Weekly market preview – 3 March 2014
The first week of the month means one thing. That is the return of increased volatility, speculation and highly market sensitive economic releases. This comes following a week whereby the headlines were dominated by conflict in Ukraine and alleviated pressure at the ECB following an unexpected rise in inflation. This week we will be focusing largely upon PMI and employment data coupled with central bank monetary policy announcements. In the US, Friday’s jobs report is expected to bring substantial volatility to the markets. Meanwhile in the UK, the focus will largely be centered upon the release of key PMI figures throughout the early part of the week. Finally, the eurozone’s ECB press conference will take precedence following the higher than expected inflation data.
In Asia, the Chinese manufacturing PMI figures from both official and HSBC sources will be key in understanding whether the Asian powerhouse is set for a more protracted downturn. Lastly, in Australia a raft of releases will be dominated by the RBA monetary policy announcement on Tuesday.
US
In a week where almost all the major economies are releasing highly notable and market moving data, it is the US which will likely remain the central driving force of the markets. The major events largely center around the jobs market; typically seen by most as the key driver of monetary policy within the US. With the reemergence of the FOMC meeting this month, the questions will again be asked as to where we currently stand with regards to tapering of asset purchases. The three key employment readings to look out for this week come in the form of the ADP non-farm employment change, unemployment rate and non-farm payrolls figures. It is also well worth looking out for the manufacturing and non-manufacturing PMI readings.
On Wednesday, the ADP non-farm payrolls figure is due to provide the earliest indication of February employment change. There are two ways to look at this figure, either as a key and central economic indicator, or else a predictive tool for the more notable non-farm payrolls figure on Friday. I take the first route, primarily due to the notably poor correlation between the ADP and headline payrolls figures. This has been particularly so over the past two releases, where the average differential between the two figures is 107,000 jobs. Given that the two headline announcements came in at 75,000 and 113,000, this means the ADP figure projected job creation at over double the rate in the past two months.
This is largely due to the fact that the ADP figure seemed to reflect the job market more positively than the headline rate during a period of adverse weather, which brings us to why the ADP figure is worth keeping an eye on. The decision to taper within the FOMC was a nod to the fact that despite seeing shockingly poor payrolls data, the ADP and unemployment rate figures held up surprisingly well and highlighted a strong underlying jobs market. On this occasion, the ADP was a crucial factor into Fed decision-making and for this reason I believe it is a closely followed barometer that will continue to be highly notable going forward. This month the market forecasts point towards a figure close to 153k, following a strong 175k reading last month. Typically, a over/undershoot of around 15-20k is usually enough to take the attention of the markets.
Also in the early part of the week, the ISM manufacturing and non-manufacturing PMI figures are due to bring about a more focused view of the current outlook with regards to specific sectors. It is the manufacturing PMI figure which I will be following most closely and is widely expected to rebound strongly from the sharp reduction seen last month. This was largely attributed to the adverse weather conditions which saw some of the larger manufacturers fail to both produce and distribute at the same rate. With January out the way, there is an expectation that we will move back towards the higher 50′s, with the readings prior to the January freeze being around 57.0 rather than the timid 51.3 reading in January. Given that the fall was attributed to seasonal and temporary factors, I am bullish about this figure and expect a stronger figure than the 52.0 level cited by forecasters.
Later in the week, the jobs report brings the expectations of high volatility and focus of the trading community. This comes in the typical format of the headline unemployment rate, coupled with the more unpredictable and accurate non-farm payroll figure. The headline unemployment rate will always be crucial as an overarching gauge of where the economic recovery is at for consumers and is easily comparable on a country by country basis. Hence the focus will always be upon this figure to ensure we see a fall to respectable levels. With a pre-recession rate of 4.5%, there is still some way to go, yet a tumble of 0.7% over the past three months shows that the picture is improving. In the past, markets have been fixated upon the 6.5% threshold as a key driver of possible interest rate hikes. However, with Fed’s Plosser and Yellen recently announcing that the 6.5% threshold is ‘obsolete’ as a target, we are now looking for further guidance from the Fed. Thus for the time being, we simply see this figure as being a key indicator for both economic performance and the subsequent Fed outlook. Expectations point towards the rate remaining at 6.6%.
Also on Friday, the most anticipated figure of the month is released in the form of the non-farm payrolls. This typically brings volatility in each direction, as market participants try to take advantage of the price action generated. The release is always interesting for the fact that it can be naturally erratic and unpredictable in nature itself. Market predictions point towards a rise to 160k following a weak figure of 113k last month, driven in part by weather conditions.
There is always two ways of construing any announcement which makes trading the event highly dangerous. The impact of strong employment data is typically viewed in two ways, as an indicator of improving economic conditions along with a potential driver of tighter monetary policy. Given that both of these can have very different effects upon the market, this makes the possible impact hard to predict.
UK
The UK economy is back into focus this week following a forgettable week. The early part of the week will be dominated by the release of three key PMI surveys, followed closely by the latest monetary policy decision from the Bank of England.
The first of the PMI figures to be released will be the manufacturing PMI survey, due for release on Monday. This provides a leading indicator of the health of manufacturing sector, which behind services is the second highest contributor to UK GDP. This figure, along with services has suffered somewhat of a comedown throughout the beginning of 2014, following a very strong and positive second half of 2013. Market predictions are mixed in relation to whether this deterioration is set to continue, and it is this unpredictability which can bring a response in the markets should we see a strong swing either way.
On Tuesday, the release of the construction PMI figure shifts the emphasis onto a sector which has had substantial focus with the growing availability of credit and increased optimism within the housing market. Unlike manufacturing, the construction sector has fared well at the beginning of 2014. However, this looks to be waning somewhat, with the estimates looking for a figure closer to 63.6 following 64.6 last month; the highest since the 2007 financial crisis began. Should we see this fall, it is worth noting that we would still be at multiyear highs when discounting last months reading and thus a pullback would not be such a crisis.
Finally, on Wednesday the vitally important services PMI figure is in the spotlight, where we will be watching for a potential reversal of the cooling off seen in the past three months. Given that services are the core driver of GDP growth in the UK, a return to increasing expansion would be highly beneficial to the economy and job prospects going forward. Market expectations point towards a pullback to 58.0 from 58.3 last month. Should this occur, it would not particularly prove detrimental to growth going forward, unless we saw something a little more substantial. The key driver here is likely to come by either a larger than expected move or else a shift higher against expectations.
Finally, on Thursday the BoE’s monetary policy committee are due to make their latest decision in relation to the headline interest rate and asset purchase facility. This is unlikely to really attract too much volatility for the fact that the provision of forward guidance under Mark Carney means that interest rates and asset purchases are likely to remain constant. The one potential driver of volatility would come if an accompanying statement provided any change or update to the guidance framework, which seems unlikely.
Eurozone
A somewhat mixed week for the eurozone, where the release of various PMI figures in the early part of the week give way to the crucial ECB announcement on Thursday. Given the recent lack of volatility surrounding the PMI figures in the eurozone, I do not want to dwell too much. However, it is worth knowing that should we see any substantial shift into or out of contraction, then there could be a significant response in the markets.
The main event of note to watch out for will be the ECB interest rate decision and accompanying speech from Mario Draghi. The actual interest rate decision is unlikely to really bring too many surprises and is expected to remain at 0.25%. Given the minimal impact to inflation following the last interest rate cut, it is clear that this method of price manipulation is ineffective. This is also against a backdrop of a recently raised CPI inflation rate which was revised to 0.8%. Thus going forward, I do not expect any change to this rate unless inflation fell drastically. What is worth watching out for is the accompanying speech from Mario Draghi. Bearing in mind that the inflation rate remains an ongoing worrying, we will be watching out for any signals of possible future measures such as LTRO’s, negative interest rates or asset purchases.
Asia & Oceania
A mixed week in Asia, where Japan has little in terms of market moving announcements. Thus the headlines will predominantly be coming out of China, where the release of the official and HSBC manufacturing PMI figures will dominate proceedings. The Chinese manufacturing sector has been absolutely key to global growth and the recent deterioration in the HSBC manufacturing PMI figure brought about the beginnings of the emerging markets sell-off recently. This week, the HSBC manufacturing PMI will be unlikely to dominate as much, given that we are due to receive the final revision of the February figure. However, it is key to understanding just how bad the state is, with the first reading showing clear contraction at 48.3. The reason the HSBC figure is key is that this concentrates on the smaller and less well protected firms in China. Given the over-investment seen throughout China in the last decade, the buzzword to look out for is overcapacity. This is the focus upon companies which have essentially been incentivised into taking on staff and workloads for a non-existent demand. Thus as the fat is trimmed from the economy, the likes of the smaller and medium sized businesses will suffer most. This would also have a notable knock-on effect upon employment and growth going forward.
That being said, the headline manufacturing PMI is also due this week, on Saturday. Given that there has been manipulation of the official data in the past, many choose to discount the figures announced. Thus should we see a move below 50.0, this would be absolutely massive. Market estimates point towards a fall back to 50.2 from 50.5 last month. Should we see the measure fall below 50.0, this would mean that even official avenues are willing to admit that the largest manufacturing firms in China feel that the sector is in contraction, which would be a significant development. Should this occur, we could see a substantial return to the anxiety seen throughout the emerging markets.
Finally, in Australia a busy week brings about the latest GDP release, along with the monetary policy announcement from the RBA. The first of these to come to the fore is the interest rate decision from the RBA, due on Tuesday. The environment within Australia has calmed down recently, with the removal of the notably dovish element of their interest rate statement last month. Some have seen this as a sign that the next move from the Australian central bank is likely to be a rate rise. This comes as a sharp reversal, given the constant dovish tones being utilised throughout 2013 by Glenn Stevens as a means to reduce the exchange rate. Stevens may have previously mentioned an interest rate target of 0.85 in AUDUSD, yet signs are that potentially the low interest rate environment could have negative effects upon the economy, with a dangerous boom in property underway. Thus while I do not expect any change in interest rate, I will be watching for the statement from Glenn Stevens for any hawkish tones.
The GDP release on Thursday will be key in understanding quite how much the economy has recovered from the downturn seen in the second half of 2013. That being said, this measure has actually remained fairly consistent throughout that period with the quarterly figure remaining within the band of 0.5-0.7% since Q2 2012. On this occasion we are looking for the Q4 2013 figure to return back to 0.7%, which would be move in the right direction, yet not particularly outstanding. Should we see the figure push any higher than that, it could be a sign of a more protracted period of strength, yet I cannot see it happening with the weaknesses in China ongoing.
