Finally, Mario Draghi looks set to bite the QE bullet! Get ready to rumble people!!

Week Commencing Monday 5th January 2015


This Week in Brief


In the UK we expect a mixed bag for the PMI’s, with construction expected to decline slightly while Services should expand. We do not expect any shift in central bank policy from the Bank of England.


In the US many investors will be watching for the tone of the upcoming FOMC minutes, with a hawkish statement expected to boost the Dollar. Apart from that we have the ISM Non-Manufacturing figure and Non-Farms.


In Europe we have a quiet week with the expectation of the CPI results. We are look for negative inflation, especially given the recent trends on global oil prices. This will lead many to believe that Mario Draghi has no choice but to implement a QE strategy sooner rather than later.


Overriding Market Themes


Starting the year off at the embattled European Central Bank, global investors are increasing bets that the bank will initiate its own version of quantitative easing in the next few months, sending the Euro into freefall against the greenback. The ECB council’s next policy meeting is scheduled on the 22nd January, which interestingly is 3 days before the much anticipated Greek elections. With the ECB undoubtly involved in buying Greek national debt, this fact could persuade the ECB to hold off until after the event. This all plays into our projections of EUR/USD pushing south of 1.11 this year, with risk remaining to the downside. Indeed, if we do get EZ QE, we believe that markets have failed to price in the full magnitude of the event. It appears Mario Draghi remains the money man of the moment therefore!


Moving to another troubled part of the world, Russia has said annual inflation hit 11.4 percent in 2014, the highest level since the financial crisis of 2008. Inflation crept up 2.6 percent in December, a month when the rouble experienced a dramatic crash on December 18, falling by 20 percent in a single day and triggering fears of a full-blown “Northern Rock style” bank run. The rouble's decline has also sparked fears about Russian companies and their ability to service billions of dollar denominated debt, while the Russian central bank has raised interest rates to 17 percent, sacrificing growth in order to protect the currency. Mr Putin has already conceded that tough times where ahead for the Russian economy, especially given that oil prices are projected to drop even further in the coming months. With no rescue plan in place, let us hope that Putin does not embark in another project to steer attention away from the economy!


GBP This Week


We have a reasonably busy week for the UK ahead, with eyes firmly on the remaining PMI’s and the Bank of England. Starting with the Construction PMI figure, we anticipate a slight decline from last months 59.4 to 59.2 this month. Although a decline, this still remains a reasonably bullish growth figure, and as such we do not anticipate a enormous amount of GBP selling on the back of the release.


Moving to Services, which given the size of the sector in the UK is by far the most important of the PMI’s, we expect a slight uptick from 58.6 last month to 58.9 this month. This growth is in line with current trends and, in general, has beaten most forecasts. With this in mind, we believe risk is to the upside on this release, and should we see any posting above the 60.0 mark expect Sterling to make some modest gains.


Finally, we expect the Bank of England to be somewhat of a no-event, given that it is unlikely that there will be any further revolt on the MPC committee. With this in mind, we expect no changes in either the main interest rate or the level of QE.


USD This Week


In the US we have the usual suspects, coupled with the all-important FOMC Meeting Minutes. Starting with the minutes, we do not expect any massive omissions and will more likely, once again, analyse the tone of the statement. We will look for additional clues on the dove-hawk balance in the December FOMC minutes. While the December FOMC statement offered a hawkish tone in introducing “patience” in policy normalisation, the Fed dampened such sentiment by stressing that its guidance remains consistent with the previous statements’ “considerable time” characterisation.


We will also be watching the ISM Non-Manufacturing PMI, which is expected to post slight declines on the month at 58.2 from 59.3 last month. This will not surprise markets, especially given the non-manufacturing activity gauge posted a strong advance to 59.3 – almost a post-recession high. This, coupled with the Dollar’s strong position, should leave little room for USD sellers.


Finally, we expect a narrowing in the international trade deficit to USD 42.6bn in November from USD 43.4bn in the previous month. Exports likely declined as suggested by USD appreciation over the past few months as well as lower export prices. In particular we look for declines in industrial supplies and materials exports and ex-auto capital goods exports due to declining energy prices.


EUR This Week


We have a quiet week ahead for Europe, with most eyes focusing on German preliminary CPI and the SPI Flash Estimate. We expect both these figures to post downside revisions, which is unsurprising given than oil prices have dropped by 45 percent in recent months. Markets should be prepared for a negative release, however it will still prove to be a EUR negative event.  

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