Ukraine continues to weigh on European sentiment with German ZEW expected in the red!
Week commencing Monday 17th March 2014
This week in Brief
- In the UK we have the Bank of England MPC minutes, unemployment, PSNB and the Chancellors spring budget. All these releases should be reasonably positive for Sterling as we move deeper into March and hopefully allow the currency to reverse some of its recent losses.
- In the US we have the all-important FOMC statement where we expect Janet Yellen to taper once again. We also have unemployment claims, existing home sales and the Philly Fed, all of which are expected to be reasonably positive.
- We have a quiet week ahead for Europe with German and EZ ZEW the only release of note. We expect both of the figures to be slightly down on the month as the Ukrainian crisis continues to weigh on European sentiment.
Market Themes & Current Events
Retail sales in the US rebounded in February and new filings for jobless benefits hit a fresh three-month low last week, suggesting the economy was regaining strength after an abrupt slowdown caused by the atrocious weather we saw last month. The data on Thursday reinforced our expectations of a pick-up in US economic activity and should encourage the Federal Reserve to continue scaling back its massive monetary stimulus. The retail sales indicator increased 0.3 percent last month, with receipts rising in most verticals according to official Commerce Department figures. The gain followed a 0.6 percent drop in January and ended two straight months of declines, a situation which many economists feared would derail the Federal Reserve’s tapering strategy. In a separate report, the US Labour Department said initial claims for state benefits dropped by 9,000 to a seasonally adjusted 315,000 last week, the lowest reading since late November. All in all, a positive end to the quarter for the world’s largest economy.
Moving to the Far East, China’s industrial output rose 8.6% in January and February, according to the National Bureau of Statistics in Beijing. The figures were considerable worse than expected, adding to fears that the Chinese economy is slowing down. The news comes as China’s leaders end their parliamentary session, the National People’s Congress. At the start of the congress earlier this month, China's Premier, Li Keqiang, announced that the government was expecting the economy to expand at the rate of 7.5% this year, which although dwarfs western economies is somewhat disappointing for the far eastern giant. He did mention on Thursday however, that there was some flexibility on that target for 2014 and that the Chinese government's main concern was jobs. Certainly, China’s economic performance is becoming a close second in financial market relevance against the United States. A bad year of Chinese growth could have far reaching consequences.
GBP This Week
We have a relatively quiet week ahead for the UK with public sector net borrowing, the minutes from the latest BoE meeting and unemployment the only real releases of any note. Starting with the Bank of England, given that the bank has been very clear in its stance on monetary policy for the foreseeable future, we doubt that any policymaker revolted against the current line. With this in mind, we expect minimal impact on Sterling pairs when the minutes are finally published.
The unemployment data should be of more interest, although again it has become less significant since the Mark Carney announced the changes to the BoE’s guidance on interest rates (the so-called forward guidance 2.0!). There remains considerable slack within the UK economy at present, and we doubt that policy makers will make any moves to increase base rate before this is addressed. Unemployment also remains high, with this month’s figures expected to come in flat at 7.2%.
Finally in more political news, this week sees the release of the Chancellor’s spring budget. We expect little in the way of changes to tax structures, with perhaps a small decrease in corporation taxes the only exception. We expect more in the way of capital spending projects aimed at rejuvenating the countries so-called “two tier” economy. This should definitely be one to watch, even if its impact on currency markets is likely to be muted.
USD This Week
In contrast to both Europe and the UK, we have a very important week ahead for the US with the FOMC monetary policy decision certainly the global release of note. Fortunately, Federal Reserve Chair Janet Yellen and a few other policy makers have made it very easy for analysts this year. They’ve clearly stated that the scaling back of asset purchases will continue on the current course, of USD 10 billion reductions per month, as long as the economic data doesn’t deteriorate too much. Some have argued that the missed opportunities to taper in both January and February demonstrate that tapering is not ‘set in stone’, however we feel that this was mainly due to the adverse weather and not a fundamental change in direction by the FOMC.
Apart from the FOMC we will be looking for an continued betterment of both unemployment claims, existing home sales and the Philly Fed on Thursday. With all of these indicators set to post improved figures on the month, we hope that some sentiment can return to markets to counter the wave of risk aversion caused by the ongoing crisis in Ukraine.
EUR This Week
We have a quiet week ahead for the Eurozone with German and Eurozone ZEW really the only releases of note. Both of these indicators have been moving steadily higher since the beginning of last year, demonstrating that the Eurozone economy has improved. Optimism seems to be budding with each passing month, with bond yields already dropping considerable in the periphery. Ironically, we expect both German and EZ ZEW to come in slightly lower on the month, but this is mainly due to the ongoing situation in Ukraine and not investor driven.