Get ready for European QE as Draghi finally gets the go-ahead
Week Commencing Monday 18th January 2015
This Week in Brief
In the UK we expect a decent week on the jobs front, with unemployment potentially dropping down below 6 percent. We expect no movement in the BoE’s rate and QE mandate.
In the US we have a very quiet week ahead, with housing starts the only release of note. We do not expect any shocks with this release, so expect a quiet week with the US economy.
In Europe we have the all-important ECB meeting where we expect QE to finally be announced. Although some commentators suggest this is now priced in, we expect some significant volatility on EUR pairs, and expect the EUR to move to the downside.
Overriding Market Themes
The Swiss National Bank has abandoned its minimum exchange rate of 1.20 franc per euro, surprising the market with the timing as it brought a three-year policy to an end and sent the franc soaring and the single currency crashing against the dollar. After a move which surprised investors and analysts alike, the Swiss central bank attempted to soften the blow on the currency by cutting the interest rate from -0.25% to -0.75% on larger deposit account balances. This appeared to have little effect on trader sentiment, as EUR/CHF dropped almost 14 percent to just over 1.03 within the day. Indeed, the move seems to have only led to spark yet more volatility and moves on the CHF based currency pairs. The move has had a conservable knock on effect, with exporters based in Switzerland likely to bear the brunt of the move. International Finance has also been affected, with privately held online trading firm Alpari FX, a sponsor of premier league team West Ham United and The New York Rangers, stating that the currency move may drive the firm into insolvency. All round, this move by the SNB in our opinion was “amateurish”, and its impact will cause a considerable headache for the countries tourism and export businesses. It has also firmed up speculation that the ECB will be going ahead with some form of proposed Quantitative Easing this week. All in all, if you have a skiing holiday in the Alps anytime soon, expect things to get very expensive, very quickly!
Moving to the US, a surprise fall in retail sales knocked both equities and bonds into freefall on both sides of the Atlantic. US Commerce Department figures showing that retail sales dropped 0.9 percent in December from the previous month, against forecasts of a 0.1 percent fall, sparked renewed concern over the impact of lower oil prices on the US economy. Oil prices had been expected to weigh down on this figure, however investors were spooked by the 0.4 percent drop in core retail sales, the figure that excludes petrol but includes such products as electronics and clothing. The figure will no doubt fuel speculation among the investor community over how far cheaper petrol prices are translating into greater consumer confidence. Despite this however, many economists still believe that the broader trend for the US economy remains positive and this, we believe, is demonstrated by the US Dollar resilience in recent days. It seems that it will take more than just a bit of bad news to derail the world’s largest growth engine!
Finally, and on the topic of growth, the World Bank has recently cut its 2015 global growth forecast to 3 percent from 3.4 percent because of sluggishness in the Eurozone, Japan and some major emerging economies. The bank warned that the global economy was still struggling to gain momentum as many high-income countries tackle the legacies of the global financial crisis and emerging economies become less dynamic than in the past. It forecasted that, across high-income countries, growth would be 2.2% in 2015-17, up from 1.8% in 2014 because of gradually recovering labour markets, receding fiscal consolidation and still low financing costs. One of the main victims in this report is Russia, which given the recent trend in oil prices is projected to contract by 2.9% in 2015, getting barely back into positive territory in 2016 with growth expected at 0.1%.
GBP This Week
With little in the way of news out from the UK week, we will be concentrating on the Bank of England minutes along with some minor labour market reports. Starting with the labour side of things, we expect the November report to be consistent with the previous months, with a decreasing claimant count of -25k and an unemployment rate drop to 5.9 percent.
We will also be looking out for retail sales, where we expect the measure to maintain its current momentum and come in at 2.6 percent month on month, leading to an annualised figure of 6.3 percent.
We expect the BoE minutes to show unchanged votes on both rates and asset purchases. We do however expect the tone of the minutes of be somewhat softer than before, given the recent fall in global oil prices. With inflation set to remain low in the coming months, we expect Carney to continue his dovish stance.
USD This Week
We have an even lighter week for the US Dollar, with the only release of not being Housing Starts on Wednesday. We expect Decembers housing starts to confirm the recent Beige Book survey, which presented a wholly mixed outlook for the US construction sector. With this in mind, we are looking for a 1038k print this month, which is slightly lower than the general consensus of 1042k and only marginally higher than the 1028k posted in November. Given that we expect the print to come in broadly in line with expectations, we expect a limited impact on markets (especially given the importance of other releases this week).
EUR This Week
The main even in the Euro calendar this week is clearly the ECB’s meeting on Thursday and the expectation that QE will be announced by Mario Draghi. With negative rates introduced in December, and given that inflation remains under pressure, we believe that the time has come for Draghi to act and that a QE announcement is inevitable. We expect just a vague admission that QE will be conducted, with the technicalities of the program most likely to be announced in the ECB’s March meeting. Some analysts are suggesting that the program could initially be around EUR 500bn in size, and the program is likely to only purchase investment-grade EGB’s.
Also out form Europe this week are the Euro-area flash PMI’s, which we expect to rise modestly in line with expectations. Specifically looking at the French composite PMI, we hope it will finally breach to 50.0 level as the services sector stabilises and manufacturing continues to rebound.