World Week Ahead: Key ECB Meeting to Pose Test of Central Bank Unity, Power

One event looms above all others in this week's macro calendar: the European Central Bank's policy meeting Thursday. Seen as a critical test of President Mario Draghi's 2012 "whatever it takes" pledge to save the eurozone and of the ECB's capacity for consensus, the meeting is expected to deliver a massive program for buying the bonds of eurozone governments. The hope is that this long delayed "quantitative easing" strategy will spur growth, kill a deflationary threat and encourage hiring across Europe.

Yet even as markets are betting on a big program, reports suggest it will include a compromise to accommodate the objections of Germany's Bundesbank, whose members carry great clout on its governing council.

One version holds that the ECB won't collectively take on the risk of owning the bonds but that each country's national bank will buy them.This Balkanized arrangement would raise all sorts of questions. The most important of these concerns is how, in the event of debt restructuring, it would reconcile with the common currency zone's Eurosystem of central banking. Under that clearing mechanism, each bank's debts and obligations are recognized on paper but permanently absorbed by the group as a whole. If one national bank's balance sheet is corrupted by their government defaulting on their debt, will the other countries step into to recapitalize it, as is implied by the core principles of the Eurosystem? If so, what's the point of separating them? After all, it's physically impossible to have the euros issued by one national central bank valued at a lower rate than those issued by another.

This compromise solution, clearly designed to mollify German and Dutch concerns about taking on the debts of shaky governments such as Greece, suggests a serious clash between the competing realities of monetary unity and political disunity. One could argue that it questions the very foundations of the eurozone.

As with the Swiss National Bank's surprise, market-disrupting decision last week to stop intervening to cap the value of the Swiss franc against the euro, we are now bearing witness to the limitations of central banks' power.

Since the crisis of 2008, investors world-wide have looked to these monetary authorities to keep money flowing and financial institutions afloat, all in the interest of hopefully restoring growth. But that paradigm is now being tested by politics, found in the failure of government to shoulder a fiscal share of the burden of economic reconstruction but also in the persistent popular opposition that savers have mounted against central banks backstopping debtors.

Even if this week itself doesn't represent a crossroads, it's not unreasonable to assume that the post-crisis paradigm of central-bank omniscience is facing its ultimate challenge.

MONDAY

U.S.: Markets, government closed for Martin Luther King Day.

CHINA: 9 p.m. (10 a.m., Beijing)

--December industrial output. [Expected industrial output index +7.5% vs. +7.2% in November.]

--Fourth GDP. [Expected +7.2% on-year vs. +7.3% in third quarter.]

--December retail sales. [In November, +0.89% on-month, +11.7% on-year.]

--Dec fixed assets investment. [Expected +15.7% on-year vs. +15.8% in November.]

If you knew nothing about China's recent past, its investment-led boom and the property bubbles and structural imbalances that went along with it, you'd wonder why the world is so concerned about the Chinese economy. Any other country would kill for forecasted numbers like these. But the direction is down, not up, and China needs continued strong growth to make a transition from investment-led growth to an economy fueled by consumer spending. That's the context in which the always highly anticipated GDP report will be interpreted. Still, if it comes in at 7.2%, as expected, the world can make its peace with that. Anything markedly lower might be seen as a threat to global growth.

TUESDAY

GERMANY: 2 a.m. (8 a.m., Berlin) December producer price index. [Expected PPI -0.4% on-month vs. unchanged in November, -1.4% on-year vs. -0.9%.]

Germany's producer price deflation isn't as bad as Switzerland's, but it's still waving the kind of red flags that demand action. It's one reason the European Central Bank is expected to announce a big quantitative easing, or bond-buying, program this week, which is needed to weaken the euro and is in turn a reason the SNB was spooked into abandoning its currency target.

TAIWAN: 3 a.m. EST. (4 p.m., Taipei) December export orders. [Exports expected +1.75% on-year vs. +6% in December.]

There's been a slowing in the impressive export growth reported earlier last year by Taiwan, a mid-sized economy that nonetheless functions as an important bellwether for global trade trends. That slowdown likely reflects a softening in the cycle of demand for the country's key semiconductor output as the rush of orders for the new iPhone 6 drops off.

GERMANY: 5 a.m. EST. (11 a.m., Berlin). ZEW January indicator of economic sentiment. [Expected current conditions index 15 vs. 10; economic expectations +40.3 vs. 34.9.]

It's remarkable that, as France and other eurozone countries' economic woes push the European Central Bank to an expected round of quantitative easing this week, Germany, whose central bankers are the ones most resistant to that monetary program, is experiencing a revival of confidence.

TURKEY: 7 a.m. (2 p.m., Ankara) Central Bank of Turkey interest rate decision.

Turkey's inflation rate has declined from levels close to 10% midway through last year, but that's mostly because of falling energy prices. Core inflation continues to churn along at an unacceptably high rate, and that's putting pressure on the central bank to push rates even higher than the current 8.25%, a move that would put it at loggerheads with the government of Prime Minister Recep Tayyip Erdogan.

U.S./U.K.: 10 a.m. EST. U.K. Financial Conduct Authority Chief Exec Martin Wheatley and Federal Reserve Governor Jerome Powell speak at U.S. think tank Brookings Institution.

The topic of the discussion is about reforming the interbank benchmark Libor, which was the focus of an international regulatory probe following a scandal tied to trader manipulation and for which many believe a more closely regulated replacement is needed. But there will also be interest in what Mr. Powell may say about the impact of recent global financial turmoil on the outlook for Fed policy and plans for rate increases.

U.S.: 9 p.m. EST. President Obama delivers State of the Union address.

Expect the president to milk as much political capital out of the past year's economic resurgence as he can. In fact, Mr. Obama is expected to use that capital to push for new taxes on inherited property and investments to create tax breaks for the middle class. It's not exactly the sort of proposal that's likely to fly with the Republicans, who now control Congress. As always, there'll be lots of theater but not necessarily a lot of substance in terms of politically actionable policy.

WEDNESDAY

JAPAN: Time N/A. Bank of Japan policy decision.

There's little chance the BOJ will make another change to its bond-buying program, having increased its size only three months ago. But with the Japanese economy still struggling to grow, there's talk that the central bank will tinker with its policy toolbox, including expanding a program aimed at providing low-interest loans to banks that provide lending to businesses.

U.K.: 4:30 a.m EST. (9:30 a.m., London). Bank of England monetary policy committee minutes.

The BOE was yet again split 7-2 in voting to keep policy unchanged at its last meeting. The question is whether any among the seven are inclined to follow the Fed's supposed lead into raising rates in the months ahead or are moved by financial risks and a rapid turn toward U.K. disinflation to wait for a longer period.

U.S.: 7 a.m. EST. Mortgage Bankers Association weekly mortgage applications survey. [Previous week: composite index +49.1%, purchase index +23.6%, refinance index +66.4%.]

Last week's gain was the biggest since the fall of 2008, but that historical comparison is hardly relevant as it came after weeks of relentless declines and was largely fueled by distorted policy moves in the midst of the crisis. The most recent increase in the index was a far, far more favorable indicator of recovery. The gains were no doubt exaggerated by seasonal effects and will likely prompt a correction this week, but these data nonetheless present strong evidence that the recent drop in interest rates and improved labor conditions are bringing Americans back to the housing market.

POLAND: 8 a.m. EST. (2 p.m. EST) December producer prices index. [In November, the PPI was -1.6%.]

Poland is caught in the middle of two sources of deflation, one emanating from the eurozone, the other from Russia.

U.S.: 8:30 a.m. EST. December new housing starts and building permits. [Housing starts expected +1.4% at annualized rate of 1.04 million units vs. -1.6% in November; permits expected 1.0% at annualized rate of 1.03 million vs. -5.2% in November.]

Is the boost in mortgage origination fueling new home construction? If so, that's another positive for the economy, as this sector has a strong propensity toward job creation. But seasonal effects are strong in the winter, when construction drops off, and with last year's especially cold winter creating distortions in those adjustments it's for now a bit hard to read these numbers with any clear indication of trend.

CANADA: 10 a.m. EST. Bank of Canada interest rate announcement

After four and a half years of keeping its overnight rate at 1%, the Bank of Canada had been a strong contender for the world's most boring central bank. But things are getting interesting. Canada's once powerfully inflows of oil revenues have been severely cut by the drop in crude prices and the Canadian dollar, which was at or near parity versus the dollar for years after the crisis, has fallen sharply. This changes the game for the BOC. It doesn't portend a rate change soon and with the weaker Canadian dollar working like an effective tax cut to offset lost oil revenues, one could argue that equilibrium is sustained. In fact, it could mean that when the Fed raises interest rates Canada's central bank will still follow suit shortly thereafter, as had been expected. Even so, it's clear that dynamics have changed dramatically for Canada's central bank.

WORLD: Time N/A. World Economic Forum Annual Meeting opens in Davos, Switzerland.

Setting aside the joke that the best way to make money is to bet against the "Davos consensus," it's hard to ignore the fact that this year's meeting of world elites is occurring at a critical moment. The gathered throng of politicians, financial policymakers, bankers, economists, technologists, philanthropists, media commentators and celebrities will have many issues to deal with: the ECB's imminent launch of shock-and-awe quantitative easing, the collapse in oil prices, the end of China's insatiable appetite for the world's commodities, the disruptive potential of a U.S. interest rate increase this year, and the chaos unleashed by the decision by the host country's central bank to abandon the Swiss franc's cap versus the euro. Keep a lazy eye on those talking heads' headlines. They might be important this year.

BRAZIL: 3 p.m. (6 p.m, Sao Paulo) Banco Central do Brazil monetary policy decision.

While most of the industrialized world's central banks struggle with deflation threats, Brazil's can't shake an inflation problem--even with a benchmark interest rate of 11.75%, which was the highest among the Group of 20 nations until Russia's central bank was forced to jack its benchmark rate to 17% last month. Economists expect yet another rate hike at this meeting. In reality, though, this just reflects the failures of the Brazilian political system. Until the government deals with structural problems such as inflation-indexing in contracts and the fiscal excesses created by political patronage, inflation will continue.

THURSDAY

EUROZONE:

--7:45 a.m. (1:45 p.m, Frankfurt). European Central Bank monetary policy announcement.

--8:30 a.m. (2:30 p.m.,Frankfurt). ECB President Mario Draghi holds post-announcement press conference.

This is a very, very important meeting. Whatever the ECB decides on the critical question of whether to launch a big sovereign bond-buying (quantitative easing) program, it will have wide-ranging ripple effects around world markets. As important as the decision or not to buy sovereign bonds is the size and shape that it takes. Media reports suggest that a compromise may have been struck to mollify opponents of this project inside Germany's Bundesbank whereby the purchases will be made by national central banks rather than by the ECB as a collective, a clear attempt not to subject the group to the losses of others. If that's the plan, however, it raises questions about the viability of the ECB's underlying Eurosystem of sharing, clearing and netting out collective losses on each other's balance sheets. The foundations of the eurozone itself could be called into question.

U.S.: 8:30 a.m. EST. Unemployment insurance weekly claims. [Expected weekly jobless claims 300,000 vs. 316,000 in the prior week.]

Weekly initial insurance claims rose to a four-month high last week. But economists are pretty sanguine about things. Other indicators suggest that the labor market continues to tighten. The latest rise in claims was likely a function of the usual odd movements around the holiday period. And while concerns might rise if the number doesn't dip lower again as expected, the prevailing opinion is that U.S. employers simply aren't laying people off anymore.

SOUTH KOREA: 6 p.m. (8 a.m Friday, Seoul) Advance GDP estimate. [Third quarter was +0.9% on-quarter, +3.2% on-year.]

South Korea's economy is expected to have slowed in the fourth quarter and to continue doing so through 2015. That was captured in the Bank of Korea's downgraded full-year 2015 forecasts. But the moderate growth data mask the fact that South Korea's CPI is approaching deflation levels and its exporters are reporting their worst numbers for years, mostly on account of China's slowdown but also because key South Korean exporters of consumer goods makers such as smartphone maker Samsung are losing market share. That this slide hasn't shown up too harshly in overall economic growth numbers explains why the Bank of Korea has been reluctant to cut rates beyond the record low 2% at which its benchmark rate now sits. But if the slowdown becomes more acute it may have no choice but to push closer and closer toward the "zero bound" level.

CHINA: 8:45 p.m. (9:45 a.m., Friday). January HSBC China preliminary (flash) manufacturing purchasing managers index. [End-December PM 49.1.]

Fresh off the release of China's advance GDP estimate for the fourth quarter, we get a preliminary January read on one of the most closely watched indicators of Chinese manufacturing performance. Last month's result was especially worrying, showing a significant contraction. Was that an anomaly? Investors worldwide are hoping this number reveals a return to stronger growth.

FRIDAY

EUROZONE: Markit's preliminary (flash) January purchasing manager indexes.

--3 a.m. EST. (9 a.m., Paris) January flash PMI. [Manufacturing PMI expected 48.0 vs. 47.5 end-December; services PMI expected 50.7 vs. 50.6 in December.]

--3:30 a.m. EST. (9:30 a.m., Berlin) January flash PMI. [Manufacturing PMI expected 51.7 vs. 51.2 end-December; services PMI expected 52.5 vs. 52.1 in December.]

--4 a.m. EST. (10 a.m., Brussels) January flash PMI. [Manufacturing PMI expected 51.0 vs. 50.6 end-December; services PMI expected 51.9. vs. 51.4 in December.]

The forecast numbers here suggest economists see a bottoming in the cycle of decline that has lately defined business activity across the eurozone. But remembering that 50 is the threshold signifying the difference between contraction and expansion, these expected index readings are far from painting a robust picture of growth. The outlook for France, the eurozone's second-biggest economy, remains especially bleak.

U.S.: 10 a.m. EST. December existing home sales. [Expected +3.0% on-month, 5.08 million annualized rate vs. -6.1% in November.]

Another gauge of whether falling interest rates and improved labor condition continue to spur home-buying activity.