Big week at the Fed...
Week Commencing Monday 26th October 2015
Overriding Market Themes
We start this week in Europe, where traders are speculating that the ECB will need to revisit its quantitative easing program at its December meeting. Mario Draghi, the president of the European Central Bank, stunned markets by signalling that he might be prepared to either increase the amount of asset purchases, or cut the interest rate even further. Speaking after the ECB’s latest policy meeting in Valetta, Draghi revealed that some members of the governing council had favoured taking more action to stimulate the economy immediately. As Draghi spoke, the euro dropped by 1.5 cents against the dollar, and jumped almost 2 cents against the Pound. Europe continues to struggle amidst declining global demand, especially in China, and a persistent lack of confidence from European consumers. One thing is for sure however, should Mario Draghi entertain such a move, the Euro will be hard pressed to provide any support versus its currency peers. Maybe, just maybe, we could be back on the path to 1.44 once again!
Moving to China, the Peoples Bank of China lowered its benchmark interest rates by 25 basis points, alongside a 0.5 percentage cut in the reserve requirement ratio, in an attempt to kick start a slowing economy. Expectations for global growth have already been revised down to 3.1 percent in 2015, the lowest IMF forecast since 2009, and economists are concerned that prospects for next year are also worsening. In a further move, the bank also cut the reserve ratio that domestic banks must post with the central bank to secure client deposits, effectively increasing the amount of available cash in the financial system by GBP 58 billion. It is clear that China is finding itself more and more vulnerable as it continues to stamp its mark on the global economy. Does this remind you of Japan back in the 80’s anyone?
Finally in the UK, retail sales was boosted to a whopping 1.9 percent in September as the Rugby world cup pushes beer sales through the roof! Indeed, the ONS cited falling store prices and Rugby World Cup promotions as the biggest contributors to the better data. Economists had expected retail sales to rise by 0.3 percent on the month and 4.8 percent on the year, after upbeat surveys from both the British Retail Consortium and the CBI.
GBP This Week
With little data out from the UK this week, all eyes will be on the release of preliminary Q3 GDP on Tuesday. We expect a growth rate of 0.5 percent for the quarter, down from 0.7 percent in the second quarter and below market expectations.
With the above in mind, we expect Sterling to struggle to maintain its recent highs against the US Dollar, potentially returning to the 1.51/1.52 range shortly. Sterling should continue to remain reasonably robust against the Euro, however it will most probably stabilise at its recent highs as investors attempt to reassess UK growth potential coupled with renewed ECB QE fears.
USD This Week
We have a busy week ahead for the US with the Federal Reserve set to speak on Thursday. We expect them to “confirm” that a rate rise is on the cards by the end of the first quarter 2016, and any such acknowledgement should boost US Dollar markets.
In terms of data, we expect Friday’s employment cost report to increase by half a percent on the quarter, which is positive given the 0.2 percent rate posted last quarter. Finally, Q3 GDP should continue to post a health figure, potentially reaching 3.5 percent (annualised). All in all, this should be a positive week for the Dollar.
EUR This Week
On the data front we expect German IFO, Spanish Preliminary GDP and Euroarea inflation to be the key points to focus on. Starting with the IFO, we expect a continued downside trend on this report in line with the continued reduction of German consumer confidence. Although we expect downside movement, the report should still show that Germany is still leading Europe, so expect any market reaction to be muted.
Moving to Spanish GDP, with most analysts expecting a print of around 0.75 percent for the quarter (slightly down from the 1 percent print last quarter). Finally, Inflation should have edged up to 0.0 percent from -0.1 percent last month. Despite the uptick, we expect this very modest gain in inflation not to impact the ECB’s need to address further easing.