0:10 PBOC funds money markets, pushing Asian markets higher
1:00 European and US indices expected to trade higher
1:34 Japan industrial production disappoints
2:21 RBA governor sees further downside in AUD
Forex research: Global markets daily
[B]Earnings back in focus ahead of central bank meetings[/B]
Today’s US opening call provides an update on:
[ul]
[li]Confidence on the rise in the eurozone;
[/li][li]Spain remains in recession, but only just;
[/li][li]Traders cautious ahead of central bank meetings;
[/li][li]Corporate earnings remain in focus on Tuesday.
[/li][/ul]
European indices are trading higher this morning, following some positive data and earnings early in the session.
The economic data out of the eurozone has once again been quite encouraging. The German Gfk consumer confidence rose for a sixth consecutive month, coming in above expectations at 7.0. This is the highest consumer confidence figure seen in Germany since June 2007, which under the circumstances is quite encouraging.
Also encouraging is the other eurozone sentiment surveys for July, which were also released this morning. Consumer confidence, business climate, economic sentiment, services sentiment and industrial confidence figures all improved significantly this month, which suggests Mario Draghi may have in fact been correct earlier this year, when he claimed the eurozone would pull itself out of recession later this year.
One country that looks on the verge of pulling itself out of recession is Spain. In the second quarter, it contracted by only 0.1%, which means with only a marginal revision, the country may have already moved out of recession. While all of this looks positive for the euro area though, things can still go very wrong, as we’ve seen on numerous occasions in the past, so it’s still far too early to get carried away.
US index futures are trading in positive territory this morning, tracking their European counterparts higher. There is clearly an element of caution in the markets though, which is unsurprising given some of the events still to come this week.
We always see a little caution during the week in the lead up to the jobs report. Especially when we have Fed, BoE and ECB meetings and the flash US GDP reading for the second quarter. Many are now expecting the Fed to come across more dovish following some weak growth and housing data. The unemployment rate is also likely to stay high as we see an improvement in the participation rate.
Today we’re likely to see more focus on corporate earnings again. We’ve already had some disappointing results from Barclays this morning, which helped pull RBS and Lloyds lower ahead of their results later this week. Still to come today, we have BP, Deutsche Bank and Pfizer all reporting earnings.
Ahead of the open we expect to see the S&P up 2 points, the Dow up 24 points and the NASDAQ up 6 points.
[B]Eurozone unemployment and CPI in focus ahead of FOMC[/B]
Today’s UK opening call provides an update on:
• Traders cautious ahead of FOMC statement;
• Eurozone unemployment expected to drop for first time since March 2011;
• ECB left with little room to manoeuvre if inflation rises to 1.7%;
• US growth falling and H2 is looking no better.
The cautious tone seen over night in the US looks set to continue in Europe today, as investors opt to sit on the sidelines ahead of some major economic releases and the Federal Reserve statement.
While few believe that the Fed will make any changes to its asset purchase program today, in the form of tapering, it very rarely pays to try and guess what the Fed is going to do. Even when correct, markets can be so volatile around the decision and the release of the statement, that most forms of technical analysis go out of the window and it can be very difficult to profit from it. That’s why we always tend to see similar scenarios to what we have this morning, with markets opening largely flat.
This is now likely to be a common theme for the rest of the week, with the Bank of England and ECB rate decisions tomorrow and the US jobs report on Friday. That said, one thing is guaranteed for the rest of the week, there’s going to be no shortage of volatility in the markets.
While the headline event on Wednesday is going to be the monetary policy decision and statement from the Fed, the rest of the day is going to be far from quiet. Unemployment data from Germany, Italy and the eurozone as a whole will be of interest this morning. There’s been a significant improvement in a number of the business and consumer surveys in recent months, which should hopefully have resulted in a boost in consumer spending and hiring, or so you would assume. The eurozone unemployment rate is expected to fall from 12.2% last month, to 12.1% in June, which would represent the first drop in unemployment since March 2011. This would be quite an encouraging sign going forward.
The CPI figure for the eurozone will also be of interest today, ahead of the ECB rate decision tomorrow. Inflation is expected to have risen to 1.7% in July, leaving the ECB very little room to manoeuvre if it is going to stay within its target of at, or below, 2% inflation. There is already very little chance that the ECB will cut interest rates tomorrow, and this figure, if in line with expectations, will only reduce the odds further.
Moving on to the US next and the focus before the opening bell is going to be on the release of the second quarter GDP figure. Growth in the US has been extremely disappointing so far this year, especially when compared with most forecasts from the beginning of the year. Today’s figure is expected to show the economy grew at an annualised rate of 1.2% in the second quarter, well below original forecasts for this year of 2.5-3.5%. Some believe growth will pick up in the second half of the year, but I remain sceptical, with rising oil prices, cuts to government spending, falling demand in the housing market and a slowdown globally likely to weigh on growth in the US.
Finally we have the headline event, the FOMC rate decision and corresponding statement. As I mentioned earlier, no tapering decision is expected today, with the Fed not scheduled to hold a press conference after. This is likely to come either in September, or, more likely, December. However, the statement will probably contain vital clues about when tapering will begin, based on the current economic environment, and when asset purchases will come to an end. As a result, plenty of volatility is expected around this announcement.
Ahead of the open we expect to see the FTSE up 10 points, the CAC down 5 point and the DAX down 6 points.
[B]Markets marginally higher as traders turn to FOMC statement[/B]
Today’s US opening call provides an update on:
[ul]
[li]Markets only marginally higher in response to strong eurozone unemployment data;
[/li][li]Traders to use GDP and ADP to guess at Fed’s stance;
[/li][li]ADP important today despite historical inaccuracy;
[/li][li]Earnings suggest it is not the time to turn the QE taps off;
[/li][li]Gold slightly higher in the lead up to the Fed statement.
[/li][/ul]
Encouraging unemployment data for the eurozone has got things off to a positive start on Wednesday. However, investors are clearly focused on one thing today, the FOMC statement, with European indices and US futures only trading marginally higher in response to the figures.
We also have the first reading of the second quarter GDP figure for the US due out before the opening bell, as well as the ADP non-farm employment figure, but even these are simply going to be used to try and guess whether the stance of the Fed is going to be more dovish or hawkish.
While there is a lot more emphasis on the fundamentals at the moment, as seen over the last couple of weeks with corporate earnings being a key driver in the markets, the Fed is always going to play an equally important role. People may have accepted that tapering will begin later this year, but that doesn’t mean that it doesn’t matter when.
There appears to be a slightly higher bias towards September at the moment, which is why the FOMC statement tonight is so important. This is the last meeting until September, so the statement should give a major clue about whether they are leaning towards tapering in September, or whether they’ll hold off until December. For me, I think it’ll be December at the earliest. Especially if the GDP figure today is in line with, or below, expectations.
Despite being historically inaccurate, the ADP figure will also be important today. The non-farm payrolls figure won’t be available until Friday, so the ADP figure will give us a clue about what kind of number the Fed has been working with when constructing their statement.
Aside from this, traders will also have one eye on corporate earnings with Comcast, Mastercard and Phillips 66 all reporting in the US. Despite the positive start, corporate earnings season hasn’t actually been overly encouraging this time round. While around two thirds of the S&P 500 companies have beaten earnings expectations, the beats have been smaller than in previous quarters, and revenues have still not been great. This is hardly ideal at a time when the Fed is looking to turn the QE taps off.
So far this morning, the markets have been relatively steady despite the raft of good data. Gold and silver are both trading slightly higher in the lead up to the FOMC statement, which could suggest that traders are expecting something a little more dovish from the Fed.
All things considered, one message looks clear across all of the markets, and that is one of caution. Traders are very cautious ahead of the statement and rather than trying to guess the outcome, are currently opting to sit on the sidelines and see how it plays out. That may all change though if we see any surprises in the economic data this afternoon.
Ahead of the open we expect to see the S&P up 3 points, the Dow up 25 points and the NASDAQ up 5 points.
0:10 Markets pause ahead of key US releases
0:29 Eurozone unemployment beats expectations
1:12 ADP non-farm payroll expected to fall
2:13 US GDP forecasts points to weak Q2
3:12 Markets await FOMC announcement for tapering clues
[B]All eyes on BoE and ECB following dovish Fed statement[/B]
Today’s UK opening call provides an update on:
• Stocks boosted by surprise growth in Chinese manufacturing;
• FOMC come across slightly more dovish in last night’s statement;
• BoE expected to hold off on forward guidance until next week;
• Draghi likely to give little away on ECBs “forward guidance”.
Stock markets received a boost over night, after the official Chinese PMI showed the manufacturing sector growing in July, beating market expectations for a small contraction.
There has been a major concern recently that falling external demand for Chinese manufactured goods, and weak demand domestically, could see the sector shrink significantly in the coming months and years. That doesn’t appear to be the case at the moment, according to the official PMI, which gave a reading of 50.3, indicating that the sector grew slightly last month. The markets were originally expecting a figure around 49.8, indicating a contraction.
Once again, the HSBC manufacturing PMI told an entirely different story, falling to 47.7, in line with market expectations. In recent months, investors have been more inclined to follow the HSBC figure, due to fears that the official figure could be easily manipulated, which many believe to have been the case on numerous occasions this year. However, there is another thing that would explain the difference in the figures. While the official PMI surveys a larger sample of state-run firms, which continue to be supported by large amounts of fixed asset investment, the HSBC PMI focuses more on small to medium sized firms, which are feeling the impact of rising wages, an appreciating yuan and slowing global demand much more.
Global markets also received a small boost over night from the FOMC statement, which despite being almost identical to June’s statement, did come across a little more dovish, suggesting that the Fed may hold off until December before tapering. As expected, the statement was overly scrutinized, so it is entirely possible that people have read too much into the statement, and the Fed’s position is in fact unchanged from the month before. That would explain the fact that US indices pared gains towards the end of the session to end the day slightly lower.
Today the focus will switch from the Federal Reserve to the Bank of England and the ECB. No change in interest rates or asset purchases is expected from the BoE, after the statement last month made it perfectly clear that the central bank would like to explore other methods of supporting the economy. We could get some form of forward guidance on interest rates, however it has been suggested that this may be given instead with the inflation report next week.
Following the last meeting, Mark Carney’s first as Governor, the BoE released a statement, similar to what we get on a monthly basis from the Fed. It is believed that the reason for the statement on this occasion was to clarify the bank’s fresh approach and new direction under Carney and it is unlikely to be a regular feature. That said, I think it’s safe to say that the markets would welcome more transparency from the BoE, so it will be interesting to see if this has been taken on board.
Shortly after the BoE decision, we have the ECB decision on interest rates, and once again, no change is expected. As always, ECB President Mario Draghi will hold a press conference at 1.30 (UK time), during which, increase amounts of volatility in the markets is to be expected. In the press conference, Draghi is expected to point out the recent improvement in the data out of the eurozone, while continuing to highlight the downside risks to the economy. While the markets would like more clarity on the ECBs forward guidance offered last month, since the guidance offered was extremely vague and barely guidance at all, I expect today’s responses will be just a vague and unhelpful.
We also have a relatively full economic calendar on Thursday, with the revisions to the eurozone manufacturing and PMIs due out early in the session. The first estimates of the UK and US manufacturing PMIs are also due out today, both of which are expected to improve slightly on last month. In terms of corporate earnings, there are a few major companies reporting today, most notably the second largest component of the S&P 500, Exxon Mobil, and in the UK, Royal Dutch Shell.
Ahead of the open we expect to see the FTSE up 25 points, the CAC up 21 point and the DAX up 47 points.
[B]BoE & ECB: Focus on forward guidance[/B]
Today’s US opening call provides an update on:
[ul]
[li]Europe higher on dovish Fed statement and Chinese manufacturing data;
[/li][li]Strong PMIs help extend gains early in the session;
[/li][li]BoE and ECB expected to leave rates unchanged, investors look for forward guidance;
[/li][li]Economic data and earnings to come in the US session.
[/li][/ul]
Investors are not holding back this morning, despite the fact that we are due to get interest rate decisions from the Bank of England and the ECB today, as well as a press conference shortly after from the latter.
Usually in the lead up to these meetings, there can be an element of caution in the markets, but that is certainly not the case this morning. Some dovish remarks in the FOMC statement last night, along with encouraging manufacturing PMIs from China and the eurozone today, has given investors a real boost so far in the European session.
While the FOMC statement did come across as more dovish, the Fed was careful not to give very much away, which means there is a risk that the markets have overreacted to minor irrelevant details. An example of this is the reaction to change from the “moderate” improvement in the economy in the previous statement to “modest” this month.
We may also be getting a little carried away with the Chinese manufacturing PMIs over night. In recent months, people have paid more attention to the HSBC PMI as there has been fears that the official PMI has been manipulated. With the official PMI rising to 50.3 this month, while the HSBC fell deeper into contraction territory, it has now been suggested that the difference may be due to the fact that the official survey includes larger state-run firms while the HSBC survey focuses on small to medium sized firms.
Even if this is true, it would be foolish to ignore the fact that manufacturing from small/medium sized firms is contracting at an increasing rate. All this does is increase the reliance on state-run enterprises for growth at a time when the government is looking to move away from the model of investment led growth. That said, the markets don’t appear concerned at this stage, instead using the official figure as an excuse to buy into any dips.
With the Fed statement disappointing after all the hype in the lead up to it, attention will now shift to the Bank of England and ECB meetings today. Neither are expected to make any changes to monetary policy, with the BoE and ECB expected to keep interest rates at 0.5%, and the former keeping asset purchases at £375.
One thing that traders will be looking for in both cases is forward guidance. The ECB offered what it calls forward guidance at the last meeting, but in reality it was nothing of interest. Claiming interest rates will remain low for an extended period of time is no different than previous claims that the ECB will remain accommodative for as long as necessary. An accommodative stance was always going to be necessary for an “extended period” of time, so unless Draghi plans to elaborate on this, we should really just ignore it.
At the same time, the statement from the BoE following the last meeting hinted at forward guidance, which looks to have been priced in now, to an extent. Forward guidance is not expected today though, but next week instead along with the inflation report. Unless the rate decision is accompanied by another statement, the BoE should be a dull affair.
Elsewhere today, we have some important pieces of data due to be released, including the US manufacturing PMI for July, which is expected to rise to 53.1, as well as the weekly jobless claims, which is expected to remain below 350,000. Corporate earnings season is also continuing to drive markets, although maybe not as much as in the last couple of weeks, and today we have Exxon Mobil reporting, the second largest component of the S&P 500.
Ahead of the open we expect to see the S&P up 11 points, the Dow up 90 points and the NASDAQ up 18 points.
0:17 Dovish FOMC statement
1:28 Mixed Chinese manufacturing PMIs
3:22 BoE rate decision
3:51 ECB rate decision and press conference
4:43 Key events this afternoon
[B]Traders turn to jobs report for tapering clues[/B]
Today’s UK opening call provides an update on:
• S&P and Dow hit new record highs over night;
• NFP has tended to beat expectations this year, figure above 184k likely;
• Drop in unemployment doesn’t take rise in participation rate into consideration;
• Fed’s Bullard due to speak this evening.
European indices are expected to open higher on Friday, after the S&P 500 and Dow in the US hit new record highs on Thursday following better than expected jobless claims and manufacturing data.
Investors appear completely unfazed by the prospect of Fed tapering in September and are instead buying on strong economic data, therefore focusing more on the fundamentals rather than what the central bank is doing. I’m still not convinced that we will see tapering in September, regardless of some of the data we’ve seen recently. The Fed’s statement on Wednesday, if anything, was more dovish than hawkish, which suggests they’re still concerned that the recovery is not sustainable. The last thing they want to do is withdraw support too early and have the recovery run into a brick wall.
The jobs report, released later on today, should give us a much better idea about how the economy is performing. The number of jobs created in July is expected to be around 184,000, bring the unemployment rate down from 7.6% to 7.5%. That said, there has been a tendency for the non-farm payrolls figure to beat expectations this year, with stocks then performing well on days when the jobs report is released.
The ADP figure, released Wednesday, suggests we could be in for another upside surprise today, after coming out above expectations at 200,000. That said, this has not been an accurate estimate of the NFP figure in the past so it should only be taken with a pinch of salt.
The unemployment rate will also be of interest today, given that the Fed is determined to see it fall below 6.5% before it considers raising interest rates, and 7.5% before tapering begins. The rate is expected to hit 7.5% today, but I don’t think we’ll see this. Even if we do get a good NFP figure, the forecast doesn’t appear to account for those returning to the labour market, after previously giving up. The increase in the participation rate, as we saw last month, is going to push the unemployment rate higher. We say the opposite at the back end of last year, when unemployment was falling, quite rapidly at times, despite NFP figures being average at best.
I think the smaller details should also be watched closely today as they will also have a bearing on whether the Fed tapers in September or not. For example, we may see a good NFP figure and a drop in the unemployment rate, but if the jobs created are mostly temporary or part-time, the improvement is hardly sustainable and therefore the withdrawal of stimulus would quickly reverse it. Also, things like average earnings and personal spending are also key today.
While the jobs report is going to be the main event today, there are a few other things worth keeping an eye out for. For example, the UK construction PMI is expected to rise to 51.6 in July, as the UK recovery continues to gather pace. US factory orders are expected to rise by 2.3%, although these numbers do tend to be volatile.
We’ll also here from voting FOMC member, James Bullard, who is due to speak on the US economy in Boston. This is likely to be followed closely, given that is comes shortly after the release of the jobs report. It will be the first chance for people to get some insight into how the report impacts the Fed’s position on rates and asset purchases. It is worth noting that Bullard is a well known dove, so if his comments come across slightly dovish, we shouldn’t read too much into it.
Ahead of the open we expect to see the FTSE up 27 points, the CAC up 22 point and the DAX up 58 points.
[B]Markets pause ahead of key US jobs data[/B]
Today’s US opening call provides an update on:
[ul]
[li]US futures flat as caution returns to the markets;
[/li][li]NFP has tendency to beat market expectations in 2013;
[/li][li]Unemployment rate also in focus as it nears Fed threshold.
[/li][/ul]
European indices are trading slightly higher on Friday, while US futures are pointing to a flat open as caution returns to the markets ahead of the US jobs report for July.
So many times this week we’ve seen traders take a back seat and prepare for surges in volatility, only to be disappointed. We’ve had meetings of the Fed, ECB and Bank of England this week and each of them has been an extremely dull affair, with none of the above giving anything new away. The most disappointing of the lot was the ECB press conference yesterday, where ECB President, Mario Draghi, conceded that interest rate cuts and forward guidance thresholds hadn’t even been discussed.
Thankfully there’s been plenty of economic data released this week to help give the markets a bit of energy, while corporate earnings season has also helped. The lack of volume in the markets over the summer months hasn’t helped things over the last few week, although we have seen some improvement here this week.
I doubt we’ll be disappointed today though because irrespective of what number we get. With the Fed looking to taper in September or December, and traders appearing split on which they think it will be, whatever number we get is sure to get a response in the markets.
Current expectations are for a figure around 184,000, just short of last month’s 195,000. However, when you take into consideration the number of times we’ve seen above forecast figures this year, and the ADP figure of 200,000 released Wednesday, another beat here today looks on the cards.
While we have seen markets focus more on the fundamentals recently, and therefore buy on strong data even if it increases the probability of Fed tapering, it is still uncertain whether a strong jobs report today will have the same impact.
Traders bought into the slightly dovish Fed statement on Wednesday, which suggests that while they are more focused on the fundamentals, they still favour a scenario in which the Fed injects $85 billion per month into the financial system for as long as possible.
The unemployment rate will also be watched closely on Friday, given the Fed’s threshold of 7.5% to taper asset purchases and 6.5% to raise interest rates. Market expectations are for a drop to that 7.5% threshold today, although I can’t see it. It doesn’t appear to take into consideration the inevitable upward pressure that an increase in the participation rate would have on the unemployment rate.
The finer details in the report will also be important, including the number of part time and temporary jobs that contribute to the non-farm payrolls figure. We’re already seeing these contribute to the number of jobs added a lot more than is healthy. If the Fed withdraws its support, these will be the first to go and the unemployment rate will spike again.
Ahead of the open we expect to see the S&P down 1 point, the Dow down 5 points and the NASDAQ down 1 point.
0:09 US jobs report
2:44 UK construction PMI
3:51 What to watch out for this weekend
[B]Services PMIs to highlight ongoing recovery in Europe[/B]
Today’s UK opening call will provide an update on:
• Focus on FOMC members this week as investors attempt to guess when tapering will begin;
• Chinese stocks boosted by services PMIs;
• Eurozone services PMIs expected to show further improvement in July;
• US services sector in focus this afternoon.
European indices are expected to open slightly higher on Friday, as investors try to make sense of last weeks Fed statement and jobs report and what it means for tapering later this year.
A mostly unchanged Fed statement last week, from the one in June, combined with a disappointing jobs report on Friday, has slightly increased the number of people expecting tapering to begin in December, compared to September. This is why the stock market continued to rally on Friday, with S&P 500 and the Dow once again hitting record highs.
Comments from Fed voting member, James Bullard, shortly after supported this view, when he claimed that the Fed tapering should not begin on expectations of an improvement in the economy, but when we actually see evidence, which we clearly haven’t yet. We’ll hear from a number of other members of the Fed this week, all of which are expected to be followed closely ahead of the next meeting in September, when many still believe the Fed will begin to taper.
Chinese stocks received a small boost over nigh by the release of the services PMIs over the weekend. The official PMI, release on Saturday, showed the sector growing at an impressive rate, with a figure of 54.1. As always, there was a big difference between the official figure and the HSBC one, which remained at 51.3, but even this is comfortably in growth territory, which is encouraging given the efforts in China to become less reliant on investment and exports.
The economic calendar isn’t necessarily looking as full as last week, but there’s still plenty for the markets to get their teeth stuck into, starting this morning with the release of the services PMIs in the eurozone for July. While many of these are revised figures, we do regularly see some significant revisions which can have a real impact on the markets.
Recent surveys out of the eurozone have been very encouraging, with the majority either making the move into growth territory or coming very close. This is expected to remain the case today, with any upward revisions to the figures only adding to suggestions that we’re finally witnessing a turnaround in the euro area. Just to be clear though, a turnaround doesn’t mean the crisis is coming to an end, there’s still a long road ahead.
The UK services PMI is expected to improve again in July, hitting 57.4, up from 56.9 in June. As with the data out of the eurozone, the UK data has been extremely encouraging over the last four or five months. As I’ve pointed out previously though, with the global recovery still very fragile, we shouldn’t get carried away with this, although the signs are positive.
Also today, we have June’s retail sales figure for the eurozone, which is expected to fall 0.5% from a month earlier, and the sentix investor confidence figure, which is expected to rise to -9.5 in July, the highest level since February.
Over in the US, we also have the services PMI for July being released. As with the UK, this is expected to remain comfortably in growth territory, at 53, up from 52.2 last month. Services contribute more than two thirds to US GDP so this figure is also followed very closely by the markets, with any weakness signalling difficult times ahead.
Ahead of the open we expect to see the FTSE up 4 points, the CAC up 4 point and the DAX up 5 points.
[B]Europe higher on better services PMIs[/B]
Today’s US opening call provides an update on:
[ul]
[li]Tapering in September unlikely following dovish statement and disappointing jobs report;
[/li][li]Comments from FOMC members key this week;
[/li][li]Eurozone services PMIs within touching distance of growth territory;
[/li][li]UK services PMI hits six year high.
[/li][/ul]
With corporate earnings season beginning to wind down and economic data highlighting just how fragile the US recovery is, there’s going to be a lot of attention on the Federal Reserve this week, in particular the many speeches from the FOMC members.
Tapering in September now looks very unlikely, following the slightly dovish statement on Wednesday and the disappointing jobs report on Friday. It would be very difficult for the Fed to claim that the recovery in the US is sustainable, when growth has been well below expectations from earlier this year and the reason for a drop in unemployment is a combination of falling participation rates and higher than normal part-time and temporary employment.
James Bullard was the first to come across quite dovish shortly after the jobs report on Friday, claiming that tapering could not begin on expectations that the economy would pick up. Instead, the Fed will have to wait for the data to back it up. Many more FOMC members are due to speak this week, and you can guarantee what they say will be followed very closely by investors.
Fundamentals are certainly playing a much bigger part in the markets at the moment. However, with fewer companies reporting second quarter earnings and increasing uncertainty over the Fed’s bond buying program, any comments from FOMC members that hint at December tapering will only support the rally.
It’s been a positive start to the week in Europe, with services PMIs being revised higher in all cases except for Germany. The Spanish, French, Italian and eurozone PMIs are all now within touching distance of 50, the level that separates growth from contraction, which is really encouraging given where they were only a few month ago. A return to growth before the end of the year doesn’t look like too bad a call now.
The UK, which only a few months ago was facing a triple dip recession, is looking better by the day. July’s services PMI was revised up to 60.2 this morning, the highest in six years and well above that of any of the other major economies. While these PMIs can fall rapidly if things take a turn for the worse, we’ve seen a consistent improvement in these figures all year, while growth has exceeding all expectations.
The rest of the day could be a little quieter, with the economic calendar looking a little light and earnings season winding down. The only notable economic release is the ISM services PMI, which is likely to remain comfortably in growth territory at 53.
Ahead of the open we expect to see the S&P down 2 point, the Dow down 17 points and the NASDAQ flat.
Chief Market Analyst James Hughes discusses this morning’s UK services PMI reading and looks ahead to tonight’s Australian rate decision.
[B]European markets expected lower while RBA interest rate is cut[/B]
Today’s UK opening call will provide an update on:
• Global markets fall as rally comes to a halt
• RBA cut interest rates as expected
• UK manufacturing production
• FOMC board member Evans due to talk later in the day
Global indices are expected to open lower today, coming off the back of a weak Asian session where the Hang Seng and Nikkei 225 both suffered continued losses. The markets have seen significant upside momentum throughout July, driven in part by a relatively strong corporate earnings season in the US, coupled with diminished likeliness of monetary tightening from the major Central banks in Europe and America.
The shift away from the Fed, ECB and BoE as the core driver of market price action has been noticeable, with a strong non-farm payroll (NFP) reading in July having little impact on stock strength despite the associated notion that tapering could be earlier than some would like. On the other hand, the disappointing NFP figure released on Friday was expected to provide a boost to this rally, with markets now understanding that tapering will likely occur at December at the earliest.
Tomorrow is expected to bring some form of forward guidance from the BoE alongside the quarterly inflation report. Typically seen as an opportunity to express the existence of long term low interest rates and monetary accommodation, this speech has the potential to provide a boost to the equity markets. However, given the possible overheating of those markets, it is possible that the downside potential of Carney failing to provide enough could overshadow upside which is likely to be more muted given the topping off of the FTSE100 at the moment.
This morning, the RBA has reduced the headline interest rate for the Australian economy by 25 basis points, from 2.75% to 2.50%. This was largely factored in and subsequently we have since seen approximately a 25 pip rise in the AUD/USD pair despite the association that such a shift would typically devalue the Australian dollar. This news came off the back on continued rhetoric out of the the RBA governor Glenn Stevens that the economy continued to suffer from a weakening export markets and deteriorated export prices. He also clearly expressed a view that the Australian dollar continues to be overvalued and thus a further interest rate cut seemed to be warranted to help further devalue their currency and given their weakened terms of trade.
This decision also came off the back of a rather unorthodox decision from Australian PM Kevin Rudd to declare he hopes to see interest rates as low as possible for the economy. A decision which raised some eyebrows given the valued independence provided by central bank policy decision-making. This announcement, coupled with weak trade balance figures, which saw both imports (-2%) and exports (-1%) decline, made a reduction in the headline rate almost inevitable.
Whether this represents the final interest rate cut from the RBA in 2013 is doubtful, with concerns regarding a Chinese slowdown, a deteriorating jobs market and a diminished growth outlook. The accompanying statement also noted that they see inflation remaining within target for the next two years despite a weakening AUD, thus allowing for further rate cuts going forward.
One of the major events of the day comes in the form of the UK manufacturing production figure, due at 9.30am BST. The strength of the UK economy has been highlighted over the past week, with significant beats in all three key PMI figures boosting investor sentiment. The manufacturing PMI perhaps provided the least impressive rise of the three, despite rising significantly from 52.9 to 54.6, capping off three consecutive months of expansion in the manufacturing sector.
Subsequently, it is important to have consistency across indicators to provide a more well rounded picture for the economy and in this case we are seeking further evidence of a strengthening manufacturing sector through a rise in manufacturing production. Expectations of a 0.9% rise could be a little wide of the mark given the previous two failures to meet market forecasts. However, a return to positive growth in production would be a sign of expansion nonetheless.
Tomorrow is expected to bring about the announcement of forward guidance and the use of thresholds from the BoE. Subsequently while we do not expect releases such as manufacturing production to factor into such thresholds, it does factor into the general health outlook of the UK economy.
Later in the day, the focus will shift towards the speech from FOMC member Charles Evans where markets will be looking out for any further indications of his estimated tapering outlook. Evans is a voting member, thus increasing the importance of his views. Given Evans’ recently dovish stance, any views expressed would likely be leaning towards either delayed tapering. Previously the Fed tones have originated from those lower members and subsequently been reflected by the views of the chair and thus markets will be looking for any indications of where the current stance is of the Fed.
UK and European markets are expected to open lower, with the FTSE100 -24 points, CAC -7 points and DAX -16 points.
0:15 RBA cuts interest rates over night
1:25 UK recovery gathers pace
2:13 Italy on the verge of growth after two years of recession
3:19 Fed’s Evans speaks later
[B]Investors turn to Fed voter Evans for tapering hints[/B]
Today’s US opening call provides an update on:
[ul]
[li]Aussie rallies as RBA cuts rates and issues more neutral statement;
[/li][li]UK recovery gathers pace in June and July;
[/li][li]Italy close to climbing out of recession after longest period of contraction on record;
[/li][li]Fed’s Evans due to speak later.
[/li][/ul]
We saw a classic example of buying the rumour and selling the news over night, when the Reserve Bank of Australia cut interest rates by 25 basis points to record lows of 2.5%. The view among economists and traders in the run up to the decision was that a rate cut was almost guaranteed, so it entirely priced in. Unless we saw a surprise 50 basis point cut, we were always going to see some profit taking.
On top of that, we had the statement from the RBA which was far less dovish than we’ve seen previously, leading many to believe that another rate cut in the next couple of months is unlikely. I still think that we rates could be cut to 2.25% before the year’s out, or during the first quarter of next year at the latest, but that is later than traders were previously predicting.
Over in the UK, the recovery is continuing to gather pace, with industrial and manufacturing production figures for June showing the biggest year on year improvement since February 2011 and July 2011, respectively.
On top of that, according to Halifax, house prices rose 0.9% in July, the sixth consecutive increase, as home buyers continue to benefit from low interest rates, the funding for lending scheme and the governments help to buy scheme. Finally, retail sales increased by 2.2% in July, the biggest improvement since March. Given how much consumer spending contributes to UK GDP, this is a major boost for the economy. Hopefully this should be reflected later in the NIESR GDP estimate for the three months to July, with an improvement on last month’s figure of 0.6%.
Also on a positive note, Italy contracted less than expected in the second quarter and could finally be close to moving out of recession after two years of pain. While the contraction figure of -0.2% leaves Italy in its longest recession since records began in 1970, we really should focus on the fact that the country finally appears to be turning a corner. There’s still a long way to go yet, and plenty that could go wrong, such as a break-up of the unstable grand coalition, but the early signs are encouraging.
Looking ahead to the rest of the day and the focus is likely to be on the speech from voting Fed member Charles Evans. With the markets still undecided on whether the Fed will begin tapering in September, December or later, Evans’ comments are going to be listened to very closely. As a dove, any suggestion that tapering could begin at the next meeting will probably spark some selling of US equities and buying in the dollar.
Ahead of the open we expect to see the S&P down 2 point, the Dow down 19 points and the NASDAQ down 2 points.
[B]Markets pause ahead of key UK inflation report[/B]
Today’s UK opening call will provide an update on:
• Markets expected to trade lower
• UK NIESR GDP estimate beats expectations
• Fed’s Evans hints at possible September tapering
• UK inflation report expected to dominate
Global indices are expected to trade lower again today, in a continuation of slowdown seen over the past three days. Coming off the back of a significant stock market rally, the ability of the markets to take a breather is not particularly notable in itself. However, it is the inability of the likes of the FTSE100, CAC and DAX to break into new highs which brings into question the longevity of current levels. Should this mark the beginning of a longer downtrend, a highly bearish double top formation may come into existence; the precursor to potentially significant losses.
The losses expected in the markets today fly in the face of the UK NIESR GDP estimate released yesterday, which indicated that the economy grew at a rate of 0.7% in the three months ending in July. This comes against median market estimates of 0.6% which in turn where largely based upon the official preliminary Q2 GDP figure from the ONS. Or in other words, the UK economy was seen to have grown 0.1% faster in July than in April 2013.
However, some of the losses in both Asian and US markets can be attributed to increasingly hawkish comments of the typically dovish Fed member Charles Evans yesterday. Evans discussed his current outlook for tapering, taking into account recent notable shifts in jobs data last week and notably views a possible tapering within September as possible. Of course, should we see a pullback in the volume of asset purchases made by the Fed, it is likely that it would be minimal. However, given the disappointing non-farm payroll figure last week, it has been widely speculated that December is much more likely for an initiation of the tapering process.
Today is expected to be dominated by the quarterly inflation report from the Bank of England, due out around 10.30pm BST. Since Mark Carney’s inception as BoE governor on 1 July, the markets have sought to find out how he will implement a framework which can push the UK economy forward under the the current inflation targetting framework. The indication from the chancellor of the exchequer in March that the BoE will require ‘unconventional policy’ going forward was borne out of a view that given the trade-off between asset purchases and inflation, then alternate measures will be required to spur growth as long as the inflation rate remains the number one target.
Mark Carney’s ability to swing MPC votes to a full consensus against additional asset purchases is likely to have been driven by a clear outline of where he sees the BoE going forward. Subsequently, today’s inflation report was cited as the primary target for discussions and declaration of both an outline to a long term low interest rate scenario, coupled with thresholds to measure when the economy is sufficiently ready to raise rates.
We know that Carney looks favourably upon the notion of committing to long term low interest rates, as he performed such forward guidance at the BoC in April 2009. He noted that “it worked because it reached beyond central bank watchers to make a clear, simple statement directly to Canadians”. Put simply, the ability to promise long term low interest rates provides a positive outlook and framework for the population who know that they can plan with confidence for the upcoming period.
That being said, the inability of the ECB and Fed to prescribe forward guidance with any clarity should act as a warning to the new governor where typically leaders have tied themselves in loops attempting to interpret whether the current economic conditions are sufficient or conducive to a more tight monetary policy outlook.
Overall we are expecting to see a commitment to low interest rates, coupled with thresholds which must be reached as a precursor to addressing the issue of whether rates should be raised. Given the inflation targets set by the chancellor, it is likely that there will be in inflation element, however I believe the growth or jobs data will also accompany this. That being said, there are problems associated with both these methods, where unemployment rates can be skewed by shifts in the participation rate (as seen in the US on Friday) and GDP rates are often unreliable and subject to significant retroactive revisions.
Also later today we are looking for key German industrial production data out of the eurozone, along with important Canadian Ivey PMI and building permits data.
European markets are expected to open lower today, with the FTSE100 -13 points, CAC -7 points and DAX -30 points.
[B]Markets fall as Carney provides forward guidance[/B]
Today’s US opening call provides an update on:
[ul]
[li]Markets trading lower after BoE inflation report
[/li][li]Mark Carney provides forward guidance, linking interest rates to unemployment
[/li][li]German industrial production reaches 14 month high
[/li][/ul]
Global indices are trading lower ahead of the US open after the key quarterly inflation report out of the UK failed to provide the boost expected by the forward guidance provided by Mark Carney in his first speech as the governor of the Bank of England. The inability of markets to rally upon what is supposed to be equity positive news points to either an innate weakness within the upside seen throughout the past six weeks or else a market which had already factored in a more significant statement from the BoE.
The highly anticipated announcement from the Bank of England today provided clarity of which indicator the markets will be closely watching from now on, as Carney decided that interest rates will be kept at 0.5% until the unemployment rate reaches 7% or below. Much like recent clarification from the Fed regarding their guidance, this is a prerequisite for the bank to open discussions as to whether rates should be raised, as opposed to a threshold which will automatically raise rates. Bearing this in mind, the UK economy is not expected to reach 7% unemployment until Q3 2016, providing markets with an estimated three years of low inflation and stable asset purchases.
The primary remit of the Bank of England is of course price stability and any forward guidance was always likely to include an element to ensure this remains in focus. Subsequently, it came as no surprise that Carney provided the caveat that the forward guidance framework could be invalidated should the 18-24 month expectation for CPI reach 2.5%. This allows for some room to breathe and provided a boost to the forex markets, where sterling rose unexpectedly despite a commitment to the current 0.5% interest rate and £375 billion asset purchase policy.
Overall, Mark Carney sought to provide direction to both the markets and also the wider population. The ability to promise low interest rates for the foreseeable future allows for better forward planning for the likes of homeowners and business owners alike. This was the outlook for Carney when implementing forward guidance under his role as the Canadian BoC governor in April 2009 and the success of that no doubt drives him in today’s announcement. The ability to implement and manage forward guidance successfully has come under question recently after ECB and Fed attempts have created convoluted and confusing messages for the market.
In other news, the German Industrial Production figure rose to a 14 month high, significantly beating market expectations. This comes off the back of a particularly strong period for the eurozone, and provides another boost given the size and importance of the German industrial sector. The 2.4% rise represents a significant out-performance over the 0.3% forecast and shifts the emphasis towards growth for the sector considering last month saw the first negative reading for this figure in seven months. That being said, given the proximity of this release to the BoE forward guidance statement, any meaningful effect was largely overshadowed in the markets.
Looking ahead, key Canadian data in the form of the Ivey PMI and building permits figures, coupled with US crude inventories provide a focus for the US session.
US markets are expected to open lower, with the S&P500 -5 points and DJIA -41 points.
Chief Market Analyst James Hughes discusses the big story of the day, Mark Carney’s first inflation report as head of the BoE.