Brazil tanks as focus shifts to ECB...
Week Commencing Monday 7th March 2016
Overriding Market Themes
We start this week with news that Brazil’s economy shrank 3.8 percent in 2015, putting what was once one of the world’s fastest growing emerging market economies on track to suffer its worst recession since official records began. A paralysing political crisis, rising inflation and interest rates coupled with a sharp drop in the price in some key commodity markets have led to a disastrous mix for Latin America’s largest economy. The government had said that the downturn had been expected, however some surveys have showed that February activity is falling at the steepest pace on record, suggesting the economy has yet to hit rock bottom. Indeed, the downturn has been so severe that Brazil's economy will probably only regain its previous size by 2019, as it grapples with a much larger debt load. Agriculture was the only bright spot, with a Q4 growth rate of 2.9 percent versus the Q3 figure. In the same period, the industry and services sectors fell 1.4 percent. Household consumption declined for a fourth straight quarter, with a drop of 1.3 percent, while investments plunged 4.9 percent. Finally, government consumption fell 2.9 percent, accounting for the steepest quarterly decline since the end of 2008.
Moving to North America now, the US economy added a better than expected 242,000 jobs last month, while maintaining the jobless rate at 4.9 percent. Unfortunately however, wage growth statistics didn’t meet expectations, suggesting that any interest rate decision is likely to be pushed further out than the March meeting. In fact, potentially more worrying is that the sectors with the biggest gains (retail, restaurants and social assistance) are considered to be lower paid jobs. This is acutely seen in the energy sector, currently feeling the pinch with low oil prices, cutting nearly 20,000 jobs in February. Regardless, the US economy continues to show signs of strength despite many external factors at play, namely general overseas weakness and negative talk surrounding the upcoming US presidential election.
GBP This Week
We have a very quiet UK data week, with both industrial and manufacturing production the only points of note. With this in mind, we expect the markets to concentrate on the implications surrounding the impeding EU referendum. While bookmaker odds continued to imply about a 30% percent chance of exit, “in” supporters gained momentum last week helping to ease markets. GBP recovered some of its post-EU Summit losses last week, despite disappointing February PMIs, as the referendum debate became more balanced. Mark Carney is also expected to speak, and if he decides to wade into the debate we expect markets to react accordingly.
In terms of target rates, we expect Sterling to his significant EUR strength at the 1.30/0.77 mark while GBP/USD continues to struggle to keep its head above 1.4.
USD This Week
Again, we have a light data week ahead with attention likely to shift towards Fed speakers in preparation for next week’s FOMC meeting. I expect them to be deliberately vague regarding any adjustment to the FOMC’s current stance, and if pressed lean towards no action during the coming quarter.
In terms of data, we look for import prices to be down 0.5 percent m/m and non-petroleum import prices to have declined 0.2 percent m/m.
EUR This Week
We have the all-important ECB meeting this week, and markets will likely brace themselves for a rough ride. We anticipate a 10 basis point deposit rate cut this week, followed by an additional 10 basis point cut in June. We also expect some fine-tuning of the Public Sector Purchase Program program with changes to the composition of QE. We expect President Draghi to provide strong forward guidance about the ECB’s ability and readiness to ease further.
On the data front, we expect German, French and Italian Industrial Production to increase by 0.3 percent, 1.3 percent and 0.7 percent m/m, respectively, and forecast Euroarea Q4 GDP on Tuesday to come in unchanged from the preliminary reading at 0.3% q/q.