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Weekly market preview from Alpari UK – 19 May 2014
This week is looking a little light on the data front, leaving investors to instead focus on the central banks as minutes are released from the Fed, BoE and RBA, while the BoJ will decide whether the time has come to increase its quantitative easing program. While the ECB is the only major central bank not meeting or releasing minutes, it’s certainly not going to fall off the radar. Its most hawkish member, Bundesbank Head Jens Weidmann is scheduled to speak on Monday and could provide crucial insight into when the ECB will announce a new stimulus package and what that package will consist of.
In terms of economic data this week, there isn’t a huge amount being released but there are some key points that shouldn’t be overlooked. These include the Chinese HSBC flash manufacturing PMI, UK retail sales and the eurozone PMI readings. The only question this week is whether strong readings will be enough to tempt investors away from government bonds, with them having flocked towards them recently as they anticipate a new round of monetary stimulus from the ECB.
US
The week ahead is looking fairly quiet on the data front in the US with the only notable economic data being released later in the week. Among the few releases is the weekly jobless claims which is becoming an increasingly followed economic indicator again as the labour market begins to significantly improved. Last year the number fell to around 330,000 on a regular basis showing that employers were no longer cutting back on staff as aggressively and focusing their efforts on other ways of improving the bottom line. Recently though the number has fallen to the low 300,000′s, indicating that not only are companies not cutting staff as much, hiring has also picked up to a point that people appear to be leaving one role and finding easier to find another, negating the need to claim jobless benefits. The number breached 300,000 last week, a repeat of this could be viewed as a sign that the start of the year was merely a blip in an otherwise encouraging recovery. Optimism will grow if numbers below 300,000 become a regular feature.
Housing data has, to an extent, fallen off people’s radar since the Fed began tapering, pushing up rates and deterring prospective house buyers. The numbers haven’t been terrible by any means but they have pulled back noticeably. Investors are willing to accept this as a consequence of the Fed looking to move towards a less accommodative policy as the economy recovers. However, they may only accept that for so long and will soon begin to demand more from the numbers. I don’t expect that to happen too soon, but plenty will still be looking towards the release of the existing home sales on Thursday and new home sales on Friday for evidence that the housing market can continue to recover even when rates are rising. While it may be a while until we see pre-financial crisis levels, an improvement here would give a strong indication that the economy is on the right track, confidence is improving and the recovery is, in fact, sustainable.
With the week being so light on economic data, the focus in the US this week is likely to be back on the Federal Reserve, especially with the minutes from 29-30 April meeting being released. The minutes themselves may not offer anything new that will change the current views of investors, if the statement is anything to go by, although you can never become complacent when it comes to the Fed. This is especially true given the number of Fed officials that are scheduled to speak before the release of the minutes, with Charles Plosser, William Dudley, Narayana Kocherlakota and Chair Janet Yellen scheduled to speak. These views may have changed over the last couple of weeks, given the amount of data that’s been released since, making the minutes themselves somewhat outdated.
UK
The week is looking even quieter in the UK, with less high impact data being released and the minutes, that will come alongside the voting figures for the last meeting, being even more of a non-event than the Fed. The Bank of England decisions have become extremely predictable since Mark Carney became Governor, which isn’t a bad thing as the reason behind it is that the economy has been recovering at a strong and steady pace. In another six months when the BoE may have to start seriously considering rate hikes the meetings and minutes will become a far more interesting event, but for now it’s fairly safe to assume that the vote on interest rates and asset purchases will be unanimous and the minutes will not be too dissimilar to the last meeting or offer any surprises.
The three key economic releases next week will be the inflation readings on Tuesday, the April retail sales number on Wednesday and the second estimate of first quarter GDP on Thursday. Inflation, or disinflation, is far from being a concern right now with it still being well above the level seen in the eurozone and, until last month, the US. However, it does seem to be gradually dropping and has fallen to 1.6%, below the BoE target of 2%. This could make life difficult when the time comes to raise interest rates, although I’m confident that as the economy continues to improve, in particular wages, inflation will pick up again. We are expecting a small improvement in April, with the rate rising to 1.7%.
Retail sales numbers are widely viewed as one of the best indicators of economic health, especially in economies such as the UK, where the consumer contributes so much to overall output. The numbers over the last few months have been quite volatile with the weather heavily distorting the winter figures. This is expected to normalise somewhat in April, with 0.4% growth expected compared to the month before. The second estimate of the UK’s first quarter GDP is expected to remain unchanged at 0.8%, a growth rate the UK has consistently produced now for the last year, which suggests we’re seeing both consistent and sustainable growth.
Eurozone
The flash readings of eurozone manufacturing and services PMIs stand out as the key releases this week, especially following the poor GDP figures seen last Thursday. The benefit of these readings is that they are forward looking and based on confidence in these sectors in the outlook for the relevant economies. While this may not translate into improving data, we have seen a general improvement in the euro area since these numbers started picking up. With this in mind, the GDP readings last week may be a set back, but as long as we continue to see an improvement in confidence, there is a good chance that economic activity should pick up. We can never underestimate the importance of confidence in the economic outlook from both businesses and consumers.
With that in mind, most of these readings from Germany, France and the eurozone as a whole are expected to fall marginally, while still remaining comfortably above 50, the level that separates optimism from pessimism. One concern that has reemerged relates to a two-tier eurozone after Germany grew more than expected in the first quarter while France, Italy, the Netherlands and Portugal all disappointed. Should these confidence figures also begin to display increasing signs of this, it would be a major concern going forward and suggest the austerity and reforms are not working as well as hoped.
The German Ifo business climate number will also be a key release as always. This is especially true following those GDP figures, as mentioned above, with Germany still being the powerhouse in the eurozone and the area so reliant on it to record what small growth it can actually manage. Any downturn in the country could have negative repercussions for the entire region so these surveys can provide important insight into the next six months or so. One thing to consider here is the impact that the crisis in Ukraine will have on business confidence, given the sanctions being imposed on Russia, and vice versa, and the amount of trade that takes place between the two. So far we’ve seen no impact on the Ifo number but that doesn’t mean we won’t and it could provide early insight into negative economic impacts further down the road.
What may have more impact on the markets than any data release this week is the speech from Bundesbank President Jens Weidmann on Monday. It is no secret that Weidmann is the most hawkish member of the ECB governing council and it’s taken some time for him to become convinced that a more aggressive approach is needed by the central bank to combat the disinflation in the euro area that is very close to turning into deflation. However, that time appears to have finally come. This is one of the main reasons why it is expected that at the next meeting in June, the ECB will announce a new round of stimulus measures that is has now experimented with before. The speech on Monday, along with the Q&A session that follows, may contain important hints as to what form that stimulus will come in, be it quantitative easing, the end of sterilisation of bond purchases, negative deposit rates or something else.
Asia & Oceania
The Bank of Japan is widely expected to ease monetary policy further this year in response to the sales tax hike that came into force at the start of April. However, the decision not to provide this additional monetary stimulus at the meeting at the end of March and preempt the slowdown that is expected to come as a result of the hike suggests the central bank wants evidence before it acts. With that in mind, and considering that it will take months to collect enough data to confirm whether or not the economy slowed as a result of the hike, it seems unlikely that the BoJ will act on Wednesday. That’s not to say it will necessarily be uneventful, the statement and press conference accompanying the decision is likely to provide insight into when the next round of stimulus will come or at least what the BoJ needs to see in order to loosen monetary policy.
Sticking to the topic of central banks, the minutes from the last Reserve Bank of Australia meeting will be released on Tuesday. Like the BoE, the RBA meetings and minutes have become something of a non-event. With inflation currently in line with the RBAs target and unemployment heading in the right direction, there is neither a need to raise or cut rates. The RBA is also making a real effort to remain very neutral and is expected to keep interest rates at 2.5% at least for the rest of the year. With that in mind, the minutes are unlikely to have much of an impact on markets unless something significantly changes.
It’s looking like a particularly quiet week for China, with only one piece of economic data scheduled to be released. The HSBC flash manufacturing PMI is widely regarded as a key indicator of economic activity in China, with the manufacturing sector being so important to the economy. The HSBC reading, unlike the official figure, focuses primarily on small and medium sized private manufacturers and is therefore seen as a more reliable indicator of economic activity and its sustainability as its not be propped up by the government. The number has been in contraction territory for four months now and is this is not expected to change which doesn’t bode well for Chinese growth this year, that is unless the government or central bank steps in and provides a fiscal or monetary stimulus package, respectively.
This week is looking a little light on the data front, leaving investors to instead focus on the central banks as minutes are released from the Fed, BoE and RBA, while the BoJ will decide whether the time has come to increase its quantitative easing program. While the ECB is the only major central bank not meeting or releasing minutes, it’s certainly not going to fall off the radar. Its most hawkish member, Bundesbank Head Jens Weidmann is scheduled to speak on Monday and could provide crucial insight into when the ECB will announce a new stimulus package and what that package will consist of.
In terms of economic data this week, there isn’t a huge amount being released but there are some key points that shouldn’t be overlooked. These include the Chinese HSBC flash manufacturing PMI, UK retail sales and the eurozone PMI readings. The only question this week is whether strong readings will be enough to tempt investors away from government bonds, with them having flocked towards them recently as they anticipate a new round of monetary stimulus from the ECB.
US
The week ahead is looking fairly quiet on the data front in the US with the only notable economic data being released later in the week. Among the few releases is the weekly jobless claims which is becoming an increasingly followed economic indicator again as the labour market begins to significantly improved. Last year the number fell to around 330,000 on a regular basis showing that employers were no longer cutting back on staff as aggressively and focusing their efforts on other ways of improving the bottom line. Recently though the number has fallen to the low 300,000′s, indicating that not only are companies not cutting staff as much, hiring has also picked up to a point that people appear to be leaving one role and finding easier to find another, negating the need to claim jobless benefits. The number breached 300,000 last week, a repeat of this could be viewed as a sign that the start of the year was merely a blip in an otherwise encouraging recovery. Optimism will grow if numbers below 300,000 become a regular feature.
Housing data has, to an extent, fallen off people’s radar since the Fed began tapering, pushing up rates and deterring prospective house buyers. The numbers haven’t been terrible by any means but they have pulled back noticeably. Investors are willing to accept this as a consequence of the Fed looking to move towards a less accommodative policy as the economy recovers. However, they may only accept that for so long and will soon begin to demand more from the numbers. I don’t expect that to happen too soon, but plenty will still be looking towards the release of the existing home sales on Thursday and new home sales on Friday for evidence that the housing market can continue to recover even when rates are rising. While it may be a while until we see pre-financial crisis levels, an improvement here would give a strong indication that the economy is on the right track, confidence is improving and the recovery is, in fact, sustainable.
With the week being so light on economic data, the focus in the US this week is likely to be back on the Federal Reserve, especially with the minutes from 29-30 April meeting being released. The minutes themselves may not offer anything new that will change the current views of investors, if the statement is anything to go by, although you can never become complacent when it comes to the Fed. This is especially true given the number of Fed officials that are scheduled to speak before the release of the minutes, with Charles Plosser, William Dudley, Narayana Kocherlakota and Chair Janet Yellen scheduled to speak. These views may have changed over the last couple of weeks, given the amount of data that’s been released since, making the minutes themselves somewhat outdated.
UK
The week is looking even quieter in the UK, with less high impact data being released and the minutes, that will come alongside the voting figures for the last meeting, being even more of a non-event than the Fed. The Bank of England decisions have become extremely predictable since Mark Carney became Governor, which isn’t a bad thing as the reason behind it is that the economy has been recovering at a strong and steady pace. In another six months when the BoE may have to start seriously considering rate hikes the meetings and minutes will become a far more interesting event, but for now it’s fairly safe to assume that the vote on interest rates and asset purchases will be unanimous and the minutes will not be too dissimilar to the last meeting or offer any surprises.
The three key economic releases next week will be the inflation readings on Tuesday, the April retail sales number on Wednesday and the second estimate of first quarter GDP on Thursday. Inflation, or disinflation, is far from being a concern right now with it still being well above the level seen in the eurozone and, until last month, the US. However, it does seem to be gradually dropping and has fallen to 1.6%, below the BoE target of 2%. This could make life difficult when the time comes to raise interest rates, although I’m confident that as the economy continues to improve, in particular wages, inflation will pick up again. We are expecting a small improvement in April, with the rate rising to 1.7%.
Retail sales numbers are widely viewed as one of the best indicators of economic health, especially in economies such as the UK, where the consumer contributes so much to overall output. The numbers over the last few months have been quite volatile with the weather heavily distorting the winter figures. This is expected to normalise somewhat in April, with 0.4% growth expected compared to the month before. The second estimate of the UK’s first quarter GDP is expected to remain unchanged at 0.8%, a growth rate the UK has consistently produced now for the last year, which suggests we’re seeing both consistent and sustainable growth.
Eurozone
The flash readings of eurozone manufacturing and services PMIs stand out as the key releases this week, especially following the poor GDP figures seen last Thursday. The benefit of these readings is that they are forward looking and based on confidence in these sectors in the outlook for the relevant economies. While this may not translate into improving data, we have seen a general improvement in the euro area since these numbers started picking up. With this in mind, the GDP readings last week may be a set back, but as long as we continue to see an improvement in confidence, there is a good chance that economic activity should pick up. We can never underestimate the importance of confidence in the economic outlook from both businesses and consumers.
With that in mind, most of these readings from Germany, France and the eurozone as a whole are expected to fall marginally, while still remaining comfortably above 50, the level that separates optimism from pessimism. One concern that has reemerged relates to a two-tier eurozone after Germany grew more than expected in the first quarter while France, Italy, the Netherlands and Portugal all disappointed. Should these confidence figures also begin to display increasing signs of this, it would be a major concern going forward and suggest the austerity and reforms are not working as well as hoped.
The German Ifo business climate number will also be a key release as always. This is especially true following those GDP figures, as mentioned above, with Germany still being the powerhouse in the eurozone and the area so reliant on it to record what small growth it can actually manage. Any downturn in the country could have negative repercussions for the entire region so these surveys can provide important insight into the next six months or so. One thing to consider here is the impact that the crisis in Ukraine will have on business confidence, given the sanctions being imposed on Russia, and vice versa, and the amount of trade that takes place between the two. So far we’ve seen no impact on the Ifo number but that doesn’t mean we won’t and it could provide early insight into negative economic impacts further down the road.
What may have more impact on the markets than any data release this week is the speech from Bundesbank President Jens Weidmann on Monday. It is no secret that Weidmann is the most hawkish member of the ECB governing council and it’s taken some time for him to become convinced that a more aggressive approach is needed by the central bank to combat the disinflation in the euro area that is very close to turning into deflation. However, that time appears to have finally come. This is one of the main reasons why it is expected that at the next meeting in June, the ECB will announce a new round of stimulus measures that is has now experimented with before. The speech on Monday, along with the Q&A session that follows, may contain important hints as to what form that stimulus will come in, be it quantitative easing, the end of sterilisation of bond purchases, negative deposit rates or something else.
Asia & Oceania
The Bank of Japan is widely expected to ease monetary policy further this year in response to the sales tax hike that came into force at the start of April. However, the decision not to provide this additional monetary stimulus at the meeting at the end of March and preempt the slowdown that is expected to come as a result of the hike suggests the central bank wants evidence before it acts. With that in mind, and considering that it will take months to collect enough data to confirm whether or not the economy slowed as a result of the hike, it seems unlikely that the BoJ will act on Wednesday. That’s not to say it will necessarily be uneventful, the statement and press conference accompanying the decision is likely to provide insight into when the next round of stimulus will come or at least what the BoJ needs to see in order to loosen monetary policy.
Sticking to the topic of central banks, the minutes from the last Reserve Bank of Australia meeting will be released on Tuesday. Like the BoE, the RBA meetings and minutes have become something of a non-event. With inflation currently in line with the RBAs target and unemployment heading in the right direction, there is neither a need to raise or cut rates. The RBA is also making a real effort to remain very neutral and is expected to keep interest rates at 2.5% at least for the rest of the year. With that in mind, the minutes are unlikely to have much of an impact on markets unless something significantly changes.
It’s looking like a particularly quiet week for China, with only one piece of economic data scheduled to be released. The HSBC flash manufacturing PMI is widely regarded as a key indicator of economic activity in China, with the manufacturing sector being so important to the economy. The HSBC reading, unlike the official figure, focuses primarily on small and medium sized private manufacturers and is therefore seen as a more reliable indicator of economic activity and its sustainability as its not be propped up by the government. The number has been in contraction territory for four months now and is this is not expected to change which doesn’t bode well for Chinese growth this year, that is unless the government or central bank steps in and provides a fiscal or monetary stimulus package, respectively.
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