Weekly Market Preview from Alpari UK – 28 April 2014
The start of May is going to be greeted with huge amounts of economic data including the all important US jobs report, central bank meetings from both the Federal Reserve and the Bank of Japan, and bank holiday’s galore. There’s also plenty more data being released this week which can’t be ignored such as the preliminary first quarter GDP readings for the US and the UK and manufacturing data from China which could provide further evidence that growth has slowed at the start of the year.
The European Central Bank may not be meeting this week but that’s not going to keep them out of the headlines, with the flash reading of eurozone inflation being released. This has been a hot topic of debate in recent months, with the number falling dangerously close to deflation territory, yet the ECB hasn’t budged. Could another drop in April be enough to convince them ahead of the next meeting on 8 May?
US
The first week of the month is always an extremely busy and important one for the US, with a whole range of important economic data being released, both backward and forward looking. Given the amount of data being released, we tend to get some very good insight into how the US economy is performing during this week and what we can expect in the coming months. The most important of these releases is the US jobs report, as confirmed most months by the amount of volatility in the markets that comes with it.
For quite a while, the most important aspect of this was the unemployment rate as the Fed had set benchmarks to its monetary policy. That is no longer the case and with some of the drop in the rate being attributed to the decline in the participation rate, much less attention is being paid to the headline figure. The non-farm payrolls figure – the number of jobs created in the previous month – on the other hand is always viewed as an extremely important release and will quite often have a significant market impact.
The number of jobs created between December and February was extremely poor and prompted many to question the strength of the recovery. The unusually bad weather was largely blamed for the poor performance in these months, not just with regards to job creation but all areas of the economy. The March figure was much better but still disappointing as it didn’t show any of the lost job creation being carried over into the following months. That makes the April figure even more important as traders now want proof that the US is on track for a strong recovery. A figure above 200,000 is essential. If in line with expectations of 203,000, as with last month it may be accepted, but I doubt it will be cheered. Only a number close to 250,000 will be viewed as supporting the view that the weather was to blame for the poor performance during the winter.
This is one of those rare weeks when the jobs report is accompanied by a monetary policy decision from the Federal Reserve, meaning there is the potential for a lot of volatility in the markets. While this may mean the start of the week is treated with an element of caution from traders, I expect to see some big moves across the whole week. This could be a week that confirms the US as either being on the road to recovery or facing a tough 2014.
The actual FOMC decision may not be quite as big an event as normal with it not being followed by a press conference with Chair Janet Yellen. As we’ve seen on numerous occasions in the past, this can produce plenty of volatility in the markets and occasionally have more of an impact that the decision itself. The actual monetary policy decision itself is likely to be straight forward with the Fed reducing its monthly asset purchases by another $10 billion, bringing it down to $45 billion. That said, you should underestimate the ability of the Fed to surprise the markets, be it through a larger or smaller taper, or a more dovish or hawkish statement that creates waves in the markets. This is an event that should be followed closely and treated with caution.
The rest of the week offers plenty of other important releases including housing data on Monday, consumer confidence survey on Tuesday, the first quarter GDP reading on Wednesday and the manufacturing PMI and jobless claims number on Thursday. While these aren’t the most important events we’ll see this week, they can have a significant impact on the markets so should not be overlooked. The surveys are particularly useful at the moment, with traders viewing data from the opening months of the year as unreliable as it’s very difficult to quantify exactly what impact the weather had. The best we can do is average out the first six months once all of the data has been accumulated and until then take the numbers with a pinch of salt and hope the surveys display a growing confidence from both consumers and businesses. If they do, I would expect to see it well received by traders.
Despite it being an important week from an economic data standpoint, the main driver for the markets in recent weeks has been corporate earnings season and I expect that to continue next week. It’s not just equity markets that are impacted by quarterly earnings reports, the results can have an impact on investor sentiment which impacts all markets. There are plenty of companies scheduled to report earnings next week so its worth keeping an eye on what the sentiment surrounding earnings is and how it can impact what you’re trading.
UK
It’s going to be a much quieter week for the UK, with the Bank of England meeting not taking place until next week and very little data being released. The preliminary GDP reading, released Tuesday, is expected to show 0.9% growth in the first quarter. This is a marginal improvement on previous quarters which, given the struggles being seen in many other countries, is very encouraging. Any reading in line with expectations is likely to be well received by traders, and even a small miss is unlikely to knock them. Sterling is already one of the star performers in the currency space, due to the more hawkish stance of the central bank and the performance of the UK economy. It has struggled to make the next move higher against the greenback in recent months and a strong GDP reading this week could provide it with the boost it needs to take that next step.
The other two key releases for the UK this week will be the manufacturing PMI on Thursday and the construction PMI on Friday. As stated earlier, PMI readings provide important insight into the sustainability of the recovery, in the case of the UK, or an early indication that confidence is growing and the recovery is near, in the case of the eurozone. While this may be a little more important for the latter, with the hard data offering little to cheer about, it’s also very important for the UK. It’s very important that the UK doesn’t lose momentum and this data should give an indication of whether this will happen. It will also provide insight into how balanced the recovery is so tends to be followed quite closely.
Eurozone
There may not be an ECB meeting this week, but that’s not going to stop people talking about the central bank, especially on Wednesday when we’ll get the flash estimate CPI reading for April. Inflation has been a topic of hot debate in recent months, with the ECB refusing to act to stop the decline despite the rate falling to 0.5%, dangerously close to deflation territory. The last two decades in Japan has shown the damage caused by a prolonged period of deflation in a country so its no surprise that the ECB is being heavily criticised for ignoring its sole mandate, price stability with inflation below but close to 2%.
The ECB has been adamant until now that inflation expectations are “well anchored” and while the rate may remain low for a prolonged period, it is expected to return close to 2%. Many view this as the central bank simply being reluctant to use unconventional monetary policy tools, such as quantitative easing or negative deposit rates, rather than them truly believing further action isn’t necessary. If interest rates weren’t already at record lows of 0.25% I have no doubt that they would have cut rates in recent months in response to the drop in inflation.
The inflation rate is expected to rise to 0.8% in April, which would effectively give the ECB a free pass to hold off again at the next meeting on 8 May. A surprise drop in the rate, which would be well below expectations, could be the straw that breaks the camels back, effectively forcing the ECB into action. The central bank needs to see evidence that the decline is slowing, which so far it hasn’t had.
Of the remaining data out this week, the Gfk German consumer climate figure could cause a stir in the markets, as could the Spanish flash GDP reading and the eurozone unemployment rate. However, as with many of the other releases this week, this is all mid-tier data which means the impact on the market tends to be smaller. That’s not to say they can’t create volatility or big moves, just that based on recent releases they’ve tended to only have a small impact.
On Thursday there’s a bank holiday in many eurozone countries, including Germany, Italy and France, which is likely to have an impact on trading volumes on those days. This could also impact volumes on Friday as well, with traders opting to turn it into a long weekend.
Asia & Oceania
A bank holiday in Japan on Monday followed by bank holiday’s in China on Thursday and Friday suggest its not just going to be trading volume in Europe that’s going to be hit next week. Fortunately, in and around these bank holiday’s there is some important data being released as well as a potentially significant meeting of the Bank of Japan.
The BoJ is expected to discuss in depth the impact of the sales tax hike (from 5% to 8%) that came into place on 1 April and whether it warrants any further loosening of monetary policy to act as an additional support for the economy. I will be very surprised if the central bank decides to act at this meeting having opted against it at the last meeting three weeks ago. Given that the tax hike came into effect less than a month ago, they can’t possibly know any more now about its impact than they did they. It’s surely safe to assume that if they wanted to wait for evidence three weeks ago, they’ll want to again this week.
What’s more, I don’t expect a loosening of monetary policy for a few months at least as the early data will be distorted by the increased spending ahead of the hike. Only by averaging out the next four or five months of data can they have a real idea of the impact of the tax hike and act appropriately.
That said, the outlook report, which will be released at the same time, may provide the central bank with a reason to provide additional stimulus. This gives the BoJs outlook for both inflation and economic activity and is only released twice a year. I still don’t believe they will act, partly because recent comments from officials suggest they are pleased with developments made in both of these areas. Aside from slight amendments to these forecasts, I don’t expect anything major to come from this.
The Chinese manufacturing PMI and non-manufacturing PMI, released on Thursday and Saturday, respectively, will be followed extremely closely by traders. The slowdown in the Chinese economy in the first quarter has been analysed by many people in recent months with some panicking more than others and the government apparently not being at all concerned.
The non-manufacturing PMI has remained strong throughout this so is less of a concern. The manufacturing PMI on the other hand is hovering dangerously close to the 50 level that separates growth from contraction and has been for months. The HSBC reading, which covers more small to medium sized private firms, has been in contraction territory since the start of the year and despite being supported by the government, it looks inevitable that the official reading is going to follow suit. That isn’t expected to happen this month, but if it does it will only add to calls for more stimulus, either fiscal or monetary, in order to stop growth slowing too quickly. Without this, people will continue to question the ability of China to achieve even 7% growth this year.
