FOMC round two... Will they act?
Week Commencing Monday 25th January 2016
Overriding Market Themes
We start this week in Europe, where ECB president Mario Draghi said the bank would “review and possibly reconsider” its monetary policy stance at its next meeting in March, indicating that a further bout of asset purchases could be on the way. His comments followed the ECB's regular meeting and press conference, where it kept the benchmark rate unchanged at 0.05 percent. The overnight deposit rate was also left unchanged at -0.3 percent. In December, the ECB expanded its quantitative easing programme and trimmed a deposit rate paid on reserves held at the central bank. However the action was deemed too modest many market analysts at the time, leading to suggestions that more aggressive moves from Draghi would be needed if he was serious about lifting Eurozone inflation out of its current lows. On FX markets, the euro weakened to a two week low against the greenback on the prospect of more monetary policy easing from the ECB as soon as March. Draghi’s comments also moved oil markets with Brent crude up more than 6 percent from the previous session at just under USD 30.00 per barrel.
Back on home soil, the UK government borrowed GBP 7.5 billion in December, nearly GBP 4.3 billion lower than the previous year. Prior to the release, economists had expected borrowing, excluding banks subsidised by the UK government, to come in at GBP 10.5bn for December. The estimate for the amount the government borrowed in November was also decreased on Friday to GBP 13.5bn from GBP 14.2bn previously. This left total public sector debt standing at GBP 1.54 trillion, or roughly 81 percent of UK GDP. In the autumn statement last November, George Osbourne continued to stress that the UK is on track to produce a budget surplus by 2019/2020, however this perhaps did not take into account some of the external risks facing the UK. A slowdown in China, the sharp slide in oil prices and market turmoil surrounding the possibility of “Brexit” are all producing a substantial risk to UK growth.
Finally, China’s economy grew by 6.9 percent in 2015 compared with 7.3 percent in the previous year. This is naturally disappointing for the Chinese government, which continues to maintain its official growth target of 7 percent. Chinese premier has said that weaker growth would be acceptable, providing that new jobs continue to be created, however some analysts believe that the actual growth figures are considerably lower than the official figures, something Beijing denies. Indeed, with growing debt and overcapacity in both the housing and factory sectors, economists and even Chinese officials are projecting considerably tougher times ahead. Other data released last week proved a interesting read, with industrial output rising at a less than expected 5.9 percent, fixed asset investment in nonrural areas climbed 10 percent while retail sales grew 11 percent.
GBP This Week
Despite the continuing uninspiring data, Sterling saw a rebound last week with GBP/EUR pushing back above 1.30 and reaching as high as 1.33. Although we continue to look for further depreciation in GBP/USD, we think even on this pair there could be a near-term correction.
In terms of data this week, our expectations for GDP growth on Thursday will likely cap further downside for Sterling. We expect a 0.5 percent on the quarter print for Q4 2015, which is 0.1 percent higher than the growth posted for the third quarter. We do acknowledge that risk is to the downside on this release however, so should we see any print below our expectations we will likely see a considerable sell off in GBP. Finally, the only other event of note is Mark Carney speaking on Tuesday, which always manages to stoke some volatility on Sterling pairs.
USD This Week
We have a very busy week ahead for the US Dollar, with the FOMC meeting on Wednesday and the GDP release on Friday dominating the news wires. With the FOMC, we do not expect any material changes in the statement and we imagine a return to the more cautious stance we saw prior to the first rate hike. With this in mind, we do not expect this week’s meeting to be a market mover per say, and expect the FOMC to wait for further information regarding labour market conditions before they contemplate a further rate hike.
GDP could well be disappointing, with the fourth quarter levels looking to come in around 0.8 percent annualised. Should we see stronger growth (and the US is probably the only western economy capable of producing a upside figure) we could see further Dollar gains.
Alongside the two releases above we have consumer confidence on Tuesday, New Home Sales and Crude Oil Inventories on Wednesday and Durable Goods on Thursday. All in all, plenty to get stuck into in Dollar markets then! Expectations of an easier monetary policy stance in the Euro area should continue supporting risky assets in the near term. Therefore, commodity and emerging market currencies and risky assets should find some support while USD and EUR should see some near term declines.
EUR This Week
Data this week is likely to be somewhat boring for the Euro area, with CPI on Friday the highlight. We start with the German Ifo Business Climate on Monday, where we expect the print to drop lower as consumers and business feel the strain. French GBP on Friday should also be interesting, with expectations set to see a 0.2 percent point decline to a mere 0.1 percent in the fourth quarter.
Inflation is the big one, with the market expecting to see inflation edging up to 0.3 percent in January, while core prices should remain stable at 0.9 percent for the year. We do expect these inflation figures to start edging down as we draw further into 2016, which follows the ECB’s own assessment of inflation pressures for the year.