced as always by John Dalton. Thank you for listening in. If you did enjoy this podcast, or would like to hear more, please like and subscribe to Numerous Podcasts on Apple Spotify and SoundCloud, or wherever you get your podcasts. If you have a moment, please leave us a review, and as we always say, it would make our day if you could press a few buttons and share this podcast with a colleague or a friend. For more, log into NumerousConnect.com to keep up to date and to keep on listening. 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