[B]ECB under pressure to respond as inflation falls to 0.7%[/B]
Today’s US opening call provides an update on:
[ul]
[li]ECB under pressure to respond as inflation falls back to 0.7%;
[/li][li]ECB may be forced to consider unconventional tools, including QE as a last resort;
[/li][li]Eurozone unemployment falls to 12% after stabilising in 2013;
[/li][li]Focus on the US consumer for the rest of the day
[/li][/ul]
The risk of deflation in the eurozone has become a hot topic again this morning after the eurozone CPI was seen falling back to 0.7%.
This is the level that prompted the ECB to cut interest rates to record lows of 0.25% back in November, and therefore speculation will be rife about how they will respond at the meeting next week. The problem the ECB now faces is that any interest rate cut to, say, 0.1%, will probably have minimal impact, which means they will be forced to consider more unconventional measures.
The options that have been discussed at previous meetings include negative deposit rates, with the rate currently standing at 0%, and forward guidance, which the ECB attempted last year and proved to be very unsuccessful due to the lack of any form of threshold. The central bank policy makers appear very reluctant to fully adopt either of these options which should make next week’s decision all the more interesting.
Other options that the ECB may consider include another round of long term refinancing operations (LTRO’s), although many have raised doubts about whether this would address the real issue. Quantitative easing is one that has been successful in other countries, but I feel this would be more of a last resort than a likely option at an upcoming meeting.
On the bright side, eurozone unemployment was lower at 12%, with the November reading also revised down to this level. Unemployment stabilised over the last year following its relentless rise to record levels prior to this. The fact that we’re finally seeing this number come down, albeit slowly, is a sign that the eurozone is turning a corner. Although I’m sure there’s still plenty of countries that aren’t seeing this yet.
The focus for the rest of the day will remain on economic data, with fewer companies reporting fourth quarter earnings on Friday. We have a number of releases which will be of interest to traders today, with particular focus on the consumer.
The UoM consumer confidence figure is expected to be revised higher to 81 from 80.4, which will be music to the ears of those hoping for a strong recovery in the US this year. It will also ease concerns about consumer spending levels in January, which has been another poor month on the weather front, a potential deterrent for shoppers.
Even if this has had an impact on consumer spending, a good consumer sentiment figure would suggest that these are one-off figures and things should improve in the coming months. Shortly before this, we’ll have the release of the December personal spending figure, which is expected to fall to 0.3%. Anything above this would further ease concerns about falling consumer spending.
Also being released today is the core personal consumption expenditure index, the Fed’s preferred measure of inflation. This is unlikely to have much impact on the markets though as it is expected to remain at low levels of 1.1%. Finally we have the January Chicago PMI, which is seen remaining relatively unchanged at 59.
Ahead of the open we expect to see the S&P down 17 points, Dow down 146 points and the NASDAQ down 32 points.
The first week of the month means one thing, and that is a whole plethora of top tier economic releases and announcements to sink our teeth into. The US focus will be largely centered upon the jobs report due to be released on Friday. Meanwhile in the UK, the release of the three industry specific PMI figures will no doubt dominate proceedings in the early part of the week. Over in the eurozone region, Thursday’s ECB press conference takes on a heightened importance following the continued downward pressure seen in the inflation rate.
In Asia, the celebration of Chinese New Year and the spring festival mean that we are likely to see less activity from the region. Despite this, Saturday’s manufacturing PMI figure will be keenly followed given the impact the fall in the HSBC figure had upon the emerging markets. Finally, a busy week for Australia sees the RBA come back to the fore with the accompanying statement from Glenn Stevens likely to dominate proceedings.
[B]US[/B]
A highly significant week ahead for the US economy, with the release of the ADP non-farm payroll figure leading the way to Friday’s jobs report climax. The impact the jobs data has had upon ongoing tapering has been absolutely crucial and thus the release of this weeks employment figures will give us a better idea of whether Yellen is likely to taper at her first meeting.
The [B]ADP non-farm payroll[/B] is commonly seen as a poor man’s version of the headline figure owing to the lessened impact and questionable correlation. That being said, the importance of the ADP figure came into question over the last month. The release of the lowest non-farm payroll since mid 2012 was widely attributed to adverse weather seen across the US and drove the Fed to seek guidance from alternate employment measures including the ADP figure. The fact that the ADP non-farm payroll (highest since December 2011) and unemployment rate (lowest since November 2008) both came in very positively allowed the FOMC to conclude that significant strength remained in the US jobs market despite the fall in the non-farm payroll figure.
This month, expectations are somewhat lower, with a figure closer towards 191k being mooted following an impressive 238k last month. In my mind, anything around the 200k mark would be respectable and given that the last two releases have beaten estimates, I believe the jobs market is picking up strongly which could lead to third consecutive beat in this measure.
On Friday, the release of the fabled jobs report is likely to bring the most volatile period of the whole week, when the unemployment rate and non-farm payroll figures are released. As mentioned previously, the [B]non-farm payroll[/B] figure came in substantially lower than expected last month, posting the lowest change in payrolls since mid 2012 at 74k. However, with no adverse conditions effecting this month’s figure, the expectation is for this measure to return to ‘business as usual’. Estimates point towards a figure closer to 185k, which would be somewhat short of the 200k+ seen prior to the big freeze. However, this would still point to a healthy range for the measure and would make a potential March taper highly plausible.
Much of that decision with respect to a March taper is also driven by the [B]unemployment rate[/B], which is also released on Friday. The unemployment rate has been utilised as a target under forward guidance for both the UK and US, showing the importance of this figure. Given the proximity of the current 6.7% rate of unemployment to the 6.5% threshold, any further fall would be highly significant to the markets. That being said, the outgoing Fed chair Bernanke has said that interest rates will remain at low levels for an extended period after the 6.5% threshold is reached.
As ever, it is worth watching out for some of the other statistics that are released alongside these two key figures, with the [B]average weekly hours, average hourly earnings[/B] and [B]participation rate [/B]all key in Fed understanding of whether there has been positive progression for workers in the US. As mentioned, the March FOMC meeting is going to be key going forward, given that there isn’t one scheduled for February. Thus this week’s jobs data will be one half of the new data being utilised by the FOMC for their next decision. For that reason, there is a possibility we could see less emphasis upon FOMC decision-making in this release and more upon the US economic health and potential impact to forward guidance.
[B]UK[/B]
A major week in the UK economy, where the first half of the week will be dominated by the release of industry specific PMI figures, followed by the latest monetary policy statement from the Bank of England’s Monetary Policy Committee (MPC).
On Monday, the [B]manufacturing PMI[/B] figure provides the latest outlook for an industry which behind services is the second highest contributor to the UK’s GDP figure. Much was made of the over-reliance of the UK economy on services following the 2007/08 crash and thus the ability to become stronger in areas such as manufacturing allow for greater stability going forward. As a proponent of 2013 Q4 GDP growth, the manufacturing sector contributed 0.10% of the 0.70% overall growth and for that reason, this survey is key to understanding how the sector will contribute going forward. Market estimates point towards a figure around 57.0 from 57.3 last time which would represent the second consecutive fall in the measure.
On Tuesday, the [B]construction PMI [/B]figure is released, following the news that it was the only sector which shrank in Q4 within the GDP reading. This comes despite the booming housing market and perhaps points to weaknesses in policy with respect to building new construction projects. That being said, the construction PMI has been the best performing over recent months and thus one should not be too dismissive. It will be key to note whether we can see a positive push into higher expansion this month, despite a predicted fall to 61.6 following last month’s figure of 62.1. However, given the relatively minor impact that this sector has upon growth in the UK, this figure will be third in line in terms of emphasis for me.
Wednesday brings the most important of the three, with the [B]services PMI[/B] providing a leading indication of what direction the UK’s most important sector is moving in January. As mentioned, the services sector is absolutely key to whether the UK economy is growing or not and thus the ability to see ahead of time in what direction the sector appears to be progressing is invaluable. Market forecasters point towards a potential rise back to 59.1 from 58.8 last month. Ultimately, any rise in this figure would be positive for the economy as it would point towards a move back in the right direction for not only the sector, but most importantly the wider economy.
Finally, on Thursday the monetary policy committee at the BoE will announce their latest [B]interest rate[/B] and [B]asset purchase policy decisions[/B]. As with previous months, there is little likeliness of any change in either the interest rate or asset purchase facility given that Mark Carney’s forward guidance policy seeks to provide a stable environment. Add to this the fact that the economy has been performing particularly well in recent months and there is no appetite for further changes.
Thus as with previous months it is worth looking out for any change in the statement, most notably in relation to the forward guidance policy which is coming under increased pressure now that we approach the key 7.0% threshold much earlier than expected. Recent statements from Carney at the World Economic Forum cited a willingness to update the forward guidance policy to encompass different tools. Whilst this is unlikely to have been finalised quite yet, I am looking for further clues as to how this might take shape.
[B]Eurozone[/B]
A similar week ahead for the eurozone, where the release of various PMI figures, along with the latest ECB meetings will dominate proceedings. The [B]PMI releases[/B] are split across two days, with the manufacturing figures due on Monday, whilst Wednesday will be focused upon the services sectors. As mentioned previously, the key numbers to be watching out for are the German and eurozone figures primarily. However, it is also worth noting that those weaker areas such as French manufacturing are going to be key as we need to see a move closer towards expansion to bring a sense of calm. Currently, with a figure of 47.0 in play, economists and analysts can plainly see an uncomfortably deteriorating sector in the second largest eurozone economy. Also watch out for the eurozone composite PMI, which takes into account all areas of the single currency and gives a more all encompassing figure.
The biggest event of the week arrives on Thursday, when the[B] ECB [/B]announce their latest decision with regards to [B]monetary policy[/B]. This would not be as much of a major event had it not been for the latest inflation figure out of the eurozone, which saw CPI fall back to 0.7%. The last time we saw an inflation rate of 0.7%, Mario Draghi decided to pull back interest rates, cutting the minimum bid rate by 25 basis points. However, given that the impact of that rate cut upon CPI was almost non-existent, there are significant doubts as to whether Draghi will employ the same type of tactic. Thus whilst I do not expect a rate cut, this meeting will be significantly more interesting for the fact that Draghi has to address this threat of deflation in some way. Thus look out for both the headline rate and failing that, an indication of what alternate could be utilised.
[B]Asia & Oceania[/B]
A somewhat quiet week in Asia, in part due to the fact that China will be celebrating the spring festival following the Chinese new year. That being said, there is the release of the [B]manufacturing PMI[/B] to address, which is due out over the weekend. Much has been made of the Chinese data recently for a number of reasons, not least the emerging markets sell-off seen over the last week. This was initiated from a disappointing HSBC manufacturing PMI figure, which saw the sector shift back into contraction. The emerging markets were the ones to suffer the most from the market jitters seen in response to this figure, however it has been felt around the work in the form of heightened risk aversion.
The official manufacturing PMI figure typically performs better than the HSBC reading for a number of reasons. Firstly, the official figure is geared towards the larger, state backed firms, which will of course fare better during the weaker times of growth for the economy in comparison to smaller firms. Also, the HSBC figure is an independent measure and thus there is little political will to alter how the industry is portrayed to the world. Following the admission that trade figures have been manipulated by bogus invoicing, it is understandable that analysts treat official data out of China with a degree of skepticism. Thus there is a greater degree of trust associated with the HSBC nowadays as a true measure.
That being said, the official manufacturing PMI figure remains the main measure of the manufacturing sector for the worlds second largest economy. Following the HSBC figure falling into contraction, this release is going to be absolutely key and should it also fall back below 50, this could spark a significant sell-off globally. Estimates point towards a pull back to 50.5 from 51.0 last month. Given the proximity of this to the key 50.0 mark, it is well worth looking out for this release.
Finally in Australia, a busy week is dominated by the [B]RBA monetary policy statement[/B] which sees governor Glenn Stevens take the stand once more in what is likely to be a somewhat less showstopping meeting than usual. One of the key drivers behind the dovish rhetoric from Stevens has been the need to drive the AUD rate lower. However, with the Aussie continuing to fall, signs point towards things going the right way for the RBA. That being said, not long ago he explicitly mentioned a target of 0.85 for the AUDUSD pair, and with the level currently at 0.875 there is still some way to go. Thus I would say that it is unlikely we are going to see a reduction in the interest rate this month, yet the accompanying statement will still be crucially important to how markets perceive this event.
[B]Week off to a bad start Chinese data disappoints[/B]
Today’s UK opening call provides an update on:
• Week off to a bad start driven by disappointing Chinese and Australian data;
• Emerging market concerns continue to weigh on investor sentiment;
• Busy week ahead with plenty of data and earnings releases, as well as three central bank meetings;
• Eurozone manufacturing PMIs in focus this morning.
We could be in for another bad week in the markets after things got off to a shaky start in Asia over night, with losses being made across the board driven largely by disappointing data from China and Australia.
The Chinese non-manufacturing PMI dropped to 53.4 in January, a decline that surprised no one given how the rest of the data has performed so far this year, but nonetheless weighed on markets over night. On the bright side, the figure remained comfortably above 50, the level that separates growth from contraction, while continuing to show growth, albeit slightly slower, in both the services and construction sectors.
Data out of Australia wasn’t any better with the number of building permits in December falling by 2.9%, well below the flat reading that was expected. This is just the latest disappointing figure from a country that is struggling to adapt to life after double digit growth in China that provided a significant boost to Australia’s mining sector. With the central bank meeting tomorrow, this could further encourage policy makers to cut rates again in order to provide a further boost to the economy and devalue the currency to a level its more comfortable with.
These figures just further dampened investor sentiment, which was already pretty low as a result of what’s going on in the emerging economies at the moment. Investors have been concerned about what impact the Fed’s tapering could have on these countries for quite a while now, prompting a similar reaction in the middle of last year when Ben Bernanke first hinted at tapering.
I don’t think this panic will last, although I do expect repeats of this throughout the year as the Fed brings it asset purchase program to a close. Given the size of the rally in stocks last year, I think part of this sell-off is being driven by investors using the emerging markets story as an excuse to allow for a correction in the markets.
This week could be very important from an investor sentiment standpoint, with plenty of economic data being released, including the US jobs report on Friday, three central bank meetings taking place and another batch of earnings being announced. This morning we have a number of manufacturing PMIs being released from the eurozone, all of which are expected to show a slight improvement compared to December.
Over in the US later we also have some manufacturing figures being released, as well as construction data for December. Overall though, the US session is likely to be pretty quiet, with trading volumes taking their normal hit on the day following the Super Bowl.
James Hughes look at a negative start to the week for financial markets and looks ahead to a key week of economic data with the ECB and Non-farm payrolls looking to take centre stage.
[B]Further negativity over night weighs on European futures[/B]
Today’s UK opening call provides an update on:
• Disappointing manufacturing data prompts further selling on Monday;
• Negativity carries over the Asia and Europe, where futures are around 1% lower this morning;
• UK construction PMI and Spanish unemployment data being released this morning;
• Nikkei takes another beating as yen correction continues;
• RBA reluctantly keeps rates at 2.5% while dropping dovish comments from this month’s statement.
We’re looking at another negative start to the European session on Tuesday, following another sell-off in the US on Monday in response to some weaker than expected manufacturing data, which prompted a similar reaction in Asian stocks over night.
To be honest, the response to the manufacturing data on Monday was a little over the top, which just highlights the risk averse approach from investors right now. The drop in the figure on Monday, like the decline in a number of the data releases for December and January, was driven largely by the terrible weather in the US, which is only going to be a temporary factor.
With that in mind, what we’re seeing in the markets so far this year may not be investors panicking about the turmoil in emerging markets, or the ongoing weaknesses in corporate earnings, or even the poor data coming out of the US for December and January. Instead, I believe these are all simply being used as an excuse for investors to allow for the significant correction that many investors have been calling for, for a number of months now. Which begs the question, when are investors going to start buying the dips.
Well, I don’t think it will be this week, not with such an important US jobs report being released on Friday and a huge ECB meeting on Thursday. With dreadful weather negatively impacting the December and January figures in the US, I will be very surprised to see a strong jobs report this week, which means the negativity may persist for another couple of weeks yet. However, once we start seeing decent figures again for February, I believe investors will start buying into the dips again, and at levels that back in December would have been seen as a huge bargain.
What that means today though is that this risk aversion in likely to continue. Especially as there’s very little economic data being released in either Europe and the US. There’s only a couple of notable releases this morning, the first being the Spanish unemployment change figure. This is expected to show a decline of 21,300 in January, which is quite encouraging but will have little impact on the overall rate of unemployment rate, which currently stands at a staggering 26.03%.
Also this morning we have the UK Construction PMI for January, which is expected to fall slightly from the month before, while still remaining at extremely high levels of 61.5. This is a very good sign for the sustainability of the UK recovery, which is clearly being felt in all sectors of the economy, despite being driven largely by a pickup in the housing market and consumer spending. That said, this has been one of the wettest January’s in years, which could negatively impact this figure in the short term.
Given investors’ reaction to other blips in the data recently, it will be interesting to see what the response will be if the figure does in fact decline much more than is currently expected, which I think is very likely. There’s been a lot of optimism around the UK recovery over the last six months or so, but that doesn’t mean the country is immune to fear driven sell-offs by risk averse investors, regardless of how unjustified it may seem.
The mood was no better over night during the Asian session. The Nikkei suffered further sell-offs, driven by a short term strengthening of the yen, which brings this year’s losses to more than 12%, meaning the Japanese index is technically in a correction phase.
The Australian dollar rallied over night after the Reserve Bank of Australia Governor Glenn Stevens was forced to release a more hawkish statement in response to the rising levels of inflation. Stevens had previously claimed that the RBA was ready to cut rates further if needed, while claiming the fair exchange rate for the aussie against the US dollar was around 85 cents, just under 4 cents below current levels. This was dropped from today’s statement which prompted a rally in the aussie, a response I’m sure Stevens will not be too happy with.
Ahead of the open we expect to see the FTSE down 45 point, the CAC down 32 points and the DAX down 91 points.
[B]European indices track US and Asian counterparts lower[/B]
Today’s US opening call provides an update on:
[ul]
[li]European indices taking a cue from their US and Asian counterparts;
[/li][li]Risk aversion likely to continue beyond this week’s US jobs report;
[/li][li]Quiet US session expected, due partly to a lack of catalysts;
[/li][li]Spanish unemployment remains a concern;
[/li][li]UK construction PMI hits highest level since August 2007
[/li][/ul]
European indices are trading lower across the board on Tuesday, as investors take a cue from the US and Asia overnight, where indices took another beating.
US futures on Tuesday though are pointing higher, a move that’s probably more reflective of profit taking than an improvement in investor sentiment. Traders have clearly been very risk averse so far this year, with capital flight in emerging markets, a disappointing start to earnings season and poor economic data for the months of December and January all contributing.
That said, I don’t think this is the start of a longer term bearish move in the markets as none of the above are likely to be major issues in the months to come. Things are likely calm down in emerging markets, although I imagine there will be a few more smaller flare ups this year, corporate earnings over the last week have shown a significant improvement and the poor data is largely driven by unusually poor weather in the US and is therefore only likely to be temporary.
Investors know all this which is why I think all of these are simply being used as an excuse to lock in profits following such an incredible year for equity markets and allow the long awaited correction to happen. I don’t believe the correction is over yet though so I expect this risk averse behaviour from investors t continue in the coming weeks, with Friday’s jobs report likely to disappoint again following even worse weather in January than we saw in December.
Friday’s jobs report is even more important than normal following last month’s dreadful numbers, which is likely to lead to increased risk aversion in the lead up to Friday. This won’t be helped today either by the severe lack of catalysts for the markets, with the number of economic releases only really picking up tomorrow. The only notable release from the US is the December factory orders number, which is expected to show a 1.7% decline, probably again largely driven by poor weather.
It’s not been much better during the European session this morning, with only a couple of pieces of data being released. The Spanish unemployment change was extremely poor, especially when compared to recent months and today’s expectations. The number of unemployed rose by 113,100 against expectations of a 21,300 decline. This is a huge miss and a big concern for country given that we were starting to see signs of improvement here. The last release showed unemployment at above 26% which is already extremely unhealthy.
The data out of the UK was much better though, which helped provide a small boost today. The construction PMI rose to 64.6, the highest since before the great recession began, exceeding expectations of a drop to 61.5. This is a huge positive for the UK as it shows that the improvement last year is continuing to be felt throughout the economy, not just in the services sector which has been largely responsible for the recovery so far.
Ahead of the open we expect to see the S&P up 1 point, Dow up 6 points and the NASDAQ down 2 points.
Markets continue to fall amid ongoing emerging market fears and US slowdown - 00:09
RBA statement more dovish, removing comment on weaker AUD - 00:48
UK construction PMI shows sharpest rise in output since 2007 - 02:03
Spanish unemployment spikes yet not as bad as first seems - 03:38
Research analyst Joshua Mahony discusses the ongoing sell-off driven by emerging worries fears and poor US data. Overnight the RBA took the headlines, taking a notably more hawkish stance, sending the AUD higher. In the UK, the construction PMI showed the highest output growth in 7 years, counteracting the poor manufacturing figure yesterday. Finally, Joshua discusses the Spanish unemployment change which whilst disappointing, actually wasn’t as bad as first perceived.
[B]Europe set for another negative open as focus turns to data[/B]
Today’s UK opening call provides an update on:
[ul]
[li]Eurozone services PMIs expected to point to improved sentiment in January;
[/li][li]Strong November retail sales expected to carry on into the holiday period.
[/li][li]UK services sector expected to recover following temporary blip in the last couple of months;
[/li][li]Focus switches to US labour market this afternoon, with ADP figure being released
[/li][/ul]
European stocks are set for another negative start on Wednesday, with all of the major indices currently seen opening around a third of a percentage point lower.
Quite often, European investors will take a cue from their US and Asian counterparts but that doesn’t appear to be the case today as both of these recorded modest gains over night. This could simply be a case of risk aversion ahead of a potentially huge European Central Bank meeting tomorrow. Regardless, there’s plenty of economic data being released this morning which may give the markets a temporary shot in the arm.
First up are the eurozone services PMIs, many of which are revised figures meaning the market impact is likely to be limited. That said, we have seen many occasions in the past when these revisions have been quite significant, so these releases should not be overlooked. Especially when people are looking for signs that conditions in the eurozone are improving, albeit at a very slow pace, and that countries like France, Italy and Spain aren’t going to be a threat to this in the coming months.
France has emerged as the biggest concern over the last 12 months, although there were a few months in the middle when we started to see encouraging PMI figures and the country climbed out of recession. However, that didn’t last long and the country could be confirmed as back in recession when the first GDP estimate is released on 14 February. The recent PMI figures haven’t looked to good either, with both manufacturing and services having been in contraction territory since November. That isn’t expected to change today with the number improving slightly, to 48.6, while remaining below the key 50 level that separates growth from contraction.
The problem with PMIs is that they are only an indication of potential performance in the months ahead based on current sentiment, which is why the figures can sometimes be taken with a pinch of salt. Retail sales figures though, which will be released shortly after, will provide important insight into consumer spending habits around the holiday season.
The November reading showed the biggest year on year improvement in retail sales since March 2010, which could be a sign that consumer sentiment is improving. For December, we’re expecting another strong retail sales figure, around 1.5%, which would be a good sign for the euro area going into the new year. That said, we’ve seen in the past that these figures can be very volatile so I wouldn’t be surprised to see a significant miss here. Especially if it turns out that the November gains were driven by people preparing for the holiday season earlier than normal and spreading the cost over a couple of months, rather than leaving it all until December.
Over in the UK, the services PMI reading is expected to edge higher to 59, having pulled back in December. The services sector is extremely important to the UK, accounting for around two thirds of GDP, so this is seen as the most important of all the PMI readings. These have been mixed so far this month, with manufacturing falling short, while yesterday’s construction number comfortably exceeded expectations. Another strong reading this morning would suggest the recovery is continuing to gather momentum in the early part of 2014.
Finally it’s over to the US later, where we have another batch of economic data being released, although this time the focus will switch to the labour market. Investors will be looking to the ADP non-farm employment change to provide some insight into what we can expect from Friday’s non-farm payrolls figure, although I’m not sure they should bother. Questions are always raised about the accuracy of this as an estimate for the NFP and last month’s reading was a key example of how unreliable it is. With this in mind, we should all take it with a pinch of salt, as I’m sure many others will do today.
Also being released in the US are two services PMI readings, both of which are expected to remain comfortably above 50, the level that separates growth from contraction. Before these though we have the MBA mortgage applications to give us some insight into how the housing market performed at the end of January. The figures haven’t been that great recently due to higher mortgage rates and poor weather. It’s important that things the housing market picks up again as this tends to boost consumer confidence, which is what drove the US recovery for most of last year.
[B]ADP unlikely to provide insight into January US job creation[/B]
Today’s US opening call provides an update on:
[ul]
[li]ADP report unlikely to provide much insight into US job creation in January;
[/li][li]Services PMIs likely to overlook temporary weather impacts to give better view on the economy;
[/li][li]Eurozone services PMIs mixed this morning, while retail sales disappoint;
[/li][li]Sterling sells off in response to third consecutive decline in the UK services PMI
[/li][/ul]
There’s a few important pieces of economic data being released on Wednesday, one of which in particular could provide important insight into how the US labour market performed in January ahead of Friday’s jobs report.
That figure is the ADP non-farm employment change, a measure of employment growth in the private sector, which has been designed to act as an estimate of Friday’s non-farm payrolls figure. In theory, this should remove a lot of the uncertainty in the markets this week, which has been partly driven by a very disappointing jobs report for December. However, I’m not convinced that it will.
Last month’s ADP release, in particular, highlighted just how inaccurate this figure can be as an estimate of job creation in the US as a whole. Especially the first reading, which tends to prompt the biggest reaction in the markets. While the ADP release today may still get a small reaction, traders are likely to take it with a pinch of salt. Therefore, the uncertainty that has led to so much risk aversion in the markets is likely to continue until at least Friday.
There are other figures being released that may prompt more of a reaction from traders, such as the two services PMIs, the official and the ISM readings. The services sector is hugely important for the US economy, accounting for more than two thirds of output. Both of these figures are expected to show an improvement in sentiment in the services sector, with the final reading of the official PMI rising to 56.6 and the ISM rising to 53.7.
This would be very encouraging for the US, given that a lot of the data for December and January has been hit by the poor weather conditions during those months. Figures in line with these forecasts would suggest that this is not impacting sentiment and that the rest of the data should improve as the weather improves in the coming months. Whether this will be enough to encouraging investors to be less risk averse remains to be seen, but it would certainly be encouraging.
We will also get another look at how the housing market is doing when the MBA mortgage applications figure is released for the final week of the month. The housing market was seen as a key driver behind the recovery in the US last year but, unsurprisingly, the numbers haven’t been that great in recent months as rates rose in anticipation of Fed tapering. What we need now is for the market to stabilise, as potential buyers become used to the higher rates, before continuing to support the recovery. This has been difficult in December and January due to the poor weather in the US, but hopefully this will improve in the coming weeks and months.
European markets this morning are trading higher despite data being relatively mixed. Services PMIs in Spain, Italy and France were all better than expected, although the two latter remained below the key 50 level that separates growth from contraction. However, the drop in the German services PMI clearly weighed on the overall eurozone figure, leaving it below analyst expectations and but still higher than in December.
While overall this seems mostly positive, what wasn’t so good was the retail sales figures for December. These fell by 1.6% from November’s surprisingly strong reading, which was also revised lower, resulting in a yearly drop of 1%. This could be due to people in the euro area getting ready for the holiday season earlier than normal in order to spread the cost during such tight financial times.
The reaction to the UK services PMI also wasn’t great despite the number remaining at very high levels of 58.3. This was below expectations and represented the third consecutive monthly decline in the number, raising fears over whether the pace of the UK recovery is sustainable, or whether it is likely to slow in the coming quarters. Sterling sold off aggressively in response to the number following an initial spike.
Ahead of the open we expect to see the S&P down 8 points, Dow down 58 points and the NASDAQ down 17 points.
Markets mixed following notable sell-off - 00:11
European services PMI figures allow struggling nations to play catch up - 00:35
UK services PMI falls for third consecutive month - 01:27
A look ahead to the ADP non-farm payrolls figure - 02:27
US Non manufacturing PMI preview - 03:27
Research analyst Joshua Mahony discusses the mixed markets seen today off the back of the wider sell-off this week. He discusses the services PMI figures out of the Eurozone and the UK, along with their importance to the markets. Finally Joshua previews both the ADP nonfarm payroll figure and non-manufacturing PMI figures due to be released later today
[B]Pressure on ECB to ease deflationary pressure[/B]
Today’s UK opening call provides an update on:
• No change expected from BoE on interest rates or asset purchases;
• Potential for BoE statement alongside decision with new forward guidance thresholds;
• Investors split on whether ECB will respond to recent decline in inflation;
• Increased market volatility expected, as always, during ECB press conference.
The busy end to the week continues today with interest rate decisions from the European Central Bank and the Bank of England, with the former then holding a press conference 45 minutes after, at 12.30 (GMT), which should be eventful to say the least.
As always, the BoE will be the first to announce its decision on interest rates and asset purchases, following the monthly meeting of its policy makers. With the UK well on its way to recovery and the latest inflation readings falling perfectly in line with the central bank’s target, the BoE is very unlikely to tinker with either tool this month, or at any meeting in the near future for that matter, unless of course something drastically changes.
The only thing policy makers may be tempted to tinker with is the banks forward guidance, which was announced shortly after Governor Mark Carney’s arrival last year and has achieved very little, due in part to the BoE’s hugely pessimistic outlook for unemployment and the market’s unwillingness to accept its projections.
People have been calling for the guidance to be updated to take into consideration the rapid decline in unemployment, but policy makers don’t appear willing to do this. This is despite unemployment currently being only 0.1% above the 7% threshold, more than a year ahead of when the BoE expected it to reach this level. As a result, traders will still follow the BoE announcement closely, in case it is accompanied by a statement outlining the new threshold(s) for its forward guidance.
What is guaranteed to be eventful is the ECB rate decision and press conference, with investors currently split on how the central bank will respond to another drop in the inflation rate to 0.7%. The numbers appear to be relatively even between those that expect the ECB to do nothing this month and those who expect them to respond, with most of these predicting another cut in interest rates, despite the main refi rate currently being at 0.25%.
What is interesting is that of those who expect the ECB to respond, few expect it to be more bold in its attempts to fight disinflation, with most expecting a measly 0.15% cut in the refi rate, which will do very little to ease deflation fears. Even the most optimistic of people are predicting a small refi rate cut along with a small deposit rate cut, which would push it into negative territory and effectively charge banks to park their money at the ECB overnight.
I’m not even convinced this would be enough to slow the rapid decline in inflation. If recent responses, in both the markets and inflation readings, to the refi rate cuts have told us anything, it’s that the ECB is going to need to do something drastic soon, otherwise they could find themselves caught in a deflationary trap, similar to the one that Japan has spent almost 20 years trying to get out of.
If the ECB doesn’t respond today, then President Mario Draghi is likely to be heavily grilled in the press conference after about why the central bank is choosing to ignore the threat of deflation. Even if they do cut rates, this press conference should be eventful, with reporters wanting to know what the ECB will do next if inflation continues to plummet. As always, we can expect a surge in market volatility during this press conference.
[B]Investors expect very dovish statement, at least, from ECB[/B]
Today’s US opening call provides an update on:
[ul]
[li]Investors expect very dovish statement, at least, from ECB today;
[/li][li]ECB unlikely to move into uncharted territory of negative rates and QE today;
[/li][li]BoE likely to be a non-event, changes to forward guidance more likely next week;
[/li][li]US data in focus later on with jobless claims and trade balance figures being released…
[/li][li]US futures are pointing to a positive open on Thursday, tracking their European counterparts higher ahead of some key central bank decisions in Europe.
[/li][/ul]
A lot of the gains can probably be attributed to stocks simply paring some of the significant losses that have been made this year. However, given the timing of these gains before two central bank announcements when we would normally see an element of risk aversion, I think this also reflects the dovish expectations ahead of the European Central Bank rate decision.
Inflation in the eurozone fell back to 0.7% again in January, well below the ECBs target of below but close to 2%, and the level at which the central bank cut interest rates to record lows of 0.25% in November. This has prompted speculation that the ECB will be forced to loosen monetary policy again, the only problem being that with interest rates being so close to zero, there’s very little they can do here.
Most people expect the central bank to take the easy option and either cut interest rates by 0.15%, which would have little impact on both inflation and the euro, or release a very dovish statement, highlighting its willingness to act in the coming months. The other option would be for the bank to move into uncharted territory and adopt some form of unconventional easing, such as negative deposit rates or even more unlikely, quantitative easing.
Despite the former being discussed at numerous meetings in the past, I don’t think this is likely yet. Before we see this, I expect the ECB to cut interest rates to 0.1% and try its hand again at forward guidance, something they have failed miserably at in the past. For them to pull this off they would have to be bold, setting thresholds, and ambitious ones at that. The Bank of England learned last year that if the thresholds aren’t ambitious, people won’t buy into it.
As for the BoE, no change in interest rates or asset purchases is expected today, which is likely to make it a non-event. That said, people are going to keep a close eye on the release in case it is accompanied by an amendment to the bank’s forward guidance, which as I mentioned above, has been very unsuccessful so far. This is unlikely though, with any changes here likely to be delivered with next week’s inflation report.
Over in the US later, focus will switch to economic data with jobless claims and trade balance being released. New jobless claims are expected to fall for last week to 335,000 from 348,000 the week before, while the trade balance figure is expected to show a slightly higher deficit than in November of $36 billion.
Ahead of the open we expect to see the S&P up 5 points, Dow up 62 points and the NASDAQ up 12 points.
As seems to be a common theme in recent months, the markets completely failed to anticipate how a major central bank will respond to recent economic events, with ECB President Mario Draghi being the latest central banker to catch everyone off-guard. It wasn’t the ECBs decision to leave interest rates unchanged that caught people off guard, although there were many that predicted a small cut in interest rates, which explains why there was some volatility around the announcement followed by some euro selling in the lead up to the press conference.
The surprising thing today was just how hawkish Draghi’s press conference was, given that inflation has fallen back to 0.7%, raising fears of deflation going forward. At the very least it was expected that Draghi would deliver a very dovish statement in an attempt to ease deflation fears. Instead, he launched a staunch defence of the ECBs stance, claiming among other things that the focus is on inflation expectations, not current levels, there is currently no deflation, the recovery is showing more encouraging signs and that the deflationary pressure is coming from the periphery and this is not real deflation.
While he may have a point with all of these statements, this doesn’t help the fact that the rate of inflation has been falling rapidly in the eurozone in recent months. It also doesn’t explain why the ECB cut rates in November in response to the drop to 0.7% but decided not to on this occasion. Is this more a case of the ECB not wanting to use unconventional tools, like QE, than them believing inflation expectations are well anchored? I find it hard to believe that there wouldn’t have been a rate cut, had the main refi rate not already been at 0.25%. They could have cut it to 0.1% but I think the ECB knows that this would have stunk of desperation and would have had almost no impact on inflation or the markets.
Draghi was keen to stress that this is not similar to what happened in Japan in the 90’s. However, I’m not sure who he was trying to convince, the markets or himself. Regardless, he did claim that they were waiting for the new forecasts in March so maybe we’ll have to wait until then for the ECB to do something they’re clearly uncomfortable with.
[B]Europe to open higher ahead of some key data releases[/B]
Today’s UK opening call provides an update on:
• Europe to open higher after indices in the US and Asia pare recent losses overnight;
• Germany’s trade surplus seen shrinking along with France’s deficit;
• Improvement in UK manufacturing and industrial production very important to UK recovery;
• US jobs report not as important as is being made out.
European indices are seen opening around a fifth of a percentage point higher this morning, with the FTSE up 16 points, the CAC up 8 points and the DAX up 21 points. The gains are largely driven by improved investor sentiment carried over from the US and Asian sessions overnight, where we saw the Dow and S&P record their best gains in seven weeks, both up 1.2% as we near the release of the all important US jobs report.
It’s difficult to pinpoint what’s driven this improvement in sentiment over the last 24 hours, with economic data and earnings being relatively mixed. In reality, the gains, while being the best since 18 December, are still relatively small compared with some of the losses recorded since the turn of the year. The Dow for example has made triple digit losses on seven occasions since the start of the year. With this in mind, what we’re looking at here is probably more of a minor correction than a change in sentiment.
That will certainly be put to the test on Friday with some key figures being released, none more important than the US jobs report this afternoon. First though, in Europe, we have trade balance figures for Germany and France, with the former expected to post a slightly smaller trade surplus and the latter a slightly smaller trade deficit.
This will undoubtedly please those criticising Germany for running a large trade surplus when the countries in the periphery are struggling to bring down their deficits. It goes without saying that criticising Germany for being too good at exporting, rather than encouraging other countries to aspire to it, is ridiculous. That said, hopefully measures being taken in Germany, such as raising the minimum wage, will help encourage more spending on goods from other eurozone countries which, in effect, will have a similar outcome.
Over in the UK, we have manufacturing and industrial production figures being released, both of which are expected to show a 0.6% increase in December from a month earlier. Compared to a year ago, this would represent an increase of 2.3% in both cases which clearly highlights how far the UK has come in the last 12 months. To put it into perspective, this time last year the UK recorded its 12th consecutive decline in manufacturing production and its 21st in industrial production. This would instead mark a fourth consecutive positive month for a sector that has really struggled throughout the crisis and despite making up a small part of the economy, is very important to the recovery.
In keeping with the positivity around the UK, the December trade deficit is expected to fall for the fourth consecutive month to £9.3 billion. This is still clearly far too high and an area that the UK needs to address in the coming months and years. That said, it is an improvement and should only add to the optimism surrounding the UK recovery.
Finally, it’s over to the US for the January jobs report. This has been hugely built up over the last month, far too much in my opinion, as being a key indicator of whether the US recovery has stalled or if the poor figures in December were just weather related. The only problem with this idea is that the weather in January was worse than it was in December, and has already been reflected in a number of figures that have already been released.
I don’t buy into the importance of this non-farm payrolls figure. If we see another number below 100,000, it won’t be ideal, but it won’t be the end of the world. In reality, it will probably be offset by an upward revision in December’s figure and a very strong number once the weather settles down a little. That won’t stop people overreacting if we see it and panicking about the recovery.
We’ve seen plenty of signs already that the recovery is gathering momentum, such as the fourth quarter GDP figure which was 3.2% and driven largely by the consumer, the housing market and business investment, while being slightly lower than it would have been due to a significant drop in government spending. That says far more than a couple of months of bad jobs reports during periods of unusually cold weather.
[B]US futures higher ahead of jobs report[/B]
Today’s US opening call provides an update on:
[ul]
[li]US futures higher ahead of key US jobs report;
[/li][li]Expectations for NFP too high;
[/li][li]Poor weather in January could lead to another disappointing NFP reading;
[/li][li]Another drop in unemployment could force Yellen to change the threshold in March
[/li][/ul]
US futures are pointing slightly higher this morning, with the S&P 500 seen opening 3 points higher, the Dow 14 points higher and the Nasdaq 11 points higher. This follows the positive sentiment seen in the European markets this morning, which is a little unusual ahead of such an important US jobs report, with investors ordinarily being a little more risk averse.
The jobs report is always seen as the most important economic release of the month, but this month it comes with additional importance and not necessarily for the same reason as we had throughout last year. Last year people were looking at the jobs report for signs of weakness, as this was viewed as supporting the Fed’s need to continue with its $85 billion of asset purchases every month.
This month is very different. Yes, another poor number could encourage the Fed to take a more cautious approach and leave asset purchases unchanged in March, instead waiting for more evidence that the recovery is on a firm footing. But that is not what people are focused on. The markets have accepted that QE3 will come to an end this year and that the program will be scaled back by $10 billion at most, if not all, future meetings.
The concern now is that the recovery will stall as a result, which will encourage businesses to invest less and result in lower levels of growth. Without the Fed’s asset purchases to support the markets, this is far from good news. This has contributed largely to the correction since the start of the year.
That said, I think people are overreacting to economic data from a couple of months that don’t necessarily represent the strength of the US recovery. We’ve heard over and over again that poor weather was behind the disappointing figures for December, the most notable being the non-farm payrolls – the net number of jobs added.
With the weather not improving in January, even worsening in parts of the country, and some data already showing it having detrimental effects, expectations for the non-farm payrolls figure today seem far too high. There are two problems with this. Firstly, if we do get a number in line with expectations of around 185,000, the response won’t necessarily reflect how impressive this is.
On the same note, if we get another poor number due to the weather, we’re likely to see a huge overreaction, with many claiming that the US recovery isn’t as strong as the Fed thought back in December when it announced its first taper. I don’t agree with this analysis. Clearly, in the lead up to the bad weather, the data was very good, in particular the fourth quarter GDP figure which showed high levels of growth, driven largely by spending, housing and business investment and with the government making significant cut backs in spending. This is very impressive and far more reflective of the state of the economy than a couple of jobs reports.
Should the data continue to disappoint in February and March then I will accept that the recovery may have stalled, but not based on December and January figures. With expectations so high, the markets are leaving themselves wide open to further declines in the coming weeks, which isn’t necessary, although some would argue, potentially in its best interest following the massive rally in 2013.
The other number which people will pay attention to is the unemployment rate, although there is a fair argument that this is having a diminishing impact on the markets, due to the drop being at least partly driven by a falling participation rate in the labour market. Until the Fed removes it as a threshold for an interest rate hike, people will continue to pay attention to it. This could come at the first meeting in March, Janet Yellen’s first in charge of the Fed, if we get another drop in unemployment today to that 6.5% threshold.
Looking at the markets, the jobs report was an absolute disaster. However, I see it as yet another example of people failing victim to their unrealistically high expectations. The report claimed the drop wasn’t driven by poor weather as it was compiled in the warmest week of the month but I don’t think the economy goes back to normal that quickly after such bad conditions. The revision higher was lower than I was expecting which is disappointing but I don’t think it was necessarily as bad a report as is being made out.
The unemployment rate fell to 6.6% which is a plus, and that was even though the participation rate increased. All in all, I don’t see the Fed paying much attention to this report. The February one is far more important as it won’t be distorted by poor weather. I expect this to be a far better report, in terms of jobs added, with it probably picking up a lot of the slack from December and January. A number above 250,000 next month is probably not unrealistic.
As you can see below, the volatility in the markets following the release was huge, which is not abnormal around the release of the jobs report. Most have now returned close to pre-NFP levels and in the case of equity indices, are trading above, which suggests we’re already seeing a no-taper decision from the Fed in March being priced in. When will traders ever learn that the Fed is not as sensitive to individual releases as they are?
[B]EURUSD[/B]
[B]GBPUSD[/B]
[B]USDJPY[/B]
[B]Gold[/B]
With the busiest week of the month now behind us, it’s time for the markets to try and absorb all of the information from the last seven days, make sense of it all and decide how they now position themselves going forward. Fortunately, this week should be no where near as manic as the last, but there’s still plenty to keep an eye on with US retail sales, Chinese trade balance and inflation, and Australian employment figures all being released.
On top of this we have Janet Yellen’s first testimony in front of the Financial Services Committee and Mark Carney delivering the quarterly inflation report. European Central Bank President Mario Draghi will also have his say when he speaks at the European Monetary Institute’s on Wednesday, which if Thursday’s press conference was anything to go by will surely create some waves.
[B]US[/B]
Last week was all about piecing together all the parts of the puzzle that make up the US economic recovery, and if the markets told us anything it’s that investors can’t work out right now what’s going on. Is the US recovery on track? Will we see strong growth as we had in the second half of last year? Will the Fed taper and risk derailing what little recovery we’re seeing? Fortunately this week, at least some of those questions should be answered.
The highlight of the week will come on Tuesday, when new Fed Chairwoman Janet Yellen will testify on the semiannual monetary policy report in front of the House Financial Services Committee in Washington. In this 90 minute testimony, Yellen will first read a prepared statement, which in itself can sometimes contain hints about the future direction of the Fed, especially a Fed that’s under new leadership.
If that doesn’t do it then the I’m sure the Q&A that follows will. If you remember correctly, it was during the same testimony last July that Yellen’s predecessor Chairman Ben Bernanke first suggested that tapering could begin later in 2013, ending in the middle of 2014. At the time, markets reacted very strongly to this and it actually prompted the first run on the emerging markets, which eventually settled, before the same thing happened last month.
While we may not get such a big announcement on Tuesday, we will get the first reaction of the new Fed Chair to two months of poor job created. This could provide significant hints about the pace of tapering going forward, starting at the next meeting on 18-19 March.
On the economic data side, it’s looking like a relatively quiet week for the US, although this is hardly surprising given how manic the previous week was. Once again we’ll have to wait until the end of the week for the major economic releases, including the January retail sales and core retail sales figures, both of which are expected to show growth of 0.3%. December’s figure surprised to the upside, despite the poor weather so I’m not anticipating a big disappointment here.
Some view the retail sales figures as the best barometer for how the economy is performing because it people are spending more it shows they feel more safe in their job and are confident in the health of the economy. When you look at a country like the US, which relies so heavily on the consumer, this is an even better barometer of current and future economic performance. In simple terms, if people are spending more, companies hire in order to deal with the increasing demand, which in turn leads to more spending. We’ve saw how this can be a vicious cycle in 2008, it looks like we’re starting to see the benefits of it when it goes in the other direction.
Supporting this should be the UoM consumer sentiment figure, which is released on Friday. In January this fell slightly to 81.2, following a sharp spike higher the month before. I expect this to stabilise this month with improvements then coming over the next few as we approach summer.
[B]UK[/B]
If we thought it was looking like a quiet economic data week for the US, that’s nothing compared to the UK. In the UK, there is only one notable piece of data being released and that is the BRC retail sales monitor for January. This measures the change in the same store sales for UK retailers. We’ve seen some pretty encouraging figures here over the last year and I see no reason to expect otherwise when it is released on Tueday. Looking back, there is absolutely nothing to suggest that January is normally a good or bad month, so I expect something roughly in line with December’s 0.4% increase.
The key event in the UK this week will be the quarterly inflation report when BoE Governor Mark Carney will give the central bank’s projections for inflation and economic growth. This is unlikely to have much impact on the markets for two reasons. Firstly the BoE’s projections have not been very good in recent years and are therefore not overly reliable. Secondly, we already know that the UK economy is performing well and that inflation is in line with the BoE’s target.
What we don’t yet know is whether Carney plans to change the BoE’s forward guidance, with unemployment having fallen much quicker that in initially anticipated. The rate currently stands at 7.1%, 0.1% above the threshold for when they will start considering an interest rate hike. Clearly this doesn’t provide the comfort for households and businesses that it was originally intended to.
Carney could use this opportunity to either reduce the unemployment threshold, to say 6.5%, or change the threshold altogether with unemployment clearly not being a very good option. Alternatively he could scrap it altogether. Whatever the BoE chooses, if they announce it on Wednesday, it is likely to have a significant impact on the markets. A premature interest rate hike remains one of the biggest threats to the recovery and people will be seeking more assurance from Carney on this.
[B]Eurozone[/B]
It’s going to be a relatively quiet week in the eurozone, on the economic data front, although there are still a few releases which we should certainly watch out for. Th biggest of these comes on Friday, with the preliminary release of the fourth quarter GDP figures for Germany, France, Italy and the eurozone. The French figure will be the most keenly watched here, with the country flirting with another recession after contracting by 0.1% in the third quarter. The data in the fourth quarter wasn’t overly encouraging so there’s a very real chance that the country could be confirmed as being in recession on Friday.
The eurozone is expected to have grown by 0.2% in the fourth quarter. This is in line with the growth expectations for the region in the next couple of years, as the periphery continues with its austerity efforts and reforms and attempts to regain competitiveness. Germany, the engine for growth in the eurozone, is expected to have grown by 0.3% in the quarter.
There are a few other releases throughout the week but the only other event that has the potential to significantly move markets is ECB President Mario Draghi’s speech at the European Monetary Institute’s “Progress through Crisis” conference. The ECB refrained from cutting interest rates on Thursday, in an attempt to slow the rapid decline in inflation.
While Draghi gave a staunch defence of this decision in the press conference after, he may provide more insight into the kinds of tools they could use in the future, should inflation fall further and the threat of deflation become very real. He may also provide insight into when this could happen and what the most likely course of action would be. He wasn’t very clear on this during the press conference, which isn’t unusual
[B]Asia & Oceania[/B]
As in the other areas of the world it’s going to be a relatively quiet week in Asia. The key economic releases will come from China, starting with the trade balance figure on Wednesday. People pay very close attention to this, especially the exports side given that, despite the efforts being made to evolve into a more consumer driven economy, the country is still very dependent on its export market. The figure has been quite strong in recent months, especially when compared to the rest of 2013. We’re expecting another decent figure for January of $24.2 billion.
The other key Chinese release will be the CPI inflation figure, released on Friday. Much has been made over the last 12 of the People’s Bank of China’s efforts to tighten monetary policy in order to reign in the shadow banking sector. Throughout this time though, inflation has remained in check, which has allowed the PBOC to be a little more flexible as it sees fit.
Should the inflation rate rise above, or even approach, its 3.5% inflation target, the PBOC could be forced to tighten conditions more than it would otherwise want, which could be extremely painful for the Chinese economy. This isn’t expected to have happened in January, although we could see a spike due to increased spending linked to Chinese New year.
The other notable release this week comes from Australia. The Reserve Bank of Australia was forced to issue a hawkish statement last week due to inflation pressures, which means they have little room to manoeuvre if we see another downturn in the economy. The latest labour report, released on Thursday should give us more insight into how the labour market is performing. Unemployment has been creeping higher since October, which is a concern, but another increase is not expected in January, with the rate remaining at 5.8%. At the same time, 15,000 jobs are expected to have been added following the shock drop of 22,600 in December.
[B]European futures point to a positive start to the week[/B]
Today’s UK opening call provides an update on:
• European futures point to a positive start to the week;
• Investors claim the market correction is over;
• Focus on central bankers this week with Yellen, Carney and Draghi making an appearance;
• Slow data week, focus on eurozone investor confidence this morning.
European indices are expected to open around a half a percentage point higher on Monday, with the FTSE seen opening 25 points higher, the CAC 20 points higher and the DAX 43 points higher. The gains come after US indices record only their second positive week of the year, despite another disappointing jobs report on Friday, which then prompted a strong session in Asia overnight.
These minor gains have led many to suggest that the correction seen since the start of the year is over, which is something I’m not fully convinced of yet. Only last week, in the lead up to the release of the jobs report, everyone seemed to be saying that if we had another poor non-farm payrolls figure, it would be very bad news for the US economy.
Well, the number was very poor and the December figure was only revised up by 1,000, so either one of the above statements is wrong or we’re about to see a continuation of the bullish move in stocks at a time when people are worried about a slowdown in the US and the Fed is scaling back its support, in the form of quantitative easing.
As far as I’m concerned, it’s the second statement that’s incorrect and up until now, the poor December and January figures have simply been one excuse for a long overdue correction that has been healthy for the market. While I may need to see a little more evidence that it is over, there are a number of things that would suggest this is the case, including the fact that we rarely see a full 10% correction, with it usually being between 5-8%.
This week should be a lot quieter in terms of major economic releases, with the key focus being on the central banks, as new Fed Chair Janet Yellen testifies on the semiannual monetary policy report in front of the House Financial Services Committee, BoE Governor Mark Carney delivers the quarterly inflation report and ECB President Mario Draghi speaks in Brussels.
As for today’s it’s going to be a very quiet start to the week, which isn’t necessarily a bad thing as it allows investors to fully absorb all of the events from the previous seven days. There are a few low market impact pieces of data being released this morning, including the French and Italian industrial production figures, but I think the only noteworthy release is the eurozone Sentix investor confidence figure.
This is expected to fall back to 11, from 11.9 in January, which is still a very good number, under the circumstances, and highlights the improving confidence in the euro area. It’s also reflective of the fact that with money now being withdrawn from the emerging markets, the eurozone, in particular the periphery, is seen as an attractive option that is no longer seen as risky but offers an attractive yield.