Introduction

Vaccination delays in Europe and the US together with a deadlier UK strain and new cases in China offer the backdrop for what are still rough to uneven performances from most of the major economies. Yet expectations that the worst may be passing, together with extremely aggressive monetary and fiscal stimulus, are giving a major lift to business optimism. We start the rundown with striking weakness which, however, isn't exactly the week's theme.

The Global Economy

Purchasing managers indexes

January's flash PMI for the UK service sector offers new evidence of the substantial damage being inflected by virus restrictions. At 38.8, down more than 10 points from December, the flash PMI was well below consensus and signals the steepest decline in business activity since May. Demand for services is down sharply with the leisure, travel and hospitality subsector hit badly once again. Manufacturing is also reporting trouble, not contraction but a nearly 5-point slowing in growth to 52.9. Export orders for goods are down markedly following a late 2020 surge when firms sought to beat the Brexit deadline. Yet in complete contrast to current conditions, outlooks continue to rise with service sector optimism ‒ due to the vaccine rollout ‒ at a 7-year high!

Though not as dramatically as the UK, France's services sample is also reporting weakness. January's flash PMI dropped nearly 3 points to a lower-than-expected 46.5, reflecting declining sales including for exports. Exports for manufacturers are also falling this month though this PMI edged 4 tenths higher to 51.5 which underscores January's upbeat undercurrent. Hiring in services rose for the first time in nearly a year, offering tangible confirmation of vaccine optimism among employers. One theme common across all business surveys is climbing costs, the result of supply-chain disruptions tied to shortages, bottlenecks, and rising demand. Pass through, however, has been uneven, with some surveys reporting increases in selling prices but not January's French samples which, in an effort to retain clients, cut their prices for a fifth month in a row.

Activity so far this month among German businesses is largely unchanged from December: moderate contraction for service providers in contrast to strong growth for manufacturers. Services posted a 46.8 for this month's flash, down more than a point from December and reflecting what continues to be a sustained downturn in orders. But the weakness, like that for French service providers, is no longer holding down employment as the German sample added workers at the fastest pace of the pandemic. The best news from the manufacturing sample, where the headline came in at 57.0, comes from exports which are being driven by strong demand from both the US and China. And German sentiment is strong with manufacturing optimism the highest in nine years of available data.

International trade

Japan, like Germany, is traditionally a top exporter though global trade frictions followed by Covid have made for tough going in recent years. The news from December, however, was very positive as exports posted a 2.0 percent year-over-year rise for their best showing in nearly two years. The rate of growth is modest but the direction, as evident in the red line of the graph, is encouraging. December's improvement was broad-based across major trading partners: a solid rebound in exports to Hong Kong, stronger growth to China and Korea, and smaller declines to the US, the European Union, Taiwan, and South East Asia. Imports, in contrast, were down 11.6 percent with weakness once again centered in petroleum. Falling imports and rising exports are a good mix for the trade balance which in December posted a ¥751.0 billion surplus, more than double November's ¥366.8 billion.

Inflation, deflation

Unlike exports, inflation in Japan is not going in the right direction, to say the least. Headline consumer prices declined 1.2 percent on the year in December after falling 0.9 percent in November. Food prices were down 0.8 percent while the annual increase in housing costs was unchanged at a marginal 0.1 percent. Underlying price pressures also weakened in November. Core CPI, which excludes fresh food, fell 1.0 percent on the year in December, down from a decline of 0.9 percent in November. The Bank of Japan's preferred measure of underlying inflation, CPI excluding fresh food and energy prices, fell 0.4 percent in December after dropping 0.3 percent in November. BoJ officials met during the week and reaffirmed their commitment to maintain accommodative monetary policy until inflation is above their 2.0 percent target. December's data indicate that this outcome remains a distant prospect.

Supply and demand

The BoJ isn't the only central bank wondering about its targets in a global environment that's been, as it has for the last dozen years, more deflationary than inflationary. Prices in China have also been ebbing, though recent data have been hard to read given falling pork prices and related distortions. Less hard to read were the week's mostly favorable data from China headlined by 6.5 percent fourth-quarter growth that puts GDP back at its pre-pandemic rate. Industrial production, benefiting from strong exports, continues to lead the way, rising at a 7.3 percent annual pace that's a little stronger than it was before the pandemic. Retail sales, in contrast, are still lagging, slowing 4 tenths in December to 4.6 percent growth versus pre-virus showings of 8.0 percent. A stronger Chinese consumer, and hopefully with that rising demand for foreign exports, would be a welcome benefit for China's trading partners.

Housing

The strongest data anywhere in the global economy continue to come from US housing. Starts and permits positively crushed expectations in December, jumping 5.8 percent for the former to a 1.669 million annual rate and 4.5 percent for the latter to 1.709 million. The graph tracks 3-month averages for housing's single-family core, at a 1.237 million rate for starts and 1.164 million for permits. These rates are up 20.9 percent and 20.0 percent respectively relative to the pre-pandemic month of February, gains fed by Federal Reserve interest-rate policy (historically low) and direct buying of mortgage-backed securities (historically high). Other housing data in the week included the housing market index from US home builders whose optimism is sky high and also sales of existing homes where annual sales of 6.760 million, showing 17.4 percent growth from February, likewise crushed expectations. Next week's calendar will include new home sales in the US for the month of December, a report that in November showed pandemic growth of 23.9 percent.

Fiscal stimulus

Like house prices, another set of economic data that's going straight up is government debt.  UK finances were again deep in the red in December, though only slightly worse than expectations. Overall public sector net borrowing weighed in at £33.38 billion, more than six times the £5.16 billion recorded a year ago. Excluding public sector banks as tracked in the graph, the shortfall was a slightly bigger £34.11 billion; this follows £26.15 billion in November and was £28.22 billion larger than December 2019. This is the highest underlying December outturn ever and also the third largest in any month since monthly records began in 1993. Highlighting virus effects, central government tax and national insurance receipts in the nine months to December fell 7.8 percent compared with the same period in 2019, while government support for individuals and businesses prompted a 30.7 percent surge in central government spending. Underlying borrowing in the first nine months of the financial year climbed by £333.5 billion to £2.132 trillion, which is equal to 99.4 percent of GDP for the highest debt-to-GDP ratio since 1962. The December report comes amid sudden talk of direct payouts to those testing positive for Covid; huge borrowing figures will be the norm until a sustainable recovery is in place.

Markets: Shanghai losing ground

A widening shift in investment flows away from China in favor of Asian markets continues to unfold. Chinese markets reacted negatively early in the week to reports that China would impose retaliatory sanctions against US officials and US defense contractors who engage in trade with Taiwan. Also not helping China is a Covid resurgence that's triggering new shutdowns on the mainland. Hong Kong's Hang Seng rallied 3.1 percent on the week and 2.7 percent on Tuesday alone amid reports of heavy outflows from China centered in the financial and technology sectors, especially semiconductors. Benefiting all markets were comments from incoming US Treasury Secretary Janet Yellen who's urging US lawmakers to go "big" on new fiscal stimulus. Markets also reacted positively to a raft of pandemic containment orders from President Biden who took office on Wednesday.

The bottom line

However uneven activity is, expectations for the global economy are very upbeat, reflecting vaccination hopes and underpinned of course by very aggressive monetary and fiscal stimulus. Econoday's consensus divergence index (ECDI) for the US, largely reflecting the strength of housing, ended the week at plus 29, indicating that recent data on net have been beating expectations by a solid margin. German data, whether outright or against expectations, have also been solid with the ECDI at plus 21. Not doing well against expectations, however, have been the recent of spate of French data, where the score is minus 21, and especially UK data at minus 29 and hit badly by the January PMI scores.

**Contributing to this article were Jeremy Hawkins in London, Brian Jackson in Sydney, and Mace News in New York

Week of January 25 to January 29 (all days local)

The Federal Reserve announcement on Wednesday will anchor the week, specifically Jerome Powell's press conference and his reaction to both this month's rise in long-term interest rates and the deteriorating conditions in the US jobs market. Thursday's initial claims data, after two successive weeks in the 900,000 zone, will update the very latest conditions in US employment. German unemployment data, which have been remarkably stable during the pandemic, will be posted on Friday while the labour market report from the UK will be one of Tuesday's highlights as will US consumer confidence. Confidence reports will also include two from Germany: Ifo data from manufacturers on Monday and consumer data from GfK on Wednesday. Inflation data have been mixed though some indicators have been showing pressure; the week's data for this category include quarterly consumer prices from Australia on Wednesday, January's CPI flash from Germany on Thursday, and fourth-quarter employment costs in the US on Friday. Fourth-quarter GDP reports are backward looking of course but important nevertheless, especially for policy makers who have to gauge whether additional stimulus needs to be added. GDP from the US will be posted on Thursday with French and German GDP on Friday as well as November GDP from Canada also on Friday. Japan will update its own supply and demand status with retail sales on Thursday and industrial production on Friday; both are expected to be down. Other market-moving news include US durable goods orders on Wednesday and the latest on capital goods demand, which has been a US strength, as well as US goods trade on Thursday where deep deficits, especially with China, have been a prominent US weakness.

German Ifo Business Climate Indicator for January (Mon 09:00 GMT; Mon 10:00 CET; Mon 04:00 EST)

Consensus Forecast: 91.8

The business climate indicator, which tracks German manufacturers, is expected to fall to 91.8 in January versus December's 92.1 which was better than expected but still short of October's 92.5.

UK Labour Market Report (Tue 07:00 GMT; Tue 02:00 EST)

Consensus Forecast, Claimant Count Unemployment Rate for November: 7.6%

Consensus Forecast, ILO Unemployment Rate for October: 5.1%

Following mixed to negative results in the prior report, the claimant count unemployment rate for November is expected to rise 2 tenths to 7.6 percent. The ILO unemployment rate, in data for the three months to October, is also expected to rise 2 tenths to 5.1 percent.

US Consumer Confidence Index for January (Tue 15:00 GMT; Tue 10:00 EST)

Consensus Forecast: 88.5

Expectations for the consumer confidence index, a report that will track the turbulent month of January, call for little change at 88.5 versus December's 88.6.

Australian Fourth-Quarter CPI (Tue 23:30 GMT; Wed 11:30 AEDT; Tue 19:30 EST)

Consensus Forecast, Quarter-over-Quarter: 0.7%

Consensus Forecast, Year-over-Year: 0.7%

At 1.6 percent, the quarter-over-quarter gain in the third quarter was the sharpest in 14 years. Consensus for the fourth quarter is a quarterly increase of 0.7 percent for a year-over-year gain of also 0.7 percent which would match that of the third quarter.

Germany: GfK Consumer Climate for February (Wed 07:00 GMT; Wed 08:00 CET; Wed 02:00 EST)

Consensus Forecast: -7.8

GfK's survey has missed expectations the last three reports, falling 5 tenths to minus 7.3 in January. The consensus for February is minus 7.8.

US Durable Goods Orders for December (Wed 13:30 GMT; Wed 08:30 EST)

Consensus Forecast: Month over Month: 1.0%

Consensus Forecast: Ex-Transportation - M/M: 0.5%

Consensus Forecast: Core Capital Goods Orders - M/M: 0.4%

Durable goods orders are expected to hold steady and strong in December at a 1.0 percent increase to match November's gain (revised from an initial 0.9 percent gain). Core capital goods have been solid, at a 0.5 percent gain in November with December seen at a useful plus 0.4 percent.

US Federal Reserve Announcement (Wed 19:00 GMT; Wed 14:00 EST)

Consensus Forecast, Change: 0 basis points

Consensus Forecast, Policy Range: 0.0% to 0.25%

With rates at the lower bound and negative rates ruled out, the Federal Reserve isn't expected to change the target for its federal funds policy rate centered at 0.125 percent between a zero and 0.25 percent corridor. And though the Fed is already committed to aggressive quantitative easing ($120 billion per month), increasing weakness in the labor market together with a steepening yield curve may raise the topic of changes to QE at Jerome Powell's press conference.

Japanese Retail Sales for December (Thu 00:50 GMT: Thu 08:50 JST; Wed 19:50 EST)

Consensus Forecast, Year over Year: -0.4%

Retail sales have been struggling, rising a year-over-year 0.7 percent in November which, however, was down from 6.4 percent in October. December's consensus is minus 0.4 percent.

German CPI Flash for January (Thu 13:00 GMT; Thu 14:00 CET; Thu 08:00 EST)

Consensus Forecast, Month over Month: 0.5%

Consensus Forecast, Year over Year: 0.7%

With a prior cut in value-added taxes reversed during the month, January headline inflation is expected to rise to an annual 0.7 percent versus minus 0.3 percent in December. The monthly change is seen at plus 0.5 percent.

US GDP: Fourth Quarter, First Estimate, Q/Q Annual Rate (Thu 12:30 GMT; Thu 08:30 EST)

Consensus Forecast: 4.2%

US Real Personal Consumption Expenditures

Consensus Forecast: 3.2%

In a skewed comparison with the recovery of the prior quarter, GDP in the fourth quarter is expected to slow to 4.2 annual growth versus 33.4 percent expansion in the third quarter. Personal consumption expenditures are expected to rise 3.2 percent versus the third quarter's 41.0 percent spike.

US International Trade in Goods (Advance) for December (Thu 13:30 GMT; Thu 08:30 EST)

Consensus Forecast, Balance: -$83.8 billion

The US goods deficit (Census basis) is expected to narrow to $83.8 billion in December versus $85.5 billion in November (revised from $84.8 billion). Goods imports rose sharply in November and were up 8.4 percent from the pre-pandemic month of February; goods exports also rose but were still 7.4 percent below February.

US Initial Jobless Claims for the January 23 week (Thu 13:30 GMT; Thu 08:30 EST)

Consensus Forecast: 875,000

Jobless claims for the January 23 week are expected to come in at 875,000 versus 900,000 in the January 16 week. US claims data have been alarmingly elevated so far this year.

US New Home Sales for December (Thu 14:00 GMT; Thu 10:00 EST)

Consensus Forecast, Annual Rate: 869,000

After November's unexpectedly low annual rate of 841,000, that followed, however, a surge in prior months, new home sales in December are expected to rise to an 869,000 million rate.

Japanese Industrial Production for December (Fri 00:50 GMT; Fri 08:50 JST; Thu 19:50 EST)

Consensus Forecast, Month over Month: -1.5%

A 1.5 percent monthly decrease is expected for industrial production in December which in November, against expectations for a sizable gain, came in unchanged. Year-over-year this index in November was down 3.4 percent.

French GDP Fourth-Quarter Flash (Fri 06:30 GMT; Fri 07:30 CET; Fri 01:30 EST)

Consensus Forecast, Quarter over Quarter: -3.9%

Fourth-quarter GDP in France is expected to fall a quarterly 3.9 percent versus the third quarter's sharp rebound of 18.7 percent (revised from 18.2 percent).

KOF Swiss Leading Indicator for January (Fri 08:00 GMT; Fri 09:00 CET; Fri 03:00 EST)

Consensus Forecast: 101.5

Leading indicators have been well above the 100 long-run average, at a higher-than-expected 104.3 in December but with a drop to 101.5 the consensus for January.

German Unemployment Rate for December (Fri 08:55 GMT; Fri 09:55 CET; Fri 03:55 EST)

Consensus Forecast: 6.1%

Germany's unemployment rate has remained impressively low during the pandemic, rising barely over a percentage point from early in the year and holding at 6.1 percent in the last report for December. For January the expectation is another 6.1 percent.

German GDP Fourth-Quarter Flash (Fri  07:00 GMT;  Fri 08:00 CET;  Fri 02:00 EST)

Consensus Forecast, Quarter over Quarter: 0%

Consensus Forecast, Year over Year: -4.0%

The flash estimate for fourth-quarter GDP is no quarter-over-quarter change for year-over-year contraction of 4.0 percent. This would compare with quarterly growth of 8.5 percent in the third quarter (revised from 8.2 percent) and annual contradiction of 4.0 percent (revised from 4.3 percent contraction).

US Fourth-Quarter Employment Cost Index (Fri 13:30 GMT; Fri 08:30 EST)

Consensus Forecast, Quarter over Quarter: 0.5%

Consensus Forecast, Year over Year: 2.4%

The employment cost index, which has been subdued, is expected to rise a quarter-over-quarter 0.5 percent in the fourth quarter. This would match the rise in the third quarter. The annual rate, at 2.4 percent, is also seen unchanged.

Canadian GDP for November (Fri 13:30 GMT; Fri 08:30 EST)

Consensus Forecast, Month over Month: 0.4%

GDP for November is expected to rise a monthly 0.4 percent to match October's 0.4 percent increase that marked a fourth straight month of slowing. Year over year, GDP contraction was running at 3.5 percent in October.