The trading week by January 17 promises to be rich and quite positive! The main major note is the long-awaited signing of the first stage of the trade agreement between China and the USA. "The weapon is hidden in sheath." On Wednesday, Chinese Deputy Prime Minister Liu He arrives in Washington to sign the official papers. Beijing pledged to increase purchases of U.S. goods in exchange for the abolition of December tariffs and a partial rollback of September duties on Chinese goods. Details of what kind of goods and in what quantity China will purchase will be known after the signing and publication of the documents.
This is great news not only for the participants of the trade dispute, but also for export-oriented Europe, which suffered as much as other major players in the world trade market. Against this background, data on industrial production volumes in the EU, the release of which is expected on Wednesday, is of particular importance for both the eurozone and the single European currency itself. On Thursday, the ECB will publish the minutes from the last meeting on monetary policy, after which the head of the European regulator Christine Lagarde will speak in the evening.
Additional volatility will be added to the main pair by inflationary data, both in the U.S. and the EU. Already on Tuesday the USA will tell about consumer and basic inflation for December, the EU will publish mirror indicators, but only on Friday. Retail sales in the USA should not be ignored either. So as the indicator will be released for the month of December, which is usually characterized by large-scale actions due to the holidays, retail sales can be surprising.
In favor of the assumption of an increase in retail sales says the growth of consumer credit, especially on credit cards of Americans. The U.S. labor market remains resilient despite the weak release in December, which encourages people to spend money. And low interest rates make loans attractive.
Federal Reserve data shows that consumer credit balances across the country in the 25 largest banks reached 1.19 trillion U.S. dollars in the last week of December, 13% more than a year earlier. And the biggest annual growth was in credit cards, where the outstanding debt increased by 16%. And that, not including mortgage loans.
This is already great news for the U.S. dollar, because the data on loans shows consumer confidence. And investors will look at this situation through the prism of the shareholder, because on Wednesday starts the next reporting season of American companies. And, as usual, the banking sector starts it. Given the above, the reports may be surprising, but more on this below.
US stock markets continue to make historic highs, ignoring almost all bad news such as geopolitics, politics, or company revenues. The trade war has dealt a major blow to energy resources and industry, but the banks are doing better. Wall Street's bank index grew 36% last year, ahead of the S&P500 benchmark we are talking about.
This predicts good news for the quarterly profits of U.S. banks, which are opening the first reporting season this year. The Fed's decision to lower interest rates in 2019 encouraged mortgage activity, which will help large lenders. Citigroup, JPMorgan Chase & Co and Wells Fargo & Co will report tomorrow, and on Wednesday will see the reports of Goldman Sachs and Bank of America.
The Americans, who borrow money to buy cars and pay vacations, have recently become a pillar of profit in the banking sector. The strength of consumers has helped compensate for the weakness of trade and business credit demand. And bank executives welcomed it as a sign that the US economy is not on the verge of recession.
A thriving American consumer has pushed problems into the background. Americans' credit balances have grown, and their incomes are growing even faster. This debt (credit balances) is almost equal to disposable personal income after it grew by a third in 2007.
Analysts are also encouraged by the fact that banks are lending more and more to consumers. According to the Federal Reserve, the level of overdue consumer debt is 2.8% compared to an average of 4.3% since 2003. In 2007, during the recession, this indicator reached 8.2%.
However, one should not forget that credit errors have already occurred. And they usually come in the best of times. That is why it is difficult to notice them at the beginning, especially when the economy is growing for the eleventh consecutive year.
GBP continues to give up positions for the fifth consecutive day, after pigeon comments from Bank of England politician Gertjean Vliegue last weekend. In an interview for the Financial Times Vliege said that he would vote for lower interest rates later this month. Only significant improvement in the data on the growth of the British economy can change his decision.
It should be admitted that Sterling will have a very busy week. Quite a few economic releases are expected. And from the first trading day of the trading week. Already today we will see the data on British GDP, as well as the volume of industrial production and trade balance. On Wednesday, inflation indicators will be released, and on Friday, retail sales data will be released.
The additional pressure on the pound creates serious uncertainty about whether the eleven months of UK and EU will be enough for a trade deal. EU leaders consider this term to be "tight" and "impossible". Britain should leave Euroblock on January 31. Prime Minister Boris Johnson promised tired voters to leave the EU and it looks like he will keep his promise, but at what cost? Time will tell.