Today’s UK opening call provides an update on:
• UK CPI expected to fall, providing main volatility trigger;
• BoE inflation report due tomorrow could shake up markets;
• Australian business confidence disappoints;
• Japanese stocks rally after yen shows further weakness.
Today looks likely to be another day of thin trading within the markets following the a somewhat uninspiring day yesterday. The day following a US jobs report is typically seen to have very little volume and yesterday was no exception. However, it will be interesting to see whether the return of many from remembrance and veterans day holidays will manage to drive any decent form of volume and volatility in a day which provides only one significant economic event of note. Futures point towards a positive open across European indices, no doubt still reeling from the ECB decision to lower rates last week. However, with the BoE inflation report and job data due tomorrow it is clear that volatility will likely pick up as the week goes on.
This morning the CPI measure of inflation is released with markets seeking to associate any changes with a strengthening or weakening of the forward guidance provided by the BoE. Under forward guidance, Mark Carney outlined that interest rates would remain at lows until the unemployment reached 7.0% or lower. However, this is only valid as long as 18-24 month expectations of CPI remain at or below 2.5%. The CPI figure will not provide the forward forecast from the ONS, yet a reduction of the current rate will reduce future inflation expectations. Markets are looking for a reduction to that key 2.5% level, from 2.7% in September. This would move us closer towards a ‘safe’ inflation environment where interest rates are unlikely to be raised as a result of high inflation. Thus should we see the CPI figure come in at or below 2.5% it would likely be viewed as positive for a continuation of loose monetary policies going forward.
The CPI is just one of three events this week which brings the forward guidance policy into question, with the most important coming tomorrow in the form of the inflation report. The rumours of multiple forecast upgrades lead us to believe we will likely see significant volatility tomorrow and will give us an insight into the current mentality within the markets. The trend seen within the post-2008 period has been one of central bank associated analysis of economic releases. Everyone loves to see a strong economy, but if the release of positive data comes to the detriment of monetary easing, it will be largely viewed in a more pessimistic manner within the markets. Thus should we see the likely upward revision to growth and downward revision to unemployment tomorrow, markets will be likely to take it as stocks negative and GBP positive. This is because the expectation of lower unemployment would also reduce the timeframe within which interest rates are expected to remain at the current lows. In all likeliness, this would be responded to by lowering the threshold to provide a greater degree of certainty, yet this may occur at next month’s BoE meeting which may leave the markets to their own devices for some time.
Overnight the Australian business confidence survey painted a less than rosy picture, falling back to pre-election levels following a notable surge in September. The study also pointed towards weakening conditions going forward, with capacity utilisation falling to a four year low, while capex and forwards orders also tumble. That being said, the Australian economy has been showing signs of resurgence and whilst this measure brought the AUD lower in early trading, markets remain somewhat forgiving in this time of adjustment for the Australian economy.
In Japan, the Nikkei225 looks set to post the biggest rise in over a month following notable yen weakness, which saw the currency fall to a seven week low. The breakout of the USDJPY from a 4-6 month triangle formation points to further upside, which brings about the opportunity for a continuation of the trend seen throughout late 2012 to mid 2013 following the imposition of ‘Abenomics’.
European markets are expected to open higher, with the FTSE100 +5, CAC +4 and DAX +11 points.
[B]Attention turns to BoE inflation report after CPI drop[/B]
Today’s US opening call provides an update on:
[ul]
[li]UK inflation plummets in October;
[/li][li]Inflation drops eases one concern with forward guidance;
[/li][li]BoE inflation report tomorrow very important;
[/li][li]Quiet afternoon expected, two Fed members due to speak.
[/li][/ul]
European indices are all trading in the red this morning, although we have seen them pare losses following the release of the UK inflation figure.
Inflation had been one of the major sticking points for investors, when considering how reliable the Bank of England’s forward guidance is. When the central bank offered its forward guidance earlier this year, one of the thresholds that had to be met in order for it to remain valid was inflation expectations for 18-24 months down the line had to be at, or below, 2.5%.
At the time, inflation was 2.8%, which didn’t provide investors with much comfort. Surely only a small increase would invalidate the forward guidance altogether, which explains why we saw no sell-off in the pound at the time. There were also other reasons as well for this including unemployment expectations, but inflation was certainly one concern.
That explains why we saw such a big reaction to CPI release this morning, which fell much further than expected, from 2.7% in September, to 2.2% in October. Not only is this close to the BoEs 2% target, it’s also significantly below the 2.5% threshold set by the BoE when it offered its guidance, providing investors with that comfort that was previously lacking.
This could now be a big week for the BoE, with the unemployment rate for the third quarter due tomorrow, followed by the inflation report. If we see another drop in the rate, which many expect we will, it will be very difficult for the BoE to convince anyone that it will still be 2016 before it hits 7%. Even if we don’t, people still believe it will fall faster than current forecasts.
This could therefore open the door to an amendment of the BoEs forward guidance following the next meeting in December, which I think is increasingly likely. Especially after we get the revised forecasts tomorrow which will undoubtedly be improved following another strong quarter for the UK.
Another reason why this drop in inflation is so important is because it closes the gap between the rise in people’s incomes and the rise in the cost of living. The difference in these figures has not helped the recovery so far as people’s real incomes have been squeezed leaving them to either spend less or become more indebted. The former isn’t good for the economy, while the latter is meant to be what we’re trying to get away from. The more we see this gap close, the better it will be for the economy, so this is a good start.
Aside from this, it’s been a relatively quiet day so far in the markets. We’ve had some companies reporting third quarter earnings, which have been relatively mixed. The period of calm is expected to continue into the US session, with no major economic releases scheduled.
We will hear from a couple of Fed members today, with Dennis Lockhart and Narayana Kocherlakota scheduled to speak. Neither of these are voting members of the FOMC, but that doesn’t mean they can’t provide insight into how the voting members are expected to vote at the next meeting in December. More and more people are coming round to the idea that tapering will begin at this meeting, so their insights could be very useful.
Ahead of the open we expect to see the S&P down 2 points, the Dow down 16 points and the NASDAQ down 7 points.
[B]BoE forward guidance comes into question on Wednesday[/B]
Today’s UK opening call provides an update on:
• Europe tracks US and Asia lower;
• Focus on UK unemployment and BoE inflation report;
• What does the report mean for forward guidance?
European indices are expected to open lower on Wednesday, following on from negative sessions in both the US and Asia over night.
In the US, the S&P and Dow are continuing to flirt with record highs on a daily basis but appear to have lost a little bit of their spark since Friday’s jobs report. The initial response to the report was very positive, but since then investors appear to have become a little uncertain about where to go from here.
The jobs data clearly suggests that things aren’t as bad in the US as many were fearing. That said, I still think December is too early for the Fed to consider withdrawing its support, something investors appear to agree with. On the other hand, the lack of drive in the US could be due to Janet Yellen’s appearance before the Senate Banking Committee on Thursday, which could provide clear insight into when tapering may begin and come to an end, with the previous timeline now seen as unlikely to achieved. As it stands, all we’re getting is contrasting views from other Fed officials, so Yellen may provide the only reliable insight.
The focus is going to be back on the UK today, with unemployment figures for the third quarter being released, followed by the Bank of England inflation report. Together with the October inflation figure, released yesterday, these should provide much better insight into whether the BoEs forward guidance, provided earlier this year, is in fact credible, or whether the markets were right to dismiss it.
The data that we’ve seen over the last six months suggests the latter. The biggest concern with the forward guidance was the BoEs unemployment expectations, with the central bank forecasting that it would take three years for the rate to fall to 7%, from 7.8% at the time. This would be the point at which the MPC would first consider raising interest rates again, thereby guaranteeing low rates for businesses and households for at least three years.
Unfortunately, people did not buy into this forward guidance as they expected the unemployment rate to fall faster as the recovery gathered pace. Without people buying into it, the guidance was useless. Today we’ll find out, when the BoE releases its latest forecasts on inflation, growth and unemployment, whether people were right to doubt it. If the new forecasts show unemployment falling faster, the BoE will be forced to either shorten the time frame of guaranteed low rates, or lower the unemployment threshold. Which they choose will probably be announced following the next meeting in December.
The other concern when the forward guidance was announced was the inflation threshold that had to be met in order for the guidance to remain valid. This threshold was 2.5% in 18-24 months time. Considering that inflation was 2.8% when this was announced, it wasn’t surprising, again, that people didn’t take to it. Since then though, due to a number of reasons including falling petrol prices and the higher tuition fees having less of an impact on the figure, inflation has fallen much fast than expected, reaching 2.2% last month. Within touching distance of the BoEs 2% target.
As we saw when the inflation figure was released, this did help to ease investor concerns over whether a small rise in inflation expectations would invalidate the forward guidance. Sterling fell sharply against the other currencies, as we would have normally expected when the central bank initially provided the guidance. The only problem now is that energy bills are due to rise in the coming months, which could once again create a spike in inflation. The new inflation forecast should provide insight into how much the BoE expects it to impact inflation and whether it alters its 18-24 month expectations
In terms of market reaction to both the unemployment data and the BoE quarterly inflation report, it could be quite significant. I expect to see plenty of volatility in the sterling currency pairs, while both equities and bonds could benefit from a long term commitment to low interest rates, as long as investors believe the guidance is realistic. Unfortunately, with any amendments to the guidance not likely to come tomorrow, any reaction will be in anticipation of any amendments to the guidance, or changes to forecasts that justify the current guidance.
Aside from the UK, it’s going to be a pretty quiet day. The only other notable economic release this morning is the eurozone industrial production figure for September, which is expected to show a 0.3% decline from a month earlier.
Ahead of the open we expect to see the FTSE down 38 points, the CAC down 8 points and the DAX down 32 points.
The Bank of England today responded to the faster than expected drop in inflation and unemployment by revising its forecasts for growth, unemployment and inflation for the coming years. The most notable revision was in unemployment, which is now sees falling to 7% in the third quarter of 2014, one year earlier than precious forecasts.
The first question on everyone’s lips at this point was, what does it mean for the BoEs forward guidance. As it turns out, absolutely nothing. The BoE will stick with its original guidance which means that interest rates will now be discussed a year earlier than originally planned.
You get the sense under Mark Carney that the BoE is working hard to regain the credibility that many think it has lost over the last five years, firstly with its handling of interest rates in the lead up to the crisis, and then by its handling of the crisis after it hit. The latter being the idea that if they throw more money into the financial system, the problems will abate, and if it doesn’t continue to more of the same. Another thing that has dented their credibility has been their wildly inaccurate forecasts.
Mark Carney made it clear today that forecasts aren’t always going to be correct but changes to these will not alter their position on interest rates. Regardless of how much the recovery gathers pace, interest rates will still be discussed at 7% - although a hike is not guaranteed - but that is not necessarily a bad thing, it’s simply because the economy is improving.
Carney made something perfectly clear today that many seem to have not understood previously. Guidance is not meant to guarantee rates for a set period of time, it’s meant to guarantee low rates until the recovery is sustainable, and that is the important thing because at that point, businesses and households will be able to take it.
Unemployment at 7% would suggest that this is the case and at that point, they will therefore begin discussing rates again. The MPC did stress though that productivity, along with inflation, is the biggest concern of the MPC. The first step was to improve demand, which should bring with it improved productivity and finally rises in incomes. The latter has been a big concern over the last five years, with it being far below the rate of inflation. Therefore, guidance was never created to be linked to growth, but to the elimination of the slack in the economy.
Ahead of the US open we expect to see the S&P up 3 points, the Dow up 25 points and the NASDAQ up 4 points.
00:21 - UK unemployment falls to 7.6%
00:45 - Inflation report sees GDP forecasts revised marginally higher
01:09 - Unemployment now expected to reach 7% by Q3 2015
01:41 - Carney keeps 7% threshold in tax
[B]Stocks higher on dovish Yellen remarks[/B]
Today’s US opening call provides an update on:
[ul]
[li]Stocks higher on dovish Yellen remarks;
[/li][li]Investors seek new timeline for tapering;
[/li][li]US jobless claims and non-farm productivity also in focus.
[/li][/ul]
European indices are trading higher on Thursday, following the early release of Janet Yellen’s dovish text, which will be read out in front of the Senate Banking Committee.
Janet Yellen, who is expected to be confirmed as Ben Bernanke’s successor as Fed Chair in the coming weeks, will speak before the Senate Banking Committee on Thursday. Based on the text of her prepared remarks, Yellen is likely to be very supportive of the Fed’s accommodative policy, which isn’t surprising given the notable improvement in the labour and housing market over the last year.
What people will really want to know though is how much longer the Fed plans to remain accommodative for. Earlier this year, Bernanke stated that asset purchases would start to be scaled back towards the end of 2013 and end completely in the middle of 2014. However, the Fed opted against “tapering” in September and October and many believe they will do the same in December, with the full impact of the government shutdown yet to be seen in the data.
With that in mind, the Senate Banking Committee is likely to pressure Yellen into providing an up-to-date timeline for ending the asset purchases, as they did with Bernanke earlier this year. The text from her remarks suggests Yellen remains quite dovish, which suggests she could hint at tapering in the first quarter of 2014, with purchases then coming to an end in Q3. It is the anticipation of this dovish text from Yellen that helped stocks end on a high in the US on Wednesday and is continuing to push them higher in the futures market today.
This could potentially be another mistake from investors. We saw a similarly dovish statement from Bernanke earlier this year when he testified, before he then went on to lay out the timetable for tapering this year, prompting a significant sell-off in stocks. Given the comments we’ve had from some Fed members this week, I wouldn’t be surprised to see a similar outcome again.
Aside from Yellen’s testimony, we also have some economic data being released shortly before the US open. Weekly jobless claims are expected to fall again to 330,000, from 336,000 last week, while non-farm productivity in the third quarter is expected to have improved by 2.2%, down slightly from 2.3% in the second quarter.
Ahead of the open we expect to see the S&P up 3 points, the Dow up 13 points and the NASDAQ down 11 points.
00:22 - Indices rally on dovish Yellen statement
02:18 - Nikkei up 2% on weaker yen and strong GDP figure
03:57 - Mixed morning for Europe
06:02 - Yellen speech and US jobless claims this afternoon
Today’s UK opening call provides an update on:
• Dovish Yellen sends indices higher for a second day;
• December taper unlikely;
• Eurozone revised October CPI due this morning;
• US manufacturing data released this afternoon.
European indices are expected to open higher on Friday, following another positive session in both the US and Asia over night.
The overnight rally in the US and Asia was largely driven by Janet Yellen’s testimony in front of the Senate Banking Committee. Yellen is currently the vice Chairperson at the Federal Reserve, but is expected to be confirmed as Chairman Ben Bernanke’s successor in the coming weeks. Bernanke term will come to an end on 31 January, leaving Yellen to take the hot seat on 1 February.
The initial rally came following the release of Yellen’s opening statement, which was seen by most in the markets as quite dovish. While Yellen didn’t go into any detail on when asset purchases would start to be reduced, in both her prepared statement and during the Q&A session despite the best efforts of the Senators, her overall tone certainly came across quite dovish.
Her comments suggest that a taper in September is unlikely, which means the first quarter of 2014 now looks most likely again. Investors had started to price in a December taper following the release of the October jobs report, which blew investors away with it’s very strong job growth during the government shutdown month, as well as upward revisions to both the August and September figures. Clearly in Yellen’s book, this one report doesn’t constitute the sustainable recovery that the Fed is after, something the markets are finding it very difficult to grasp at the moment.
Despite the positive start expected in today’s session, it is likely to be much quieter than the last couple of days. The economic calendar is looking very thin, with the only notable economic release this morning being the revised eurozone CPI figure for October. And you could argue that even this will be of little interest to investors considering we’ve already had the initial shock to the figure, when the preliminary reading was released last week, and the ECB has responded with a cut in interest rates.
The US session this afternoon is also likely to be a quiet affair, with only a couple of medium impact economic releases expected. First up we have the empire state manufacturing index, which is expected to rise to 5 in November, from 1.5 in October. Following this we have the industrial production figure for October, which is expected to show a 0.2% increase in October, from a month earlier.
Ahead of the open we expect to see the FTSE up 9 points, the CAC up 3 points and the DAX up 4 points.
Today’s US opening call provides an update on:
[ul]
[li]Quiet end to the week expected;
[/li][li]No reaction as eurozone inflation remains unchanged from preliminary reading;
[/li][li]US manufacturing and industrial production data still to come;
[/li][li]Investors remain buoyed by Yellen’s dovish tone.
[/li][/ul]
It’s looking like being a pretty quiet end to the week, with very little economic data being released in both Europe and the US. The only notable release in Europe this morning was the revised eurozone CPI figure, which was unchanged at 0.7%.
Given that the ECB has already cut interest rates in response to this, there was never going to be a reaction to it in the markets. That is unless it fell significantly further, potentially forcing the ECB into another tough decision next month.
In the US, there are a couple of pieces of data being released, but neither are likely to have a massive impact on the markets. The empire state manufacturing index is expected to show an improvement in activity in November, with the figure rising to 5 from 1.5 last month.
Also being released is the industrial production figure for October, which is expected to show a small pickup in October, of 0.2%. This is down from 0.6% last month, but this could be partly due to the government shutdown, which lasted almost three weeks of the month. A lot of the data from October is likely to be distorted in some way so should, to an extent, just be disregarded.
There’s very little else driving the markets today. US futures are higher, which suggests that investors are still quite bullish on risk assets following Janet Yellen’s testimony in front of the Senate Banking Committee. This, along with the early release of the text of her opening remarks, has been largely responsible for the positivity in the markets over the last couple of days.
Yellen didn’t actually say anything in either of these that committed the Fed to looser monetary policy for any longer than the markets previously though. However, there was certainly a very dovish tone to her comments and she did not shy away from talking about how effective the Fed’s policy has been so far. Given that she is a well known dove, the message was clear, even if she didn’t actually explicitly say it. There will be no tapering in December, the recovery is fragile and still needs the full support of the Fed.
Ahead of the open we expect to see the S&P up 3 points, the Dow up 26 points and the NASDAQ up 7 points.
00:10 - Quiet end to the week expected
00:41 - Eurozone at risk of deflation
01:32 - US data in focus this afternoon
Today’s UK opening call provides an update on:
• US October data in focus this week;
• Quiet start to the week expected;
• China releases detailed set of reforms.
There’s going to be a lot of attention on the US this week, as we finally find out what impact, if any, the October government shutdown had on the US economy.
It is strongly believed by many in the markets that the shutdown will have had very little, if any, impact on the economy, as has been the case on previous occasions. However, as far as I’m concerned, this one is very different. This shutdown came at a time when the country is still trying to fully recover from the worst financial crisis since the great depression in the 1930’s.
As it is, consumers and businesses clearly aren’t overly optimistic about the US economy going forward, and who can blame them given that already this year we’ve had an increase in the payroll tax and across the board spending cuts as a result of the fiscal cliff and the sequester, respectively. With more budget battles to come over the next few months, it’s only natural to assume that a deeply polarised Congress on Capitol Hill will shoot itself, and therefore the economy, in the foot once again.
With confidence therefore so fragile, the economy may have taken a bigger hit than it would have on previous occasions, while confidence itself may take longer to return. October’s jobs report doesn’t necessarily support this, with the economy having added 204,000 jobs, however this is only one piece of data and could simply be a one-off. I don’t expect the rest of the October figures to be so positive.
There’s a number of October figures being released this week, but I think particular attention will be paid to retail sales, existing home sales and manufacturing figures. Also on Wednesday, we have the release of the minutes from the October FOMC meeting, which should highlight just how uncertain the central bankers were about the potential impact of the shutdown on the economy. If this is the case, it seems very unlikely that we’ll therefore see tapering in December as it will take longer than a couple of months for the data to show beyond doubt that we’re seeing a sustainable recovery, despite the shutdown in October.
As for today, it’s going to be relatively quiet, with no major economic releases due out of the eurozone or the US. We will hear from a couple of Fed members later on today, including William Dudley and Charles Plosser. Dudley is a voting member on the FOMC and a well known dove, so any comments on the potential winding up of asset purchases could have a significant impact on the markets, especially if he hints at earlier than expected tapering.
Chinese shares performed very well in the Asian session over night, after the Communist Party released details of the reforms that will be carried out between now and 2020. Among the many changes to be announced was an easing in the one-child policy that came into place in the 1980’s. Baby related stocks reacted strongly this announcement, helping push the main Chinese indices up more than 2%.
Ahead of the open we expect to see the FTSE down 3 points, the CAC up 1 point and the DAX down 7 points.
[B]Europe higher on rising eurozone exports[/B]
Today’s US opening call provides an update on:
[ul]
[li]Investors remain bullish following last week’s Yellen testimony;
[/li][li]Lots of US October data released this week;
[/li][li]Bad data good for stocks ahead of December FOMC meeting;
[/li][li]Eurozone trade surplus rises, helped by the periphery;
[/li][li]Fed speeches in focus on Monday.
[/li][/ul]
US futures are treading water so far this morning, with investors lacking any real direction due to a lack of economic data or market moving news.
Last week’s testimony from Janet Yellen is continuing to buoy investors this morning, with many taking her comments to mean that tapering is unlikely before the first quarter of 2014 at the earliest. As long as investors continue to believe this, the S&P and Dow are likely to continue to record all time highs on an almost daily basis.
There’s a lot of US economic data for October being released this week, which could be key in determining whether tapering in December will happen or not. Regardless of the data, I don’t believe it will happen, however the data could go some way to confirming this.
The jobs report, released a couple of weeks ago, suggested that the government shutdown had no negative impact on companies hiring decisions, with 204,000 new jobs being created in October. But that doesn’t mean the same will be true of the rest of the data. The biggest impact is likely to be seen in consumer spending, with people in the US being concerned about job security at a time when the recovery is weak and Congress continually shoots itself in the foot.
If the October figures this week are disappointing, I don’t see the Fed tapering. The whole point of its asset purchase program was to set the US on the path towards a sustainable recovery. This has not been seen yet, although the Fed is not at fault for this. Tapering too soon would suggest that the Fed has accepted defeat, something Yellen will not be willing to do, based on her comments last week.
Today though, things are looking a lot quieter. This morning has been very quiet, with the only notable economic release being the trade balance figure for the eurozone. The boost in exports was largely responsible for the larger trade surplus, which has been well received in the markets.
What’s particularly encouraging is that the periphery played its part in the improvement in exports, which suggests all of the austerity may finally be paying off. Quite often we see improvements in eurozone figures that are largely due to improvements in countries such as Germany and France, which essentially papers over the cracks. This is not the case here though which is very encouraging.
This afternoon, with no significant economic releases due, more focus will be paid to the comments coming from the Fed. William Dudley and Charles Plosser are both scheduled to speak and could provide important insight into what the Fed will do in December. Only Dudley is a voting FOMC member, so his comments will be followed much more closely. However, Plosser could still provide some very valuable insight.
Ahead of the open we expect to see the S&P flat, the Dow up 35 points and the NASDAQ flat.
Today’s UK opening call provides an update on:
• Rally losing momentum as investors become more cautious;
• Data this week could tempt FOMC into small taper;
• Dovish RBA minutes in line with previous comments;
• Eurozone economic sentiment expected to improve significantly in November.
A downbeat end to the US session, followed by a similar performance in Asia over night is feeding through into European futures this morning, with indices currently seen opening around a fifth of a percentage point lower.
Uncertainty over when the Fed is going to begin tapering its bond buying program is starting to make investors a little nervous at the moment. It’s pretty clear at this stage that the only thing dragging markets higher right now is central bank stimulus. And while we are continuing to see record highs being made in the S&P and Dow in particular, you get the feeling that the momentum is waning.
This was seen very clearly towards the end of the US session on Monday, when Carl Icahn raised concerns about the sustainability of this rally. He claimed he was very cautious in relation to the stock market, which he believes could see a big drop. There’s many out there who will say that people have been saying this all year and yet the rally and gone on and on and on, but Icahn is a big player in the game and investors clearly took note of his comments.
It’s not difficult to see why Icahn, among others, see a massive drop in the not too distant future. The Fed’s stimulus program is not here to stay and the first taper is not likely to be far away, in fact it could come at the next meeting in December. Whether we see that could depend on what we learn about the performance of the economy in October, with a number of pieces of data being released this week.
If the data suggests the government shutdown had no negative impact on the economy, the Fed may be encouraged to taper a little and test the water to see if the economy can continue to grow on its own. That would be a very brave move by the Fed, given that the data has hardly been convincing, but you get the feeling that the central bank is under pressure to reduce its asset purchases, particularly from within by some of the more hawkish policy makers. Even some of the more dovish members, including William Dudley who spoke last night, appear more optimistic on the economy and could potentially be convinced by a small taper of around $10 billion.
There were no surprises when the minutes from this month’s Reserve Bank of Australia meeting were released in the early hours of this morning. The RBAs more dovish stance had previously come across in statements from the central bank, including the one that was released following this month’s meeting.
What is interesting is how openly the RBA talks about its concerns over the strong exchange rate, which is something of a taboo among central bankers. Clearly it is attempting to verbally devalue the Australian dollar, having continuously raised concerns about the strength of it, particularly against the greenback. However, the markets are not necessarily taking the threats of a rate cut very seriously, as seen by the reaction to the minutes over night, with the aussie rallying following the release.
As for today, we could be in for another relatively quiet session, with only a few notable pieces of economic data being released. This morning, the focus will be on the eurozone, where we’ll get the ZEW economic sentiment figures for November. The German figure is expected to show sentiment improving significantly among institutional investors and analysts, rising to 54 from 52.8 in October. The eurozone figure is also seen improving significantly, rising to 63.1 from 59.1 last month.
Ahead of the open we expect to see the FTSE down 24 points, the CAC down 12 points and the DAX down 20 points.
[B]Investors turn to Bernanke for tapering insight[/B]
[ul]
[li]Today’s US opening call provides an update on:
[/li][li]Europe lower on Icahn comments;
[/li][li]Dudley more optimistic on US economy;
[/li][li]RBA open to rate cut;
[/li][li]Economic sentiment improves in the eurozone;
[/li][li]Investors turn to Bernanke this evening.
[/li][/ul]
European indices are down across the board on Tuesday and US futures look likely to do the same, following comments from Carl Icahn yesterday that prompted a little more caution from investors.
Icahn, a billionaire investor who’s opinion is well respected in the industry, claimed that he has become more cautious on the stock market and believes it could be facing a big drop. Now, this type of comment is something we’ve heard repeatedly this year from a whole host of people in the industry, but this time it’s really hit a nerve with investors, and I think there’s a couple of reasons for that.
The most obvious reason is that Icahn is a big player in the industry so his views are always worth listening to. The second, and probably most important, is that traders were already getting a little nervous about the sustainability of the rally, with Fed tapering just around the corner.
It’s no secret that the $85 billion being pumped into the financial system is largely behind indices trading at record highs, particularly in the US. Icahn’s comments were simply a warning that tapering is coming and low interest rates have until now papered over the cracks of recent earnings reports. Once the Fed begins withdrawing its support, the cracks will appear and investors will sell. We could very well be about to see that 15-20% drop in the stock markets that people have been warning about all year.
Not helping these tapering concerns were comments from William Dudley, who claimed last night that he is more hopeful on the economy. Given that he is typically dovish, these comments have been taken by investors as a warning that the Fed will soon begin to wind down its asset purchase program.
There were no surprises when the minutes from this month’s Reserve Bank of Australia meeting were released in the early hours of this morning. The RBAs more dovish stance had previously come across in statements from the central bank, including the one that was released following this month’s meeting.
What is interesting is how openly the RBA talks about its concerns over the strong exchange rate, which is something of a taboo among central bankers. Clearly it is attempting to verbally devalue the Australian dollar, having continuously raised concerns about the strength of it, particularly against the greenback. However, the markets are not necessarily taking the threats of a rate cut very seriously, as seen by the reaction to the minutes over night, with the aussie rallying following the release.
It’s looking like another quiet day in the markets, with the economic calendar being very thin. It’s been largely the same this morning, although we did get the ZEW economic sentiment figures for Germany and the eurozone earlier on in the session.
Both of these showed analyst and institutional investors became more optimistic in November, with the biggest improvement coming in the German figure, which rose from 52.8 last month to 54.6. The eurozone figure, while improving, still fell short of expectations of 63.1, rising only to 60.2.
The focus for the rest of the day will be a speech from Fed Chairman Ben Bernanke in Washington. Traders will be looking for clues from Bernanke about when we can expect the first round of tapering from the Fed, particularly, whether it is possible in December. Any suggestion that this is likely will probably be met with further selling in the coming days.
Ahead of the open we expect to see the S&P down 3 points, the Dow down 3 points and the NASDAQ down 6 points.
Spotlight on BoE and Fed minutes, and US October data
Today’s UK opening call provides an update on:
• Investors look to BoE minutes for signs that policy makers favour a new unemployment threshold;
• US October data to provide crucial insight into whether the shutdown negatively impacted the economy;
• FOMC minutes may contain key clues about the likelihood of a December taper.
After a quiet start to the week, things should really pick up today, with the Bank of England minutes being released this morning, followed by a number of US economic releases and the FOMC minutes this afternoon. While the BoE minutes can provide important insight into what we can expect from future MPC meetings, not much is expected on this occasion.
BoE Governor Mark Carney made the central bank’s position perfectly clear last Wednesday during the quarterly inflation report press conference. After giving the BoEs new forecasts for growth, inflation and unemployment, Carney confirmed that forward guidance will remain unchanged, despite new forecasts showing unemployment dropping to 7% at least a year earlier than initially expected.
One thing we could learn from the meeting is whether any policy makers were in favour of changing the guidance in order to provide more comfort to households and businesses. One option would be to change the unemployment threshold to 6.5%, which would effectively be a commitment to low interest rates for another 6-12 months. The more support this idea had in the meeting, the more than there is that it will be adopted in the future. Aside from that, no change is expected in the voting, with members voting unanimously against a change in interest rates and asset purchases.
The US session this afternoon will be much more eventful. First up we have the release of the US CPI and retail sales figures for October before the opening bell. The CPI figure is unlikely to create too big a reaction in the markets for two reasons. Firstly, the figure is still well below the Fed’s 2% inflation target so is unlikely to convince policy makers to taper earlier than they would otherwise. Secondly, the Fed’s preferred measure of inflation is the personal consumption expenditure index, which is also well below the 2% target, so even a significant rise in this probably wouldn’t change anything.
Retail sales on the other hand are extremely important for the US economy and therefore have the potential to create big moves in the markets. These figures have been quite disappointing in recent months but the October figure could potentially be significantly worse due to the government shutdown that lasted almost three weeks.
Many analysts and economists are currently of the opinion that the impact will be minimal, hence the expectations for a 0.1% increase in retail sales in October. If they’re wrong and we see a significant reduction, it could actually prompt a rally in equities, as a poor showing in the October data would all but close the door on a December taper. The opposite is also true though, if the shutdown is shown to have no impact on the data, it could prompt investors to price in a December taper which would be negative for stocks and prompt significant risk aversion in the markets.
Finally, on the economic data front, we have the October existing home sales shortly after the US open. The number of sales fell in September due to rising mortgage rates and a lack of supply. It will be interesting to see whether the shutdown on top of these will further discourage both those looking to sell as well as those looking to buy.
To wrap things up today we have the release of the FOMC minutes from the meeting at the end of October. It was no surprise when the Fed left policy unchanged last month, but investors will be looking for hints about when policy makers intend to taper. If there is still a lot of support for tapering this year, it could lead to a December taper being heavily priced in, especially if this is paired with data that suggests the economy was unaffected by the shutdown.
Ahead of the open we expect to see the FTSE down 26 points, the CAC down 11 points and the DAX down 12 points.