Not quite a 'happy' Chinese New Year for markets...
Week Commencing Monday 8th February 2016
Overriding Market Themes
We start this week in the US, where the jobless rate dipped below 5 percent for the first time since February 2008. The US Department of Labour reported the rate dropped to 4.9 percent as the economy added 151,000 jobs. Another positive was a rise in US hourly earnings, which went up by 0.5 percent, equating to roughly 12 cents. Over the year, average hourly earnings have risen by 2.5 percent. Despite the good news, investors remain cautious; especially given the US economy barely grew in the last three months of 2015. Labour market experts warned that the slowdown in the pace of job creation could continue as employers announce cuts. This continues to feed speculation as to when the Fed will seek to raise rates again. The US Federal Reserve raised interest rates for the first time in almost a decade in December. Before Friday’s employment data, financial markets had not been pricing in another rate rise until 2017 but following the release they shifted to price in a 50 percent chance of a move in December.
Moving back to the UK, The Bank of England cut its growth forecasts on Thursday and the only policymaker who had been pushing for a rate hike reversed his position, suggesting rates will stay on hold for the medium term. The Bank said its Monetary Policy Committee voted 9-0 to keep rates on hold at the record low of 0.5 percent. MPC member Ian McCafferty, who had voted for a rate rise since August, unexpectedly fell into line this week, hitting markets hard pushing Sterling down across the board. Britain had stood out from other European countries economic weakness with relatively healthy growth, little spare capacity and a jobless rate near many economists equilibrium, for a while raising expectations that it would soon follow the US and raise rates sooner rather than later. Since the Bank of England finalised its forecasts a few days ago, markets have pushed out bets on a first rate rise until mid-2018. Looks like that mortgage doesn’t need to be fixed any time soon after all!
GBP This Week
We have very little UK data out for the week, with industrial and manufacturing output the only release of note. We forecast industrial production will fall 0.5 percent while manufacturing output should drop around 0.1 percent. With this in mind, we expect focus to remain on the geo-political risks surrounding the EU referendum. While these risks should lead to continued GBP weakness versus the USD, the referendum also poses European wide risks, so we expect GBP/EUR to begin tapering off at its current levels. Indeed, we expect a correction on GBP/EUR, especially in the context of still superior UK growth compared with the euro area.
USD This Week
In terms of US data, we expect attention to remain on the American consumer with retail sales the main event of the week. We expect retail sales to increase 0.1 percent on the month, while core retail sales should increase 0.4 percent. Finally, the University of Michigan consumer confidence report should see a above estimate print of 93.0. So all in all, we expect a decent week ahead for the US Dollar.
We continue to remain confident in the US labour market, and despite the relatively shallow hiking path that the Fed appears to be taking, we believe there is significant support for the USD within the markets. With this in mind, Fed chairperson Janet Yellen is due to appear before congress on Wednesday and Thursday to deliver the semi-annual Monetary Policy Report, so expect any indication on potential hiking to be a major market mover this week.
EUR This Week
In Europe, disappointing Industrial Production and Q4 GDP figures may curb some perceived EUR strength, especially given the recent spike versus both the USD and GBP. In terms of data this week, German IP should grow around 0.3 percent on the month, while French IP should decline around 0.3 percent on the month. GDP is also on the wires, with Euro-area GDP expected to come in 0.3 percent on the quarter.
Moving into the near term, we expect the ECB to fight persistent low inflation with further monetary policy easing, with a potential 10 bp cut in the deposit rate in March followed by another cut at some point within the year. This would ultimately bring the deposit rate to -50 bp, adding further pressure on financial institutions to open up lending to consumers.