Weekly market preview – 31 March 2014
The busiest week of the month ahead, where a relative lull gives way to a whole raft of economic data. This comes in the form of PMI figures through the early part of the week in the UK, jobs data from the US and an ECB press conference on Thursday which will be influenced by the inflation figure due on Monday. The Asian market is likely to continue to be dominated by the ongoing worries with regards to the Chinese slowdown, which will come back into view with Tuesday’s manufacturing PMI releases. Meanwhile, this week represents the implementation of the Japanese sales tax which is likely to gain substantial focus given the potential economic impact going forward. Finally, in Australia the latest interest rate decision will dominate proceedings.
One of the underlying stories within the market is likely to remain the threat of Russia moving into Eastern Ukraine and what sanctions could be imposed by the West in such a case. The Chinese slowdown is also of great concern globally and thus we will be looking for further indications of either extension or curbing of this trend. In the European sphere, the increased noises out of the ECB with regards to potential monetary loosening have led to heightened expectations being factored into the markets.
US
The US economy comes back into the fold this week, with the usual emphasis being placed upon the jobs market and how this could impact Fed decision making going forward. Whilst there are two PMI figures to watch out for, the likeliness is that much of the focus will centre upon the jobs market for much of the week.
On Wednesday, the ADP non-farm payrolls figure is released, paving the way for the official jobs data later in the week. The benefit of this privately calculated measure is that it provides us and the Fed with yet another wide reaching measure upon which to base decision making upon. Despite the similarities from a naming standpoint, this figure is unlikely to really provide too much of an indication of where Friday’s payroll figure will move, with previous experience showing that there is a weak correlation between the two. However, this is not to say that the figure will play no part in Fed decision-making or provide no volatility. It is typically the case that we will see markets shift in response to a notable figure, albeit to a lesser extent than some of the major releases. This week the market forecasts point towards a substantial rise back towards the 195k level, following a figure of 139k last time. This would push us closer to the kind of numbers we were seeing prior to the adverse weather conditions that took hold from December onwards and thus seems viable. However, we have seen the past two figures miss expectations, so I am watching to see if this trend continues or can finally be bucked.
On Friday, the headline non-farm payrolls data is released, with similar expectations coming into play in relation to the weather impact. However, this announcement typically holds substantially more potential in terms of market moving capabilities. The expectations of high volatility within the markets tends to be somewhat of a self sulfilling prophecy, with volatility coming about irrespective of whether the figures surprise or not. In general, markets will move regardless of the announcement, yet the true impact of the figure will come through in the period after when the dust settles somewhat. For this reason, this figure is seen by many as the biggest threat to their portfolio and open positions, both for the high volatility immediately following the release and the impact it can make upon market perception and direction in the days following. That being said, the typical association between US jobs data and Fed tapering is somewhat less sensitive recently given the clear willingness to go ahead with the tapering regardless of irregular data.
This month, the market forecasters are looking for a move higher in payrolls, with a figure closer to 196k expected following the February number of 175k. Should we see a figure anywhere above 190k, I would expect to see tapering continue at the April meeting.
Finally, the unemployment rate is released at the same time on Friday. The emphasis within the past year has shifted more towards this rate as a key indicator of future monetary policy given that the 6.5% threshold originally enacted by Ben Bernanke was a clear line in the sand that markets could follow as a precursor to interest rate hikes. However, with Yellen now deciding to follow Mark Carney’s lead in issuing additional forward guidance last month, the impact of this figure should make less of a difference in terms of the perception with regards to interest rate expectations than previously. That being said, this remains one of the most important indicators in relation to that rate decision and thus the markets are likely to move as a result on Friday. Expectations point towards a fall back to 6.6% following the February rate of 6.7%.
UK
Another major week ahead, this time for the UK economy, where the announcement of the latest PMI data will be the main focus. This is in part due to the fact that the BoE monetary policy decision has been pushed back to next week. Of the three PMI figures, the most important remains the services sector, given it’s impact upon the UK economy.
However, the week begins with the manufacturing PMI figure, due out on Tuesday morning. The manufacturing sector is no doubt important for the UK economy, in part due to the need to diversify away from services which dominate growth both pre and post crisis. This over-reliance can be seen as a weakness to many, with a highly diversified economy likely to weather any downturn more adequately than one which has all its eggs in one basket. However, with the emergence of low cost producers globally, the manufacturing sector has suffered within the UK and now a renewed emphasis is being placed upon generating a strong and diversified manufacturing base. Fortunately, this sector has been faring well in the past 10 months, rising from moderate expansion to substantial growth seen in last month’s reading of 56.9. Given that we are clearly growing at a strong pace, any minor slowdown in the rate of growth is likely to be brushed off somewhat. However, any signs that the recent slowdown seen in this measure are set to turn into anything more major could be taken as a cue to start paying more attention to this trend. Thus anything below 56.0 would probably grab the markets somewhat. That being said, the forecasts are looking for this figure to come in flat at 56.9 which would likely make little market impact.
On Wednesday, the construction PMI figure is due to be released following the substantial pullback seen in the February figure. Bear in mind that whilst important, the construction sector, accounts for the least amount of impact in relation to GDP growth out of the three sectors, and for that reason it often has more of a muted impact in the markets. That being said, the construction sector typically has more of a nationwide effect, whereas the manufacturing and services sector largely focus open specific sections of the economy. Thus from a domestic viewpoint, this figure will be perceived as key for future UK prosperity. Either way, from a market standpoint, the construction PMI typically requires a big move away from expectations to see a substantial shift in price action. Market expectations point towards a rise to 63.0 from the February figure of 62.6.
Finally, the all important services PMI survey figure is due to released on Thursday. This comes following a deterioration in this measure since the October high of 62.5. However, the current rate of 58.2 remains historically strong and thus the emphasis will largely be focused upon whether we are going to see the sector move into higher growth or if the deterioration looks set to continue. The importance of the services sector should not be understated, accounting for around 85% of recent GDP growth. Thus the services PMI figure can be used as a leading indicator to potential future growth within the UK. The expectations are that the recent downturn in this figure are going to be quelled, posting a steady figure of 58.2. However, this sets us up for a possibly notable miss in either direction.
Eurozone
The eurozone has become increasingly volatile within the markets in recent months, following the threat of possible deflation and subsequent implications with regards to monetary policy going forward. This week brings that same question back to the fore, with the release of both inflation data and the monetary policy decision from the ECB.
On Monday morning, the release of the flash CPI estimate will provide the latest reflection of inflation for the single currency region. This comes in a period where ECB members are increasingly discussing the potential of a looser monetary policy as a result of both price stability worries, along with potential impact of sanctions with Russia. The CPI measure has been ranging between 0.7% and 0.9% in the past five readings, prompting Mario Draghi to consider the possibility of alternate monetary measures following the low impact of November’s 25 basis point cut. The market expectations are pointing towards a reduction to 0.6%, which would represent the lowest rate since October 2009. Should this occur, it would almost certainly spark some sort of reaction from the ECB on Thursday.
Thursday’s monetary policy decision from the ECB will be absolutely key in determining how the markets are going to view European instruments going forward. In this case, the most orthodox step to take would likely be a move in the headline interest rate. Currently at 0.25%, there is actually not many places this rate could go, and recent experience has shown that it actually makes very little impact in relation to inflation. That being said, it also appears to be the favoured policy from many within the ECB, with Jens Weidmann mentioning negative rates as the most appropriate measure available. Should we not see an interest rate cut, the other options include desterilisation of bond purchases, or a full quantitative easing programme. Much of this will be dictated by the CPI release earlier in the week, yet given the partial factoring in of a monetary policy change on Thursday, there is likely to be market movement irrespective of the decision from the ECB.
Asia & Oceania
Chinese concerns come back to the fore this week, with the announcement of the March manufacturing PMI figure on Tuesday. The weaknesses seen in the HSBC PMI figures have highlighted a clear deterioration in the crucial manufacturing sector over recent months. Much like the UK over-reliance upon services, China is driven by manufacturing sector and thus there is a substantial impact upon overall growth should this downturn continue. The HSBC figure focuses mainly upon the small to medium sized businesses, which would always tend to suffer first during tight economic conditions. However, should we see this spread into the main, government backed firms, as represented in Tuesday’s headline figure, it would signal a significant escalation of the downturn. Thus I am looking out for a possible fall below 50.0 to spark widespread anxiety with regards to the Chinese growth story. Forecasts point towards a marginal fall from 50.2 to 50.1, highlighting how close this could be to contractionary territory.
In Japan, the sales tax is due to be imposed on 1 April, to much fanfare. Whilst this is unlikely to have any impact in terms of markets given the lag until we see any valuable data reflecting it’s impact, this will no doubt be regarded as the biggest story of the week in Japan.
Finally, in Australia the main event of the week comes on Tuesday, with the latest monetary policy decision out of the RBA. This comes off the back of Glenn Stevens’ recent announcement that the economy is positively transitioning away from an export led model to one of domestic consumption. This struck more of a hawkish tone than expected and for this reason I do not expect any change in policy this month. However, it will be notable to see the outlook with regards to the Chinese downturn and how this may be impacting the Australian economy going forward.
