0:09 Market reaction to this morning’s economic data
1:49 Apple earnings
3:43 Major companies reporting on Wednesday
Forex research: Global markets daily
[B]UK expected to narrowly avoid recession in Q1[/B]
Today’s UK opening call provides an update on:
• UK GDP may confirm first ever triple dip recession;
• US weekly jobless claims expected at 351,000;
• Exxon Mobile report first quarter earnings.
All eyes will be on the UK this morning, as it finds out whether it fell into a triple dip recession in the fourth quarter of 2012.
Chancellor George Osborne has had a tough time of late. Not only have the ratings agencies turned against him, with Fitch recently joining Moody’s in stripping the UK of its triple A rating, the IMF has also began to question the governments’ austerity strategy. This will have been music to the ears of Ed Balls and Ed Milliband, Labour leader and the shadow Chancellor, respectively, who have repeatedly called for a u-turn of the government’s austerity, encouraging them instead to adopt a “plan B” of more spending to drive growth, which is essentially what the IMF is now saying.
This makes the GDP figure this morning all the more important for Osborne, although in reality, it’s a no win situation for the Chancellor. If we see marginal or no growth, then the UK avoids another recession by the skin of its teeth and Osborne is repeatedly reminded of how fortunate he has been and how it should be seen as a warning that “plan A” isn’t working. If the UK falls into triple dip recession, it could be the final nail in the coffin for Osborne.
Despite all the negativity surrounding the UK over the last few months, I think marginal growth has been priced into the markets. What that means is, if the UK does fall back into recession, we can expect mass selling of the pound again as it will not only highlight the poor state of the economy, it will also increase the pressure on the Bank of England to increase its asset purchases at the next meeting, rather than waiting for Mark Carney’s arrival in July before they act.
In the US, weekly jobless claims will once again be watched closely for signs of weakness in the labour market. it A few weeks ago it looked as though we could be heading for a dip in the labour market in the second quarter, however that appears to have been a blip in the data. That being said, if we see a figure close to that again this week, it will just reignite fears of a spring slowdown in the US. That won’t necessarily be bad for the markets though, with traders viewing the slowdown as a sign of prolonged easing from the Fed, rather than a reason to sell.
There are a huge number of companies reporting again on Thursday, including Exxon Mobil and 3M before the opening bell. Exxon Mobil are once again the largest company in the S&P 500, so these results will therefore be watched carefully. After the close in the US, there are plenty more companies reporting, including Amazon and Starbucks.
Ahead of the open we expect to see…
[B]UK avoids triple dip recession[/B]
Today’s US opening call provides an update on:
[ul]
[li]UK avoids triple dip recession;
[/li][li]Weekly jobless claims expected to remain at 352,000;
[/li][li]Largest S&P 500 company reports first quarter earnings.
[/li][/ul]
The UK avoided a triple dip recession in the first quarter, recording surprisingly strong growth of 0.3%. For months now, we have been talking about the prospect of the country falling into its first ever triple dip recession, with data showing sectors such as construction and manufacturing contracting at a worrying pace.
Due to the size of the country’s services sector, these weaknesses can usually be absorbed, with the country still recording growth while it adjusts. The worry in the current quarter was that a combination of the poor weather, lower wages and overall weak sentiment may have a negative impact on spending and therefore the ability of the services sector to absorb the other weaknesses. Clearly this was not the case.
It’s difficult to be too pessimistic in relation to this figure, because the biggest impact that this figure will have is on sentiment and therefore the potential for future growth. If the headlines tomorrow would have read “UK in Triple Dip Recession”, it would have affected everything from business sentiment to consumer sentiment.
The difference between growth and triple dip recession on this occasion has only been marginal, but the impact it has on future growth could be great. The thing that concerns me now again is that the margin is so small, future revisions could show that the country did in fact fall into recession. On top of that, a small negative figure in the second quarter GDP will reignite talk of a triple dip recession all over again. That’s how fragile the whole situation is right now.
All things considered, it has been a hugely positive result and that was reflected in the markets, with cable moving more than 100 pips higher after the release and the FTSE rising around 15-20 points.
Attention will now turn to the US, with the release of the weekly jobless claims and a large number of companies reporting first quarter earnings. Jobless claims are expected to remain low at 352,000, easing any fears about the state of the US labour market after the spike in the data a few weeks ago.
Any jump in the figure back above 380,000 would once again raise fears of a slowdown in the second quarter of the year. This wasn’t helped by the release of the jobs report earlier this month, which showed the number of jobs added in March plummeted. Until we see an improvement in the non-farm payrolls figure, we’re the state of the labour market is going to be constantly called into question.
Corporate earnings season is also going to be monitored closely on Thursday, with 58 S&P 500 companies to report, including 3M and Exxon Mobil which are also components of the Dow. Exxon is the largest member of the S&P 500, so traders will naturally pay close attention to its results.
Ahead of the open we expect to see…
0:09 UK avoids triple dip recession
3:40 US weekly jobless claims
4:23 First quarter earnings including Exxon Mobil
Forex research: Global markets daily
[B]US GDP and consumer sentiment in focus on Friday[/B]
Today’s UK opening call provides an update on:
• BoJ leaves monetary policy unchanged over night;
• US first quarter GDP expected to rise to 3%;
• Markets expecting upward revision to consumer sentiment figure;
• Few companies reporting first quarter earnings on Friday.
The Bank of Japan meeting over night went exactly as expected, with officials voting to keep interest rates at 0.1%, while leaving QE unchanged after announcing a huge bond buying program at the meeting last month. The yen did strengthen slightly following the announcement but this is probably only a temporary move, with the markets fully expecting the BoJ to leave monetary policy unchanged.
The economic calendar is looking extremely light on Friday, with the only major economic releases coming from the US this afternoon. First up we have the release of the Q1 GDP figure, which is expected to show that the US grew at an annualised rate of 3%. This is a pretty strong performance from the US, given the tough global economic environment, especially when you consider the slowdown seen in the other economic data in March.
We appear to have seen an early onset of the second quarter slowdown witnessed in the US over the past couple of years, with weaker data being seen in the manufacturing and services sectors, hiring and consumer spending. This is likely to have had an impact on output, which means expectations may be a little high ahead of the release. A figure between 2%-2.5% may be a little more realistic.
The only other major release we have in the US is the revision to the UoM consumer sentiment figure for April, which showed quite a significant drop when the first estimate was released earlier this month. This is expected to be revised slightly higher to 73.2, which should act as a further reminder of the tough economic environment awaiting the US in the second quarter.
Even the corporate earnings calendar is looking pretty thin on Friday, although there are still a few big companies reporting, including Burger King, Chevron, Goodyear and Lazard.
Ahead of the open we expect to see…
[B]Europe lower ahead of US GDP release[/B]
Today’s US opening call provides an update on:
[ul]
[li]European stocks lower as traders take profits ahead of US GDP figure;
[/li][li]Expectations high ahead of GDP release, potentially setting ourselves up for disappointment;
[/li][li]Earnings take a back seat to data on Friday with the number of companies reporting massively reduced.
[/li][/ul]
It’s been quite a slow start to the European session, with a lack of economic and earnings releases providing little direction for the markets.
Instead we’re seeing some profit taking in Europe, following a relatively positive week for equities. Stocks have rallied this week on expectations that the ECB is going to cut interest rates and the next meeting on Thursday by a minimum of 25 basis points.
There’s also an element of caution in the markets, ahead of the release of the first quarter GDP figure in the US. The markets have priced in annualised growth of 3% in the first quarter of the year, but this may turn out to be a little optimistic given some of the disappointing data seen towards the end of the quarter.
The danger we have is that the strong start to the year in the US may have led to overly optimistic forecasts which means people are essentially setting themselves up for disappointment. That’s not to say this figure won’t meet expectations, but we need to take a closer look at the data before we get carried away.
There are some more companies reporting fourth quarter earnings today, although the number is far less than we’ve seen earlier in the week. This means they may not have quite as strong an impact on the markets, with investors instead focusing more on the GDP figure out of the US.
Ahead of the open we expect to see…
0:09 Profit taking pushes European stocks lower
0:37 Caution in the markets ahead of US GDP figure
1:37 Friday’s corporate earnings
Forex research: Global markets daily
[B]Attention back on economic data ahead of US jobs report[/B]
Today’s UK opening call provides an update on:
• Attention back on economic data ahead of ECB meeting and US jobs report;
• ECB expected to cut interest rates by 25 basis points as inflation falls well below target;
• German inflation expected to be confirmed at 1.5%;
• Italy hold first debt auction since the formation of its new coalition government over the weekend;
• Herbalife earnings followed closely on Monday.
With the majority of the major US companies having already reported first quarter earnings, there’s going to be a lot more emphasis on economic data this week.
This will be especially noticeable towards the end of the week, when central bank meetings and US employment data take centre stage. The ECB is expected to cut interest rates on Thursday, following the unusually dovish comments from Jens Weidmann, Head of the Bundesbank, a couple of weeks ago. In his interview, Weidmann conceded that if the economic data continues to deteriorate, then a rate cut may be warranted.
To be fair, an ECB rate cut is long overdue, so much so that some commentators are predicting a 50 basis points reduction, although I think that’s far too optimistic. So far, the only thing standing in the way of a rate cut has been inflation, which given the ECB’s focus on price stability is hardly surprising. However, that has fallen well below its 2% target recently, leaving Germany with little choice but to accept a rate cut and give a little help to those struggling most, such a Italy, Spain, France and Greece.
Inflation has even fallen well below target in Germany. Data this morning is expected to show a small increase in German inflation to 1.5%, although this remains well below the 2% target. This goes some way to rubbishing German Chancellor, Angela Merkel’s comment last week that if interest rates were purely driven by the Germany economy, then a rate hike would be warranted rather than a rate cut.
Italy will attempt to sell five and ten year debt at an auction on Monday, in what will be an early test of investor sentiment following the formation of the coalition government led by new Prime Minister Enrico Letta. I expect to see yields fall at the auction this morning, with many seeing the formation of the coalition as a step forward for Italy, following two months of political paralysis. That’s not to say the coalition will survive in the long term, which I don’t think it will, but it will at least speed up the process of making the necessary amendments to the law surrounding elections, which have led to this stalemate in the first place, before holding another round of elections.
The circus surrounding Herbalife is expected to continue today when the company reports first quarter earnings. This is unlikely to have a major impact on the overall markets, although it will attract a lot of attention thanks to the high profile nature of the ongoing battle between Carl Icahn, who owns 15%, and Bill Ackman, who went public about his large short position in the company recently.
Ahead of the open we expect to see…
[B]Italian borrowing costs tumble as new government sworn in[/B]
Today’s US opening call provides an update on:
[ul]
[li]Italian borrowing costs fall to two and a half year lows;
[/li][li]Eurozone confidence falls ahead of ECB meeting on Thursday;
[/li][li]Busy week on US economic calendar starting with pending home sales;
[/li][li]Corporate earnings takes back seat this week.
[/li][/ul]
Investors responded well at an Italian bond auction on Monday, to the formation of a coalition government over the weekend.
Yields on five and ten year debt fell to two and a half year lows at the debt auction, a clear signal that investors feel much more relaxed about the situation in Italy than they have for a long time. The only problem now is that the coalition must work together to finish what Mario Monti and his government of technocrats started.
This seems very unlikely at this stage and I’ll be very surprised if the same coalition government is in place at the end of this year. It’s good to have these lower yields for now and they should give the coalition a little room to manoeuvre. However, as soon as it becomes clear that the parties cannot function as a unit, I expect these yields to begin to creep higher once again.
This doesn’t appear to be bothering investors yet though, with European stock indices all pushing higher, lead unsurprisingly by the FTSE MIB, up 1.3%. We have seen a brief break in the rally, following the disappointing data out this morning.
Confidence in the eurozone is continuing to head in the wrong direction in April, with industrial confidence, economic sentiment and services sentiment all coming in below expectations, and down compared to a month before. This only increases the chances of an ECB rate cut on Thursday, which would likely be followed by a rebound in the figures in May.
Economic data is going to be back in focus this week, as corporate earnings takes more of a back seat. As always, the US jobs report is what people will be keeping an eye out for on Friday, but before that we have the ADP employment figure on Wednesday, and the ECB meeting on Thursday, when the central bank is expected to cut interest rates by 25 basis points.
Today, the focus will be on housing and consumer spending, with the release of March’s pending home sales and personal consumption expenditure. Both of these are expected to have improved slightly at the end of the first quarter, however based on the other data we’ve had out of the US for March, I’d be very surprised if they didn’t fall below expectations.
Ahead of the open we expect to see…
[B]Eurozone inflation and unemployment in focus ahead of ECB meeting[/B]
Today’s UK opening call provides an update on:
• German figures expected to remain strong this morning;
• Eurozone unemployment expected to hit record highs;
• Another drop in inflation could all but guarantee a rate cut on Thursday;
• Spanish GDP expected to confirm a sixth quarter of recession.
All eyes are going to be on the eurozone this morning, ahead of the ECB rate decision on Thursday.
We have some more economic data out of the eurozone this morning, starting with the consumer confidence survey and March retail sales from Germany. Once again, the worse this eurozone data is today, the better the response is likely to be in the equity markets, as it will only increase the likelihood of a rate cut at the ECB meeting on Thursday. Although this looks pretty much nailed on anyway at this point. In terms of currencies, I expect another poor batch of data to have the usual depreciatory effect on the euro.
I’m not expecting too many surprises from the German data this morning. The German economy hasn’t fared too badly throughout this crisis, compared to its neighbours, and I expect the data to once again reflect this. The Gfk consumer confidence figure is expected to remain at 5.9 for a third month in May, while retail sales are expected to have been flat in March, compared to a month earlier. This represents a drop of only 1.2% from the same month in 2012, down from a drop of 2.2% in February.
The German labour market is another area that highlights the growing divide between its economy and that of the rest of the eurozone. Unemployment is expected to have risen by 2,000 in April – only the second increase since December – which should leave the unemployment rate at 6.9%, well below that of its neighbours.
The eurozone as whole is expected to see unemployment rise to a new record high again in March. Another increase to 12.1% clearly rebuffs that any suggestions earlier this year that the rate of decline in the euro area is slowing. This isn’t going to affect the decision of this ECB on Thursday though, given its focus on price stability. What will is inflation, which is expected to have dropped again in April to 1.6%.
The final figure could even come in below market expectations, given that inflation in Germany surprisingly fell to 1.2% in April, and has continued to fall elsewhere. This will probably get the biggest reaction in the markets as it will make like very difficult for the hawks at the ECB. Comments from Jens Weidmann recently suggests that they have already conceded in the battle to keep rates at 0.75%, and another drop in inflation isn’t going to help their cause.
Elsewhere in Europe, we have consumer spending data from France, which is expected to show a small increase of 0.1% in March. This will represent the first improvement in consumer spending this year, although that by no way means we’re seeing an improvement in the economy as a whole. France has a long way to go before it turns a corner and is likely to stay in recession throughout 2013 at least.
No surprises are expected from Spain this morning, when the first estimate on Q1 GDP is released. The figure is expected to show that the economy contract by 0.5%, which would mean the economy has been in recession now for six quarters. This won’t come as a surprise to anyone and if anything, further highlights the need for a rate cut from the ECB, although the 25 basis point cut is unlikely to have any impact whatsoever.
[B]EURUSD[/B]
The euro is beginning to look quite bearish, both technically and fundamentally. The ECB is expected to cut interest rates on Thursday which should weigh on the euro. On a technical level, the pair looks to be trying to rally up towards 1.3227, the 50 fib level, but is finding strong resistance around 1.3113, the 38.2 fib level. If you take a look at the 4-hour chart, there is a bearish divergence, with the stochastic giving lower highs, while the price actions gives higher highs. If we do see some weakness in the pair, the next target should be last weeks lows, around 1.2955. However, it should find support along the way around 1.3090, 1.3066 and 1.2990.
[B]GBPUSD[/B]
Sterling is continuing to push higher, driven partly by the fact that the UK avoided a triple dip recession in the first quarter of the year. The pair has been trading in a nice channel during it’s ascent, respecting both the upper and lower trend lines along the way. Yesterday we saw it bounce off the upper trend line which suggests we could see a bit of weakness in the coming days. If the pair does continue to pull back, we should see it find support around 1.5422, where the mid-point of the fib channel intersects the 38.2 fib level. This is also a previous level of resistance, as seen earlier this month. If we see further selling from here, I’ll be looking for the pair to find further support around 1.5370 and 1.5329, the 50% and 61.8% retracements of the move from last weeks lows to yesterday’s highs. As you can see on the 4-hour chart, the 50 fib level is also a previous level of resistance, so this should provide particularly strong support.
[B]USDJPY[/B]
We’re continuing to see weakness in this pair, despite most analysts being in agreement that it’s only a matter of time before 100 is broken. That said, we may be about to see a reversal of the recent downtrend. Yesterday’s candle, a doji, suggests we could see another bullish move and potential test of 100, a major psychological level. At the same time, the pair reacted positively to the 61.8 fib level, which is another bullish signal. If we do see a move higher, the pair should find resistance around 98.19, 98.47, 98.95 and 99.49.
Ahead of the open we expect to see…
[B]ECB rate cut priced in as inflation falls to 1.2%[/B]
Today’s US opening call provides an update on:
[ul]
[li]Expectations rise for ECB rate cut as inflation falls to 1.2%;
[/li][li]Eurozone unemployment hits new record high;
[/li][li]Reaction to eurozone data muted, with rate cut priced in;
[/li][li]Consumer confidence and Chicago PMI up next in the US.
[/li][/ul]
If an ECB rate cut on Thursday didn’t look nailed on before, it certainly does now, after official data in the eurozone showed inflation fell to 1.2% in April.
Inflation was expected to fall from 1.7% to 1.6% in April, still well within the ECBs target of 2% or less. Even this would have tilted the odds in the favour of a rate cut, but the fact that is came in so far below expectations gives the ECB plenty of room to manoeuvre.
A 50 basis point cut is even a possibility now, although I’d still be very surprised if they opt for that. At best, we can hope for two cuts of 25 basis points in quick succession, similar to what we saw at the end of 2011.
Adding further support to calls for a rate cut on Thursday was the unemployment rate for March, which was released this morning. Unemployment hit a record high of 12.1%, although this was expected and therefore priced into the markets. Irrespective of that, it must be taken into consideration when the ECB meets later in the week.
The reaction in the markets to the release of both the unemployment and inflation figures was interesting. Based on what we’ve seen over the past week or so, with poor data supporting the rally, it would be understandable to expect a similar response to these figures this morning. However, the reaction was mild by comparison.
I think the reason for this mild response is that a rate cut has now already been priced into the markets. What this means for Thursday is that if the ECB put off cutting rates for another month, we could see a strong sell-off in response.
In terms of the euro, we’re continuing to see the single currency rally despite such high expectations of a rate cut, which would depreciate the currency. The best thing to compare this to is the yen in the lead up to the Bank of Japan meeting in March. The yen rallied, as traders essentially created a better entry price, then sold heavily once the news broke. We could see a similar response on Thursday.
This afternoon, it could be a case of the calm before the storm. There is a lot of major economic releases over the next few days, including rate decisions from the Fed and the ECB, so we may see the US economic releases have less of an impact on the markets.
That said, the Chicago PMI is always watched closely by traders for some insight into how businesses see the economy performing in the coming months. Also, with consumer spending contributing so much to US GDP, close attention will be paid to the CB consumer confidence figure, which is expected to jump to 61.4 in April.
Ahead of the open we expect to see…
0:09 European data paints mixed picture
0:50 Eurozone CPI leads to increased likeliness of interest rate reduction by ECB
2:56 Markets look forward to key announcements towards the end of the week
3:27 EURUSD chart
4:23 GBPUSD chart
Forex research: Global markets daily
[B]UK manufacturing eyed after narrow recession miss in Q1[/B]
Today’s UK opening call provides an update on:
• UK in focus as most other European markets close for Labour Day;
• Further contraction expected in UK manufacturing;
• Attention shifts to the US later, with manufacturing and employment data due to be released;
• Bernanke wraps things up on Wednesday with Fed press conference.
It’s going to be a much slower start to the European session on Wednesday, with most major markets in Europe closed for Labour Day.
With the FTSE being the only major European index open for trading on Wednesday, the focus is going to be largely on the UK this morning. There is a couple of pieces of economic data out this morning, which should help give the markets some direction.
UK manufacturing has been a drag on the economy since the financial crisis began in 2008. It has been a long time since manufacturing made up a significant portion of GDP, but it is still extremely important, especially at a time when the country is consistently bordering on being in recession. Manufacturing is also one area that the coalition government singled out for improvement, in a bid to rebalance the economy and reduce the country’s reliance on financial services.
So far we haven’t seen any evidence of this rebalancing. In fact, the country has become more reliant on financial services in recent years. If this is going to change, we need to see an improvement in the manufacturing data, starting this morning with the manufacturing PMI for April. Forecasts are currently for a slight improvement to 48.5, however this is still far from the 50 level which separates contraction from expansion, and is therefore not good enough.
This afternoon, traders will quickly turn to the US for some inspiration. Early in the US session, this will come in the form of the ADP employment change, which is meant to be an accurate estimate of Friday’s non-farm payrolls figure. Although the accuracy of the figure is certainly debatable. Nevertheless, traders will pay close attention to the figure to see if last months’ abysmal jobs data was a one off, or a sign of things top come.
This will be followed by two pieces of manufacturing data out of the US, the Markit PMI and the ISM PMI, both of which fell heavily in March. Another drop is expected in April, which would go some way to further confirm the slowdown in the US in the second quarter, similar to that seen in 2012 and 2013.
The Federal Reserve has been playing it a little bit low key recently, with a lot of attention being on the eurozone and the markets being incapable of focusing on two things at once. There’s been a lot less concern about the Fed scaling back its asset purchases, especially since we started to see a deterioration in the economic data.
It’s extremely unlikely that we’ll see a change in interest rates from the Fed, but with little else going on in the markets on Wednesday, traders are likely to pay close attention to Fed Chairman, Ben Bernanke’s press conference following the meeting. We’re likely to hear more of the same from Bernanke, although it will be interesting to hear his take on the surprisingly poor jobs figures in March.
Ahead of the open we expect to see…
[B]Manufacturing in focus today with eurozone markets closed[/B]
Today’s US opening call provides an update on:
[ul]
[li]UK manufacturing shows only small contraction in April;
[/li][li]Attention on the US later with ADP and manufacturing figures being released;
[/li][li]Fed press conference watched closely tonight for signs of monetary policy tightening;
[/li][li]Facebook reports first quarter earnings after the US close.
[/li][/ul]
As expected, it’s been a slower start to the European session, with the FTSE pushing marginally higher on better manufacturing data.
Data released this morning showed manufacturing in the UK contracted at a slower rate than expected in April. The figure came out at 49.8, which is also extremely close to the 50 level that separates growth from contraction. This is quite encouraging for the UK, especially given that the boost in new orders came from outside the eurozone, where the UK has been far too reliant on in the past.
This is an area that the government has been trying to refocus its attention on, with the current debt crisis in the eurozone clearing highlighting the fact that the country is far too dependent on the single currency block. Hopefully April’s figures are a sign of things to come, rather than a one off blip in the data.
Attention will now turn to the US, with little else going on in Europe as a result of the bank holiday in most of the region. The ADP employment figure will be watched closely today, although the impact on the market will probably be minimal given the inaccuracy of the first release as an estimate of the non-farm payrolls figure on Friday.
This will be followed by a couple of pieces of manufacturing data from the US, both of which are expected to show only a small improvement in the sector in April. The ISM PMI is expected to remain comfortably in growth territory, so is not a concern at the minute. However, given the deterioration in the US data in March, we could see a negative reaction should we see another miss here today.
That said, any weak data has not derailed the rally in recent months, with any weakness in the economy being seen as a sign that the Fed will continue to support the economy with the large scale asset purchase program, or QE3 as called.
We will get Fed Chairman, Ben Bernanke’s assessment on the current environment later on tonight. The press conference, which follows the two day meeting of the Federal Reserve, is always used as a way of getting some insight about the Fed’s view its monetary policy, and whether it will remain as accommodative for the foreseeable future. Based on the decline in the economic data, I see no reason why we will get any hints that it will be scaled back in the near term.
Finally, corporate earnings will be back in focus again on Wednesday, with a number of companies reporting. The most notable earnings will come from Facebook after the closing in the US. Facebook has become a major talking point among investors since its botched IPO last year, with analysts repeatedly questioning its earnings capability. As a result, these earnings will be watched very closely tonight.
Ahead of the open we expect to see…
0:09 FTSE and GBP boosted by better UK manufacturing data
1:47 Chinese manufacturing PMI falls again in April
2:22 US ADP and manufacturing data in focus this afternoon
3:35 Fed rate decision and press conference up later
5:02 Facebook report first quarter earnings
Forex research: Global markets daily
[B]ECB to cut interest rates as data highlights further decline[/B]
Today’s UK opening call provides an update on:
• ECB to cut interest rates by 25 basis points;
• Eurozone manufacturing PMI expected to remain deep in contraction territory;
• Chinese manufacturing slows in April;
• US jobless figures watched closely ahead of the jobs report tomorrow.
The ECB is widely expected to cut interest rates by 25 basis points on Thursday, after economic data in the euro area continued to deteriorate in the past few months and inflation fell to 1.2% in April. Even Jens Weidmann, one of, if not the most hawkish member of the ECB board, appears to have come around to the idea of a rate cut recently, claiming that it would be warranted if the economic data continued to deteriorate, which it has.
The interesting thing now, is that inflation is not just within the ECBs target of at or below 2%, it’s well below it which means that the ECB could technically cut interest rates by 50 basis points, while sticking to its mandate of price stability. Although this is unlikely. It’s taken some of the more hawkish members a long time to acknowledge that a rate cut may be necessary, it would be very surprising if the now agreed to such a substantial cut at this meeting. What we may see instead is rate cuts at two consecutive meetings, similar to what we saw at the beginning of Mario Draghi’s term at the end of 2011.
To be honest, how much they cut interest rates by is irrelevant. Aside from the immediate impact on the markets, with a 50 basis points cut likely to weigh more heavily on the euro, while driving European equities higher, the rate cut is going to have absolutely no impact on the eurozone, regardless of how big it is.
A cut in interest rates is going to make no difference at a time when unemployment is at record highs, youth unemployment in some countries is above one in two, banks are refusing to lend, businesses don’t want to take risks and governments are being forced to sacrifice growth in favour of austerity and structural reforms. Anyone that thinks a rate cut is going to help the underlying problem here is kidding themselves.
All you have to do is take a look at the data to see that the euro area is in way too deep for a rate cut to have any impact. Today’s manufacturing PMIs are a good example of this. Despite seeing a small improvement in the Spanish and Italian PMIs in recent months, both are still well below the 50 level that separate growth from contraction, while France’s manufacturing sector has actually been contracting at a faster rate than Spain and Italy for months now, as the economy continues to suffer as a result of falling competitiveness and lower spending at home.
Even Germany’s manufacturing sector has been contracting over the past couple of months and given that it is by far the strongest economy in the euro area, that doesn’t exactly fill me with hope. It’s incredible to think that Mario Draghi, only a few months ago, was convinced that the eurozone would climb out of recession later this year. The way things are going, the eurozone will still be trying to pull itself out of recession this time next year.
The recent data out of China isn’t exactly filling me with any hope either. The HSBC manufacturing PMI released this morning, similar to the official PMI yesterday, showed growth slowing in April, with the ongoing recession in the eurozone and the slowdown in the US probably weighing on export demand. Chinese manufacturing tends to be a good barometer for near term growth in the eurozone and US, so based on these figures, I’m not exactly optimistic about the near term outlook.
While the focus will largely be on the eurozone in Thursday, it is also worth keeping an eye on the UK and the US, with some important economic data being released here. The UK construction PMI is expected to remain well in contraction territory in April, however a small improvement to 48.0 is expected.
Meanwhile, in the US, the initial jobless claims will be watched closely this afternoon for further signs that the economy is slowing in the second quarter. So far, there has been little signs of this in the jobless claims data, however the same cannot be said when it comes to other economic releases in the US, including the non-farm payrolls, which fell to 88,000 last month and we’re expecting another disappointing figure tomorrow.
[B]EURUSD[/B]
The euro is pushing lower this morning, having found strong resistance yesterday around 1.3227, the 50% retracement of the move from this year’s highs to lows. This was always going to be a major level of resistance ahead of the ECB meeting today, when interest rates are expected to be cut. This should weigh heavily on the single currency. As you can see below, the 61.8 fib expansion level also provided additional resistance for the pair, with the price action bouncing perfectly off this level. Further weakness is expected in the pair today, especially following the rate decision, with the next major support levels coming around 1.3128, 1.3092 and 1.3053.
[B]GBPUSD[/B]
The sterling rally may have come to an abrupt end, after the pair found resistance around 1.56, the 50 fib level. The fact that the pair rebounded so aggressively off this level suggests there was a combination of significant selling pressure and profit taking here. The pair also failed to close above the 100 day SMA which is quite a bearish signal. On top of that, the stochastic is currently crossing in overbought territory, which suggests the sterling rally may have run out of steam. The next key level now, will be the mid-point of the channel, around 1.5470. A move below here will be quite a bearish signal, however if it acts as support, it would suggest that the rally may not be over. If the pair breaks below here, it should find further support around 1.5415, which has acted as both support and resistance recently, followed by 1.5375.
[B]USDJPY[/B]
The momentum has been well and truly lost in the dollar yen pair, since that 700 pip move higher last month. The pair looked certain to break through the 100 barrier, with relative ease, but now it looks like we may have to wait a while. It is still continuing to move in a upwards trend though, as marked by the higher lows seen on both the daily and 4-hourly charts, but the pace of the ascent is much slower. These higher lows combined with that strong resistance level has led to the formation of an ascending triangle, which is typically bullish. The problem is, the breakout may take some time, with the triangle still in the early stages. It could still be another couple of weeks before we see a break higher, although that’s great news for range traders, with a clearly defined resistance level and ascending trend line now in place.
Ahead of the open we expect to see…
[B]All eyes on Europe ahead of ECB rate decision[/B]
Today’s US opening call provides an update on:
[ul]
[li]US higher on hopes of additional Fed stimulus;
[/li][li]Weekly jobless claims expected to remain strong despite signs of slowdown in the US;
[/li][li]ECB expected to cut interest rates, to the benefit of no one.
[/li][/ul]
US indices are expected to open marginally higher on Thursday, after comments from Ben Bernanke last night eased concerns that the Fed will begin to scale back its asset purchases before the end of the year.
In fact, Bernanke actually mentioned that the Fed could increase its purchases, which is something that the markets hadn’t really considered up until now. Recently, all the talk has been about when the Fed will start to scale back its QE3 program, with weaker data over the last month suggesting it could be pushed back to later this year. Bernanke’s comments now hint at a possible increase this summer if we continue to see a deterioration in the data. This can only be good for the equity rally in the US, with the QE3 program so far being largely responsible for the Dow and S&P hitting all time highs.
One thing that will play a major part in what the Fed does in the coming months is the state of the labour market. The non-farm payrolls were dreadful last month, coming in well below expectations at 88,000, leading to suggestions that, similar to what we saw in 2011 and 2012, we’re going to see a slowdown in the spring.
The other data out of the US in March has been equally poor, excluding the weekly jobless claims, which, barring one bad week, have remained below or around 350,000. We’re expecting a similar figure again on Thursday, although I wouldn’t be surprised if this came out higher, around 370,000.
With most other US economic releases pointing to a downturn in the spring, it’s only a matter of time before we see a surge in the number of jobless claims.
Outside the US, the main event today is going to be the ECB rate decision, followed by the press conference 45 minutes after. The ECB is expected to cut interest rates by at least 25 basis points in a bid to bring price stability back into line with the central banks’ target of around 2%, while providing some stimulus to a region stuck in recession with little hope of climbing out in the foreseeable future.
The problem is, while the rate cut may bring inflation back in line with the central banks’ target, it’s unlikely to have any impact on the eurozone economy. This drop in interest rates is not going to tackle any of the issues stunting growth in the eurozone such as high unemployment, austerity and falling confidence.
It’s also not going to encourage banks to lend at a time when they’re propping up their balance sheets or businesses to take risks and borrow at a time when the economic outlook is bleak and likely to get much worse before it improves. Unless it’s accompanied by a scheme to get people back to work, or provide incentives for lending and borrowing, a rate cut of any size is a complete waste of time.
Ahead of the open we expect to see…
[B]Markets expecting further volatility as yesterday’s ECB rate cut paves way for NFP[/B]
Today’s UK opening call provides an update on:
• ECB rate decision meets expectations yet Draghi comments surprise;
• European markets expected unconvinced of rate impact;
• UK economy looks forward to key services PMI figure;
• US unemployment figures dominate markets with further volatility expected;
Yesterday saw the ECB announce the first rate cut in 10 months, reducing the headline refi rate by 25 basis points from 0.75% to 0.5%. On the whole it was all going as expected, with market consensus regarding such a shift as the most likely outcome from yesterday’s meeting. One of the key drivers behind this move was a shift in sentiment towards growth to accompany the harsh austerity measures imposed around the single currency region. However, from the moment the CPI inflation rate was released 0.4 below the expected 0.1 fall, the writing was written on the wall for a rate reduction of sorts.
The significant drop in inflation brought about increased questions regarding a potential 50 basis points reduction and it was this amongst other comments from Mario Draghi which actually brought about the expected response from the currency market. The usual Draghi rhetoric regarding the requirements of governments and weariness of downside risks left the markets unmoved, yet it was the announcement of the potential for negative future interest rates that sent the euro tumbling. This increasingly dovish tone from the ECB chief is notable as we are now moving into a position where many of the main Eurozone actors are taking a more growth driven standpoint.
The markets are expected to be somewhat despondent to the news of this rate cut today, despite a rally in yesterday’s session. The likes of the DAX and CAC both saw some significant upside towards the back end of the European session. However the question is whether this rate cut will actually have any significant effect upon growth within the Eurozone and perhaps it seems like too little too late for Europe’s most beleaguered nations. It is this line of thought which led us to question whether a 50 basis points reduction to the headline rate would have been more powerful.
This morning we are looking forward to the key services PMI figure which is expected to rise marginally from 52.4 to 52.5. However, the outperformance of Wednesday and Thursday’s manufacturing and construction PMI figures point to a potential surprise bumper rise in the measure. Should we see a strong rise in this figure it would cap off a particularly positive period for the UK economy after last week’s better than expected rise in GDP.
Lastly, today marks the release of the latest US unemployment data and in particular the all important non-farm payroll figure. Earlier in the week the ADP figure pointed to potential disappointment having fallen well short of expectations. However the use of this alternate figure as a barometer is becoming less and less reliable and thus it would be inadvisable to base your expectations on this measure. The markets have forecast a rise of 146k in comparison to the March figure of 88k, however given that four of the last five releases have been above 150k, I believe we are potentially in line for a better than expected release for April.
The markets are expected to open mixed, with…