Alpari UK
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Weekly market preview – 27 January 2014
A real key week ahead for the markets, where the release of a raft of economic announcements is likely to bring substantial volatility following a somewhat quiet week gone. The US is likely to take most of the attention with the announcement from the FOMC with regards to whether the tapering will continue apace despite the poor jobs data released earlier in the month. In the UK, a somewhat quieter week means we are looking towards the preliminary GDP reading on Tuesday to follow on from the positive sentiment provided by falling unemployment. Meanwhile in the eurozone, the CPI flash estimate is likely to provide further clarity on the inflation scenario which is driving talk of negative interest rates.
In Asia, the Japanese retail sales is one of very few notable releases to look out for. Finally in New Zealand, the interest rate decision will be key following higher than expected inflation in December.
US
A major week in the US, with the release of the FOMC monetary policy statement being accompanied by the first GDP estimate of Q4 2013. The most important of these is the FOMC announcement on Wednesday with regards to their next decision on monetary policy. The decision from the Fed last month to trim their monthly purchases by $10 billion started a pathway to completely eliminating the trend of operating as a buyer in the bond market as a means of boosting stability and encouraging growth. Given that this has been previously dictated largely by the movements within the jobs market, many had seen a January taper as out of the question following the lowest rate of job creation in a year and a half. However, with most of that impact being driven by extraordinary weather conditions that affected almost every state in the US, it is likely that the FOMC will view it as an outlier and not indicative of anything more significant.
The impact to the markets following last month’s taper was surprisingly muted, with many saying it had been factored into prices already. However, with the likes of the S&P500 only 30 points off all-time highs at the time of the decision, I do not believe this to have been the case per se. It is more likely that this shows a success in the ability of the Fed to properly manage expectations in the markets. This likely had alot to do with the decision to not taper in September when many had expected them to. What will be interesting is how markets respond to the next taper as it will likely give an indication of just how aggressively the Fed will be pulling back on stimulus going forward.
Personally, I do expect to see another taper on Wednesday, owing to the raft of positive figures apart from that non-farm payroll release. The unemployment rate fell to 6.7% for the first time since December 2008, with the ADP non-farm payroll figure showing the highest number since this time last year. That being said, there are mixed views in the markets as to whether Yellen will play it safe and encourage members not to taper as a means to prove she is will be highly accomodative in her role as chairperson. This difficulty in gauging whether the taper will be resumed means that this release is going to be the major event of note which markets are looking towards as a key driver of volatility going forward.
On Thursday, the US GDP figure will be released, following the recent announcement that the IMF has upgraded their 2014 US growth target to 2.7%. This month we are expecting to see a somewhat more muted figure of 3.3% following an rise of 4.1% on an annualized basis as measured from the Q3 figure. The annualized reading can sometimes confuse given that it provides a gauge of how the economy would grow if projected from that given quarter, taking into account seasonal factors and inflation. Nevertheless, the Q3 figure represented the strongest rate since Q4 2011.
The GDP figure is always absolutely critical for investors from a macro point of view as it measures the growth of the value of all the goods and services produced by the economy. Many see this as the strongest all-encompassing measure of how an economy is faring since it takes into account all sectors across the board. Bear in mind that this week’s release is the first estimate and thus provides the markets with the earliest indication of by how much the statisticians expect the US economy to have grown within Q4 2013. For this reason, the US GDP figure will be key as a potential market moving event in the week.
UK
A similar story in the UK, where the main event of note is going to be the preliminary GDP figure for Q4 2013. Given that this is the first release which indicates by how much the economy is expected to have grown, there is likely to be significant volatility surrounding this figure. Unlike the US figure, this number is not annualized and thus makes it harder to compare the two. The closest of the two figures being released which is comparable is the year on year figure, which is expected to rise moderately to 2.0%. Bear in mind that the IMF has recently cited the UK as the leading light in Europe, with expectations of 2.4% growth in 2014. Thus we are looking for a strong figure on Tuesday to follow on from the outstanding reductions in unemployment seen in the recent 6 months. Should this come true and the figures impress, this would provide yet another coup for the UK economy and could provide even further emphasis for the likes of the GBP and FTSE100 after recent rallies.
Eurozone
A mixed week ahead for the eurozone, where the German business confidence, along with eurozone CPI and unemployment rates will be in focus. The first of these to be released is the German IFO business climate survey, which acts as a leading measure of both eurozone and German economic health as perceived by manufacturers, builders, wholesalers and retailers. The figure has a high degree of correlation with the manufacturing PMI, however it is the correlation with the German GDP figure which is more interesting. Often a significant shift higher or lower on this figure has preceded a substantial move in the GDP QoQ figure. This was highlighted most notably when the October 2012 business climate figure marked the start of the recovery for the region, which was confirmed by the GDP release seen in February 2013. Thus on that occasion, this provided a leading indicator of the recovery, months ahead of the headline figures. For this reason, it is key to watch this release, which is expected to rise marginally to 110.0 from 109.5.
Later in the week, the eurozone CPI figure is released, which many will be keeping a look out for. The inflation environment in the eurozone has come back into the limelight over the second half of 2013, where Mario Draghi opted to reduce the headline interest rate by 25 basis points in response to the fall to 0.7% in inflation. The threat of deflation appears to be back on the scene following a brief boost, falling back to 0.8% earlier this month. This week’s measure is expected to show a push back to 0.9% for January on a year on year basis. However, should we see the figure fall short yet again, this could become a serious problem for Draghi who could begin to seriously consider negative interest rates or alike to avoid deflationary fears. Remember that price stability is the number one target for central banks and thus any notable shift lower will have to be addressed as a matter of urgency.
Finally, keep an eye out for the eurozone unemployment rate, due to be released on Friday. This has been somewhat of a sticking point within the eurozone, where the peripheral economies have found it extremely hard to generate sufficient employment. This obviously provides a drag upon their ability to grow given the loss of tax revenue and subsequent increase in welfare payments. The unemployment rate has remained around 12.1% for almost a year now and despite falling back from 12.2% in September, there has been little to suggest the single currency region is on any substantial path towards reducing this key measure. Expectations are that we will see yet another figure of 12.1% posted. However, should we see a fall back to 12.0% it would be highly notable and could point to the beginning of much needed improvements to the chronic unemployment seen throughout this crisis.
Asian & Oceania
A quiet week in Asia, where the main event of note come out of Japan in the form of the retail sales figure due on Wednesday. The Japanese economy has seen a somewhat mixed 2013, where the promises from Shinzo Abe seems to be coming true following a move out of deflation, which also saw the yen devalue significantly and Nikkei225 reach record highs. However, with the highest debt to GDP ratio of all the major developed economies, standing above 220%, the need for a VAT hike is evident. However, coming at a time when the recovery and growth is somewhat fragile means that figures such as the retail sales number are absolutely crucial to understand the health of economic activity. Should we see a weakening of this figure, it would be difficult to see how the VAT rise in April will not have a negative impact on sales in the country. Market forecasts point towards a moderate fall from 4.1% to 3.9%, yet any larger tumble could be notable and draw attention.
Finally, in New Zealand, the monetary policy decision from the RBNZ is due on Wednesday. This has become increasingly pertinent given that we saw a greater than expected inflation figure last week, bringing into account the possibility of an interest rate rise in the near future. Bearing in mind that most major economies are providing guidance of how long their rates will remain low, it would be highly notable should the RBNZ raise rates so soon. I do not expect to see a rise today, yet this announcement will become more and more crucial as 2014 goes on.
A real key week ahead for the markets, where the release of a raft of economic announcements is likely to bring substantial volatility following a somewhat quiet week gone. The US is likely to take most of the attention with the announcement from the FOMC with regards to whether the tapering will continue apace despite the poor jobs data released earlier in the month. In the UK, a somewhat quieter week means we are looking towards the preliminary GDP reading on Tuesday to follow on from the positive sentiment provided by falling unemployment. Meanwhile in the eurozone, the CPI flash estimate is likely to provide further clarity on the inflation scenario which is driving talk of negative interest rates.
In Asia, the Japanese retail sales is one of very few notable releases to look out for. Finally in New Zealand, the interest rate decision will be key following higher than expected inflation in December.
US
A major week in the US, with the release of the FOMC monetary policy statement being accompanied by the first GDP estimate of Q4 2013. The most important of these is the FOMC announcement on Wednesday with regards to their next decision on monetary policy. The decision from the Fed last month to trim their monthly purchases by $10 billion started a pathway to completely eliminating the trend of operating as a buyer in the bond market as a means of boosting stability and encouraging growth. Given that this has been previously dictated largely by the movements within the jobs market, many had seen a January taper as out of the question following the lowest rate of job creation in a year and a half. However, with most of that impact being driven by extraordinary weather conditions that affected almost every state in the US, it is likely that the FOMC will view it as an outlier and not indicative of anything more significant.
The impact to the markets following last month’s taper was surprisingly muted, with many saying it had been factored into prices already. However, with the likes of the S&P500 only 30 points off all-time highs at the time of the decision, I do not believe this to have been the case per se. It is more likely that this shows a success in the ability of the Fed to properly manage expectations in the markets. This likely had alot to do with the decision to not taper in September when many had expected them to. What will be interesting is how markets respond to the next taper as it will likely give an indication of just how aggressively the Fed will be pulling back on stimulus going forward.
Personally, I do expect to see another taper on Wednesday, owing to the raft of positive figures apart from that non-farm payroll release. The unemployment rate fell to 6.7% for the first time since December 2008, with the ADP non-farm payroll figure showing the highest number since this time last year. That being said, there are mixed views in the markets as to whether Yellen will play it safe and encourage members not to taper as a means to prove she is will be highly accomodative in her role as chairperson. This difficulty in gauging whether the taper will be resumed means that this release is going to be the major event of note which markets are looking towards as a key driver of volatility going forward.
On Thursday, the US GDP figure will be released, following the recent announcement that the IMF has upgraded their 2014 US growth target to 2.7%. This month we are expecting to see a somewhat more muted figure of 3.3% following an rise of 4.1% on an annualized basis as measured from the Q3 figure. The annualized reading can sometimes confuse given that it provides a gauge of how the economy would grow if projected from that given quarter, taking into account seasonal factors and inflation. Nevertheless, the Q3 figure represented the strongest rate since Q4 2011.
The GDP figure is always absolutely critical for investors from a macro point of view as it measures the growth of the value of all the goods and services produced by the economy. Many see this as the strongest all-encompassing measure of how an economy is faring since it takes into account all sectors across the board. Bear in mind that this week’s release is the first estimate and thus provides the markets with the earliest indication of by how much the statisticians expect the US economy to have grown within Q4 2013. For this reason, the US GDP figure will be key as a potential market moving event in the week.
UK
A similar story in the UK, where the main event of note is going to be the preliminary GDP figure for Q4 2013. Given that this is the first release which indicates by how much the economy is expected to have grown, there is likely to be significant volatility surrounding this figure. Unlike the US figure, this number is not annualized and thus makes it harder to compare the two. The closest of the two figures being released which is comparable is the year on year figure, which is expected to rise moderately to 2.0%. Bear in mind that the IMF has recently cited the UK as the leading light in Europe, with expectations of 2.4% growth in 2014. Thus we are looking for a strong figure on Tuesday to follow on from the outstanding reductions in unemployment seen in the recent 6 months. Should this come true and the figures impress, this would provide yet another coup for the UK economy and could provide even further emphasis for the likes of the GBP and FTSE100 after recent rallies.
Eurozone
A mixed week ahead for the eurozone, where the German business confidence, along with eurozone CPI and unemployment rates will be in focus. The first of these to be released is the German IFO business climate survey, which acts as a leading measure of both eurozone and German economic health as perceived by manufacturers, builders, wholesalers and retailers. The figure has a high degree of correlation with the manufacturing PMI, however it is the correlation with the German GDP figure which is more interesting. Often a significant shift higher or lower on this figure has preceded a substantial move in the GDP QoQ figure. This was highlighted most notably when the October 2012 business climate figure marked the start of the recovery for the region, which was confirmed by the GDP release seen in February 2013. Thus on that occasion, this provided a leading indicator of the recovery, months ahead of the headline figures. For this reason, it is key to watch this release, which is expected to rise marginally to 110.0 from 109.5.
Later in the week, the eurozone CPI figure is released, which many will be keeping a look out for. The inflation environment in the eurozone has come back into the limelight over the second half of 2013, where Mario Draghi opted to reduce the headline interest rate by 25 basis points in response to the fall to 0.7% in inflation. The threat of deflation appears to be back on the scene following a brief boost, falling back to 0.8% earlier this month. This week’s measure is expected to show a push back to 0.9% for January on a year on year basis. However, should we see the figure fall short yet again, this could become a serious problem for Draghi who could begin to seriously consider negative interest rates or alike to avoid deflationary fears. Remember that price stability is the number one target for central banks and thus any notable shift lower will have to be addressed as a matter of urgency.
Finally, keep an eye out for the eurozone unemployment rate, due to be released on Friday. This has been somewhat of a sticking point within the eurozone, where the peripheral economies have found it extremely hard to generate sufficient employment. This obviously provides a drag upon their ability to grow given the loss of tax revenue and subsequent increase in welfare payments. The unemployment rate has remained around 12.1% for almost a year now and despite falling back from 12.2% in September, there has been little to suggest the single currency region is on any substantial path towards reducing this key measure. Expectations are that we will see yet another figure of 12.1% posted. However, should we see a fall back to 12.0% it would be highly notable and could point to the beginning of much needed improvements to the chronic unemployment seen throughout this crisis.
Asian & Oceania
A quiet week in Asia, where the main event of note come out of Japan in the form of the retail sales figure due on Wednesday. The Japanese economy has seen a somewhat mixed 2013, where the promises from Shinzo Abe seems to be coming true following a move out of deflation, which also saw the yen devalue significantly and Nikkei225 reach record highs. However, with the highest debt to GDP ratio of all the major developed economies, standing above 220%, the need for a VAT hike is evident. However, coming at a time when the recovery and growth is somewhat fragile means that figures such as the retail sales number are absolutely crucial to understand the health of economic activity. Should we see a weakening of this figure, it would be difficult to see how the VAT rise in April will not have a negative impact on sales in the country. Market forecasts point towards a moderate fall from 4.1% to 3.9%, yet any larger tumble could be notable and draw attention.
Finally, in New Zealand, the monetary policy decision from the RBNZ is due on Wednesday. This has become increasingly pertinent given that we saw a greater than expected inflation figure last week, bringing into account the possibility of an interest rate rise in the near future. Bearing in mind that most major economies are providing guidance of how long their rates will remain low, it would be highly notable should the RBNZ raise rates so soon. I do not expect to see a rise today, yet this announcement will become more and more crucial as 2014 goes on.