World Week Ahead: Until Fed Adjudicates, It's ECB Bazooka vs. Greek Rebellion

WRAP: What an interesting week it is shaping up to be. Most of the attention is on Europe, where the game-changing effect of the European Central Bank's "bazooka" move--a far bigger-than-expected quantitative easing program announced last Thursday--is competing with a political rebellion in Greece.

The Syriza party in Greece was on track to win about half the seats in Parliament in Sunday's elections, and it clinched a coalition deal with a small right-wing party also opposed to Europe's economic policy to give the two a clear majority. Syriza wanting to renege on the terms of the country's EU bailout is seen by many as a threat to the unity of the eurozone. Taken in isolation, investors would be in serious panic mode right now. But they may well be more sanguine than we'd previously expected for the simple reason that they are still basking in the glow of the ECB's monetary love. We've been here before: promises of central-bank intervention overriding the earthy political concerns that eat at the heart of many of the eurozone's most battered economies. Investors tend to worry about that rebellion in the streets only insofar as the palliative effect of the monetary injection is seen as insufficient.

It's an unstable situation--one that could eventually go either way in terms of its global impact, given the misaligned priorities and misallocated resources. This is why the big event on this week's calendar stands as a potentially big decider: a two-day meeting of the Federal Reserve's Open Market Committee. How will the Fed react to these events in Europe, which have conspired to push the dollar higher? How will it affect its plan to raise rates in the months ahead? And, just as importantly, how will investors react to what they say about all that? At stake in all this is the balance of global investor sentiment, that most powerful of forces.

MONDAY

ISRAEL: 9 a.m. EST. (4 p.m., Tel Aviv). Bank of Israel interest rate announcement:

There's a slim chance that Israel's central bank could try to shave a tiny bit more of its already low 0.25% benchmark rate, especially if its policymaking team believes the shekel could again become a target for hot money inflows now that the ECB has embarked on a massive quantitative easing program. In that sense, this central bank of a small, wealthy economy poses an interesting test case for the global fallout of the ECB's move. For now, the consensus view seems to be that signs of recovery in the Israeli economy will keep the Bank of Israel on hold.

TUESDAY

SWEDEN: 3:30 a.m. EST. (9:30 a.m., Stockholm). December producer price index. [November PPI: -0.4% on-month, +1.3% on-year.]:

Sweden's economy--and its currency, the krona--is one of those mid-sized ones on the periphery of the eurozone that's seen as a target for funds that will now seek to flee the euro following the ECB's monetary easing move. That effect will compound the disinflationary forces that are already evident in indicators such as this one.

U.K.: 4:30 a.m. (9:30 a.m.) Fourth Quarter Gross Domestic Product: Preliminary Estimate. [Third quarter GDP: +0.7% on-month, +3% on-year.]:

Economists expect GDP to have slowed in the fourth quarter, but likely not by enough to stop the U.K. economy from recording its best full-year performance since 2007. The key question is whether the slowing momentum is enough to keep the Bank of England from raising rates this year.

U.S.: 8:30 a.m. EST. December Advance Report on Durable Goods. [Previous total orders: -0.7% on-month.]:

As always, look to strip out the volatile transportation numbers to see if Americans are using the windfall from lower gas prices, a better jobs outlook and a surge in mortgage refinancing to buy bigger-ticket items.

U.S.: 9 a.m. EST. November S&P/Case-Shiller Home Price Index. [20-city Index expected +4.6% on-year vs. +4.5% in October.]:

For various reasons, including the statistical smoothing and the delayed nature of this closely followed report, upturns in the year-on-year home price index tend to happen with a bit of a lag. So, the fact that it is now showing a slight improvement is a good sign of where things currently stand in the housing market.

U.S.: 10 a.m. EST. The Conference Board January Consumer Confidence Index. [Index expected 95.1, up from 92.6.]:

Consumer confidence surveys haven't made consumers look as upbeat as this since before the 2008 recession. And now economists are forecasting an even bigger gain for January. After all, what's not to like: jobs are being created, gasoline prices are falling and declining mortgage rates are again creating refinancing opportunities.

December New Residential Sales. 10:00 a.m. EST. [New home sales expected +4.6% on-month at 451,000 units annualized vs. -1.6% at 438,000 in November.]:

Same story here: falling mortgage rates and better job prospects are seen driving home buyers into new home purchases.

AUSTRALIA: 7:30 p.m. EST. (11:30 a.m. Wednesday, Sydney). Fourth Quarter Consumer Price Index. [Third Quarter CPI: +2.3% on-year.]:

Australia has so far proven comparatively immune from the disinflationary forces rolling through much of the industrialized world. That's a legacy of the long-running (if now greatly diminished) mining boom; a function of its fiscal inefficiency and dependency on imports; and a sign that the flexible Australian dollar is successfully offsetting such forces as it has fallen sharply on the back of lower commodity prices. Still, in the fourth quarter, falling oil prices may have changed the dynamics significantly.

WEDNESDAY

GERMANY: 2 a.m. EST. (8 a.m., Berlin). February GfK Consumer Climate Survey. [Confidence index expected 9.1 vs. 9 for January.]:

This forward-looking indicator isn't doing as well as business confidence in Germany appears to be doing, but Germans are reasonably confident, it seems.

U.S.: 7 a.m. EST. Mortgage Bankers Association weekly mortgage applications survey. [Previous week: composite index +14.2% on-week, purchase index -2.5%, refinance index +22.3%.]:

Even after the previous week's massive surge, mortgage origination was on fire last week. Lower rates really are driving people to take advantage of cheaper borrowing costs. And although most of this is in refinancing, the purchases result is strong, too: last week's declines were simply a correction from a much-larger gain in the prior week.

U.S.: 2:00 p.m. EST. Federal Open Market Committee's monetary policy announcement:

After the ECB's bombshell news of last week, all eyes now turn to the Fed. If it signals its continued intent to raise rates in the months ahead, this will likely drive even more fund flows into the dollar. How the Fed views that ECB move will be key. If it interprets it as an effective move to restore growth in the eurozone, it will see it as constructive to U.S. growth and likely want to stay the course and move toward higher rates sometime in the last spring or summer. If it instead focuses on the surge in the dollar that has come from the ECB move, it could be inclined toward holding back because of the disinflationary effect of that.

NEW ZEALAND: 3 p.m. EST. (9 a.m Thursday, Wellington.) Reserve Bank of New Zealand Official Cash Rate announcement:

The RBNZ is a minnow compared to the Fed. But it has long been a leader in monetary policy innovation. This time it holds the title of being the first advanced nation's central bank to return to a proper rate hike cycle since the crisis, having done so about a year ago. How it has progressed since then could also be a harbinger of what the Fed might do when it returns to tighter policy. The fact is that New Zealand's central bank has stopped the cycle. Many believe it won't raise rates again for some time--it is expected to stay on hold yet again at this meeting. The reason: a weak global economic environment and an absence of inflation. Sound familiar?

THURSDAY

EUROZONE: 4 a.m (10 a.m, Frankfurt). December Monetary Developments in the Euro Area (M3). [Expected M3 annualized growth of +3.6% vs. +3.1% in November; three-month average expected +3.1% vs. +2.7%.]:

Monetary expansion in the EU had slowed markedly, pointing to a squeeze on credit. So the more recent pickup is a welcome sign for a region that's been lacking in welcome signs. But the ECB will want to get money supply growing even faster if it is to achieve the 2% inflation target that was given paramount importance in its recent announcement of new bond-buying--and to fight the deflation threat that eats at the core of the region's economy.

GERMANY: 8 a.m. EST. (2 p.m., Berlin). January Provisional Consumer Price Index. [Expected CPI -0.8% on-month vs. +0% in December; expected unchanged on-year vs. +0.2% in December; expected EU harmonized CPI -1.0% on-month vs. +0.1%, expected -0.2% on-year vs. +0.1% in December.]:

The cause of this expected big drop in the CPI is no secret: plummeting energy prices. But it's also reflective of the kind of deflationary threat that looms over the eurozone as a whole. It's numbers like these that gave ECB President Mario Draghi leverage over Germany's Bundesbank, which for some time had resisted his plan to launch quantitative easing.

U.S.: 8:30 a.m. EST. Unemployment Insurance Weekly Claims Report. [Initial claims expected 300,000 vs. 307,000 in prior week.]:

Claims have bumped back over 300,000 in recent weeks, but no one seems too bothered by it. The labor market is still tight, we're told.

MEXICO: 10 a.m. EST (9 a.m., Mexico City.) Banco de Mexico's monetary policy decision:

Until recently, the bet was that Mexico's central bank was on track to hike rates sometime after the Fed does so, mostly because its economy had been showing signs of gaining traction from the improvements north of the border. But the fall in oil prices will not only hurt a key source of existing revenue, but could put in jeopardy a host of new private exploration projects that the government had opened up and had hoped would give a boost to overall growth. Might the Mexicans follow the Canadians' lead from last week and go for a surprise rate cut?

U.S.: 10 a.m. EST. National Association of Realtors December Pending Home Sales Index. [Expected +0.7% on-month vs. +0.8% in November.]:

If these numbers show more growth, as expected, it will be yet another sign that the U.S. housing market is coming back to life.

SOUTH KOREA: 6 p.m. EST. (8 a.m. Friday, Seoul). December Industrial Production Index. [Previous month +1.3% on-month, -3.4% on-year.]:

The previous month's gain from November was a welcome sign, but as the negative read for the on-year figure indicated, South Korean industry still needs to make up considerable ground if this manufacturing-driven economy is to return to the strong growth it once enjoyed.

JAPAN: 6:30 p.m. EST. (8:30 a.m Friday, Tokyo).

On paper, Japan's annual CPI numbers look just fine, but in reality they remain distorted by the increase in sales taxes that went through in April. The trend is downward and that's what's worrying the Bank of Japan. The core of that inflation problem lies in the other data item: households still aren't spending and aren't expected to have changed that behavior in December.

JAPAN: 6:50 p.m. (8:50 a.m Friday, Tokyo). December Preliminary Industrial Production. [Expected +1.3% on-month vs. -0.6%.]:

Is Japanese industry emerging from its slump or is doomed to the same morass of the household sector?

U.K.: 7:05 p.m. EST. (12:05 a.m. Friday, London). GfK January Consumer Confidence Survey. [Index: -4 in December.]:

A year ago, pound-dispensing British consumers were leading the U.K. into a faster economic recovery than almost any other advanced economy. Not so anymore. Their spending hasn't come to a grinding halt, but it's not the surging force for economic growth that it was.

FRIDAY

SPAIN: 3 a.m. EST. (9 a.m, Madrid).

Spain's recovery has been impressive--certainly relative to France's recession. But it still has deep, deep unemployment problems, and the price paid for its rebound has been a steep one in terms of the loss of earning power that was needed to restore competitiveness. There is also a real risk that the deflation coursing through the economy could become a Japan-like hindrance to further growth.

EUROZONE: 5 a.m. (11 a.m., Brussels).

This is where the rubber meets the road. These numbers encapsulate the reason why the European Central Bank felt compelled to take the dramatic action it took last Thursday. Region-wide, deflationary pressures are accelerating --a part of that is the effect of falling oil prices, but it's worth noting that the CPI is trending lower at a faster rate than almost anywhere else, precisely because those lower oil prices are combining with the underlying weakness of the eurozone economy. And you need look no further than an 11.5% unemployment rate for proof of that structural failure-- it being more than twice the U.S. rate. For whatever positive signals exist of, say, a recovery in Germany's business confidence or Spain's return to growth, the reality is that far too many Europeans are out of work; too little credit and money are flowing around the economy; and prices are at risk of going Japan-like.

RUSSIA: 5:30 a.m. (1:30 p.m., Moscow) Bank of Russia Board of Directors' meeting on monetary policy issues:

Local news reports have suggested that the central bank is having doubts about its dramatic decision to jack up rates to 17% last year and is so concerned about the unintended consequences in its banking sector that it now wants to reverse some of that move. The problem is that any big cut in interest rates would prompt a giant outflow of funds from the ruble. Rock... Bank of Russia ... Hard place.

U.S.: 8:30 a.m. EST. Advance Estimate Fourth-Quarter GDP. [Expected +3.3% vs. +5%.]:

It's inevitable that the fourth-quarter growth rate should slow from the third quarter's rapid pace, but at the expected 3.3% it would still be a healthy result, certainly compared with Europe and Japan. Perhaps more important for investors than the headlines from this Census Bureau report will be some of the subindicators, such as the quarterly employment cost index released simultaneously by the Bureau of Labor Statistics. Is the growing U.S. economy creating upward wage pressures or not? There's arguably no more important question for the Fed than that.

U.S.: 10 a.m. EST. ThomsonReuters/University of Michigan January Survey of Consumers. [Expected 98.2, unchanged from the mid-January reading.]:

Whether or not the index rises even further from its mid-January reading, the University of Michigan's consumer sentiment survey is painting a picture of a significantly improved mood among U.S. consumers.

SATURDAY

SOUTH KOREA: 7 p.m. EST. (9 a.m. Sunday, Seoul). January Trade Data. [In December, trade balance was $5.78 billion, imports were down 0.9% on-year, exports up 3.7% on-year.]:

South Korea's trade-dependent economy was helped by an improvement in its trade balance in November, but it will need to see more of that happen in December to take pressure off the Korean won so that the Bank of Korea can feel comfortable with a more monetary accommodative environment.

CHINA: 8 p.m. EST. (9 a.m Sunday, Beijing). China Federation of Logistics and Purchasing January Purchasing Managers Indexes. [CFLP China manufacturing PMI was 50.1 in December, non-manufacturing PMI was 54.1.]:

The flash (preliminary) manufacturing PMI from HSBC repeated two weeks ago wasn't encouraging. It remained below the 50 threshold signifying expansion. But the CFLP covers a different part of the economy. This official indicator surveys larger state-owned enterprises, while HSBC's number is focused on medium-sized private firms. Either way, the data as of December, at least for the all-important manufacturing sector, weren't particularly constructive either. Though above the 50 threshold, this is not a picture of robust growth. If these data don't improve, predictions will rise that Chinese GDP growth is set to slow significantly more than it has in recent years.