Weekly market preview from Alpari UK on 20 October 2014
A big week ahead in the markets, where the emergence of an unexpected correction has seen volatility return with a bang. The focus within the US markets will be geared towards the CPI release in the wake of the disinflationary worries that have dominated affairs in recent weeks. Meanwhile the UK GDP figure is likely to push forward talk of whether rates should move despite tumbling inflation. On the other hand, the eurozone has a somewhat quiet week, where a whole raft of PMI figures look set to dominate affairs.
In Asia, the busy week continues, with Chinese GDP set to draw focus upon a somewhat unpredictable economy of late. Finally, the Australian monetary policy minutes are likely to be the main event to watch out for amid mixed signals from the RBA.
US
The US markets are likely to see significant volatility given the major moves that saw over 10% wiped off most of the major indices. Many of these moves have been attributed to jittery traders who sold off the back of a handful of moderately negative economic releases. Whilst I do not think this is necessarily the full story, it is clear that the markets are highly sensitive at the moment and as such the economic calendar becomes more important than ever. With this in mind, the release of US CPI and manufacturing PMI figures should attract significant interest this week.
The most notable of these two releases is no doubt Wednesday’s CPI reading which will dominate given the current furore surrounding disinflation. Recent comments from Fed members Bullard and Williams have put the potential for a delay or increase in QE on the cards, all of which stems from clear downward pressure upon inflation across the world. Tumbling CPI in the US, UK, eurozone, China and alike has put the topic back on the agenda and monetary policy would typically become more accommodative as a response to any disinflationary threat. With that in mind, Wednesday’s CPI reading will be absolutely crucial for the markets and could cause significant volatility.
The month-on-month CPI reading is expected to improve somewhat, from -0.2% in August to a flat 0%. This is expected to be accompanied by a flatlining year-on-year figure of 1.7%. Another figure to be watching out for is the core number, which strips out volatile elements such as food and energy prices. Interestingly the core estimates point towards the yearly figure remaining at 1.7% and a month-on-month number of 0.2%. Thus for the most part, the markets expect a steady report this month, but with markets fully aware of what further downside could mean, there will be very close attention being paid to this release.
Later in the week, the flash manufacturing PMI is released on Thursday, where markets are expecting to see it pull back somewhat from 57.5 to 57.2. This number is likely to take on a greater significance with the current volatility within the markets, with poor data points leading to a theory that the economy could still do with some more easing. That being said, the US economy has been faring well in the past year and for that reason, I don’t personally follow that rhetoric too much. Ultimately, this is yet another major economic indicator that could move the markets and with a negative move predicted, it could yet help the downbeat story seen within the markets recently.
UK
A somewhat busy week ahead in the UK, where BoE minutes, retail sales and GDP figures allow for a likely continuation of the volatility that we have seen recently.
Wednesday’s BoE monetary policy minutes are going to the be first major event of the week in the UK, with a focus upon interest rates back on the cards. At the time of the last meeting, much of the pressure was geared towards tightening monetary policy in the near term and raising rates in Q2/3 2015. However, what a difference a week or two can make, where the global downside shocks to inflation means that there is a renewed feeling of anxiety within the central banks about raising rates too soon. As such, these minutes will be negated somewhat should we see a more hawkish view given recent developments. However, with the markets feeling like there could be more loose policy around the corner, it makes sense that any dovish minutes would be taken as particularly potent given that the next month’s minutes are likely to be dovish in comparison.
Thursday sees the retail sales figures shine a light upon the consumer base at a time when confidence is high in the UK recovery. For the most part, this measure is pretty volatile and we can see monthly swings into and out of positive growth on a regular occasion. However, last year saw 6 of 12 months with negative growth in MoM retail sales. This year has seen just 2 months out of 8 and so it will be interesting to see if the estimates of a -0.2% fall are set to give a third month of downside YTD. Given the volatility of the MoM figure, I believe markets will take any moderate downside with a pinch of salt. However, any major swings in these figures will be highly notable given the linkages between consumer activity and output growth.
Finally, the release of UK GDP for the third quarter of the year will no doubt dominate trading on Friday, with market interest focusing upon whether the strength seen in the first 6 months can be matched. For the most part, there is not too much pressure upon the UK what with the strong growth that has been seen recently. For that reason, the expected pullback from 3.2% to 3.0% wouldnt be the worst thing in the world given that 3.2% represents the highest rate of growth since 2007. However, any major move in this figure would no doubt be taken as a strong indicator with regards to the health of the economy going forward and thus the onward sentiment will be built on such a move.
Eurozone
A bit of a quiet week in the eurozone, where the major economic releases come in the form of the PMI figures, due out throughout Thursday morning. These surveys have been some of the first indicators of the downturn that has been evident within the likes of Germany in recent months and thus a poor or strong reading can provide a clue to the coming months for the eurozone. The focus of the markets will be particularly geared towards the German manufacturing PMI figure, which posted the first contradiction figure for 15 months in September. Given the reliance upon Germany within the eurozone, the recent downturn has unsurprisingly been treated as a bit of a disaster for the single currency region. Thus should we see further deterioration it would no doubt mean yet more calls for QE from the ECB. Ultimately, the attention will generally be upon whether there is a move in a certain direction for many of the readings. That being said, I believe the most important are the likes of the eurozone numbers, along with French and German manufacturing PMIs. Be aware of the eurozone composite figure which provides a good overview of the whole single currency region given that it includes both manufacturing and services sectors.
Asia & Oceania
A busy week in China, where the Hong Kong protests has somewhat dampened any renewed positivity given the possible impact it could have upon political stability within the Asian powerhouse. However, with the release of the GDP figure along with the HSBC manufacturing PMI number, the focus can try to return to the economic stance of China once again. The GDP figure is of course the most important number when it comes to China, with an economy and political system built on strong growth and high unemployment growth as a result. What we have seen in Hong Kong is no doubt the kind of thing that would be more commonplace should China not see the kind of improvement in living standards that has become apparent over the past decade. As such, it is important for China to remain strong going forward. For some of us, there is the belief that GDP isn’t necessarily everything, with much of the growth coming from artificially propping up many much of the economy. However, for now the focus is upon quantity over quality of growth and thus markets will definitely be closely watching for any movement in this figure. Estimates point towards a pullback to 72.5% in Q3 from 7.5% in Q2.
Thursday sees the release of the HSBC manufacturing PMI figure, where markets will focus upon the ability of the Chinese manufacturing sector to convincingly push out of the slowdown that has been evident in H1 2014. Recent months have been stronger than many expected, yet the pullback towards the 50 mark (which separates expansion from contraction) is certainly worrying for China. Thus this month will be crucial. Should we see this number fall back below 50, it could mean further downside for Chinese manufacturing to come and thus a potential next round of stimulus from the PBOC. Otherwise, a strong reading would accompany solid export numbers seen recently and bring alot more confidence in the recovery.
The main event in Australia is likely to be the release of the monetary policy minutes, due on Tuesday. The focus of the RBA recently has been one of stability, where the economy is too weak in its recovery for any sort of rate rise and the housing sector is too buoyant to reduce rates any more. As such, minutes are always the ideal opportunity to see whether the RBA are going to be leaning more towards a dovish or hawkish outlook.
