Weekly market preview from Alpari UK – 2 June 2014
Markets are hoping for a return to volatility this week, with the VIX reaching multiyear lows. The usual plethora of economic announcements bring about renewed hope of a spark coming back into the markets. In the US, the jobs report on Friday provides the most reliable source of market movement. Meanwhile, in the UK the services PMI is expected to push higher in yet another positive indicator for the UK recovery. However, the main event of the week could be Thursday’s ECB rate statement, where Mario Draghi is widely expected to bring about a change to the monetary policy standpoint in response to deflationary fears. In Asia, the Chinese manufacturing PMI figure starts the week early on Sunday morning. And finally the Australian GDP figure is set to shed light on whether the economy is managing to pick up despite the Chinese slowdown.
US
The US economy has been faring well in recent months, coming off the back of a disappointing first quarter. This trend is expected to continue this week, where the focus will largely be upon the jobs market, with the ADP and headline payrolls figures being joined by the unemployment rate.
The first of the major employment figures to be released is the ADP non-farm employment change, due on Wednesday. This figure is the ‘little brother’ of Friday’s official release and as such has a somewhat lessened impact. That being said, there have been countless occasions that the ADP figure has brought major volatility to the fore, especially in times when the Fed decision-making has been called into question. Unfortunately we are currently not in such a period at the moment, with the path of tapering seemingly set unless any major hurdles appear. As such I believe that a higher figure will be treated as a confirmation of the status quo, yet a significant miss could be the occurance which would bring major shocks to the market.
On Friday, the official jobs report is due to be released, with the markets and Fed watching closely for whether there is going to be another strong release following last month’s particularly impressive fall in the unemployment rate. The unemployment rate is typically the most top level measure of unemployment available and as such the likes of the Fed and BoE have used this to create expectations for markets in the past. Despite this being ditched somewhat, this the rate will be watched closely as one of the core measures upon which monetary policy is based on. Following the unprecedented 0.4% drop last month, the unemployment rate is expected to consolidate at 6.3% this time around. The more volatile reading of the two is the non-farm payrolls release, which has the ability to show a more detailed picture of the how employment is changing month on month. Given the expectations for a quiet unemployment rate release, eyes will be on the payrolls for possible market volatility. Market forecasts point towards the potential of a pullback from the major round of hiring last month which saw a rise of 288k employed. With estimates looking out for a number closer to 215k this time around, it is worth understanding whether the Fed sees this as sufficient. Given that we saw tapering persist amid figures below 200k, it is likely that the Fed would continue unchanged in such an event. However, there is no doubt that the Fed wants to see progress and any figure below 200k could bring worries that the stimulus withdrawal is having unintended effects to employment.
Given that the Fed has now ditched their unemployment rate based forward guidance in favour of a more complex ‘spare capacity’ based policy, the thought process of the Fed has become a little more hazy. Janet Yellen has said that there is now going to be an increased emphasis on factors such as the participation rate, earnings growth and the amount of part time work. Thus be aware of the impact that these elements can have upon decision making at the Fed when Friday’s report is released.
UK
The usual events to watch out for at the beginning of the month, where the three PMI releases pave the way for the BoE monetary policy announcement. It is likely that there will be a greater degree of emphasis upon the PMI figures than the BoE announcement given the imposition of a very stable monetary policy environment under Mark Carney. Thus I will be looking out for the Services PMI as the major driver of movement in the markets given the reliance of the UK economy upon the sector. However, it is the manufacturing PMI which is first, being released early on Monday morning. The importance of the manufacturing sector lies largely in the UK economy’s need to diversify away from services which dominate the economic make-up over the past decade. Thus a diversification of the economy allows us to believe the UK would weather any future crises in a more stable manner. In line with that, the UK manufacturing sector has been growing positively for the past 16 months, recently pushing into a yet higher level of expansion. This is expected to be tested this month, where estimates are pointing towards a moderate pullback to 57.1 from 57.3.
On Tuesday, the construction PMI figure is expected to confound three months of disappointing surveys, with a rise from 60.8 to 61.2. Whilst the construction sector accounts for the least proportion of the GDP figure out of the three sectors, this is one of the most evenly distributed within the UK and is expected to provide substantial growth going forward. That being said, the signals from Mark Carney that there could be a targeted cooling in the housing boom is likely to be reflected in this figure going forward and thus it is well worth looking out for.
Finally, the crucial services PMI survey is due on Wednesday, following a particularly encouraging figure last month. Unfortunately this month looks like reversing some of that if estimates are anything to go by, with a reduced figure of 58.3 expected from last month’s 58.7. However, with the unreliability of these figures being clear given previous misses, I believe this figure could prove to be one of the most interest readings of the month. With the UK economy majorly reliant upon the services sector for growth, taxes and stability, any major up-tick would be influential for UK growth going forward. The importance of the services sector is undoubted, accounting for around 85% GDP in recent months. Subsequently, the services PMI figure is a reliable leading indicator of future growth in the UK. Given the size and impact of the services sector in the UK, any major moves in this figure have substantial implications for the economy and thus the markets.
The final event of note in the UK comes on Thursday when the BoE announces their latest monetary policy decision. As time has gone on, this event has become more or less important dependant upon expectations at the time. Unfortunately current expectations point towards very little in the way of changes from the BoE for the time being and thus I expect little from this event, with both interest rates and asset purchases almost certainly set to remain as is.
Eurozone
A somewhat mixed week in the eurozone, where quiet parts are punctuated by major events in the form of the CPI flash estimate and the ECB monetary policy decision. The earliest of these is the CPI inflation figure, which in fact is going to be key to the decision later in the week from Mario Draghi. Given the inability of the eurozone to stimulate any price growth throughout 2014 to date, there has been increasing pressure upon Draghi to implement easing measures to boost prices going forward. Should we see further deterioration in the inflation figure, or else even a failure to move higher, this would put further pressure on Draghi to ease later in the week. Thus markets will be watching very closely for a indication of what actions could be taken later in the week. Expectations are for the figure to remain at 0.7% which should leave the options open for Draghi. However, a move in either way could majorly effect market perceptions.
This leads to Thursday’s interest rate decision from the ECB, where markets are expecting to see the first interest rate cut in 8 months. This comes off the back of ongoing pressure both within the ECB itself and from the public for Draghi to cut rates or take some sort of action to boost the region, increase inflation and devalue the euro. However, so far he has resisted, instead offering the reason that current inflation is attributed to long term structural factors like energy prices, which would not be affected by monetary policy. However, with the euro strength now coming into the fray, it seems Draghi is willing to act given last month’s announcement that we could see some form of action in June. Options range from interest rate cuts to fully blown asset purchases. However, it seems the most frequent estimated response is that he will make a minimal reduction in rates to around 0.1% from the current 0.25%. This would likely disappoint the markets and I believe would have next to no impact upon inflation levels. That being said, Draghi has a way with words and should he not implement any more dramatic steps, it would be highly likely that he will discuss them as future options to appease some of that disappointment. Thus remember that whilst the announcement of what changes, if any, they decide to take, the press conference closely following can often be just as likely to move the markets.
Asia & Oceania
The Asian region is pretty quiet this week, where the main event of note comes on Sunday morning when the Chinese manufacturing PMI is released. The recent rise in the HSBC measure points to a recovery of sorts following a particularly testing period for the Chinese manufacturing sector. Whilst the HSBC figure pushed well into contraction for multiple months, this official figure remained above the key 50 threshold, thus denoting an industry that remains within expansion. Now that we are seeing a response in the HSBC figure, which focuses on smaller firms, it is highly likely that this figure will also expand at a greater rate going forward. The estimates point towards a rise to 50.7 from 50.4, which would be the highest level in four months and a step in the right direction.
Finally, in Australia there is a GDP reading to watch out for on Wednesday, along with Tuesday’s monetary policy decision. Much like the BoE, the RBA has tried to set a stage for stability in the coming period. Subsequently Glenn Stevens has disclosed the fact that whilst cuts to the headline interest rate are highly unlikely, so is any rise rise. Thus I expect little change from this announcement and subsequently a rather quiet event.
However, Thursday’s GDP figure could be the main event of the week, where market estimates point towards the highest rate of growth in almost 2 years at 0.9%. Coming off the back of a very difficult period for the Australian economy, this would be a significant milestone at they attempt to reallocate towards domestic consumption. Whilst 0.9% may not necessarily be the long term goal, it would be a hurdle which would allow for greater confidence of a move back to a steady footing.
