Busy Week Ahead
Busy Week Ahead
Another significant week of data in the UK and the US is now behind us. Yet again, the signals on the economy served up in the veritable smorgasbord of information were confusing. Whilst the inflation figure released in the US was slightly worse than expected, the real surprise was the continuing strength in retail sales. There were myriad reasons and explanations postulated, mostly surrounding the mild weather the US has been experiencing. My favourite theory was the use of money previously set aside to repay student loans was being used to fund purchases. The UK also served up a mixed data set, with wage growth slightly offset by falling inflation. When all the data was digested, the markets now see a further rise in interest rates here, in Europe and across the Atlantic.
The difficulty at present, as we have touched upon previously, is that no one knows what to expect from the data. Economists can only guess how developed economies will recover from a pandemic. As such, we will be in for a continued period of surprises, making data predictions a fool’s errand. What can be predicted for sure is that we are in a cycle where interest rates will rise further and, despite the optimists’ hopes, stay at the newly elevated levels for longer than anyone expects.
Noticeably when all was said and done, currencies traded broadly sideways, almost as if they were pausing for breath. Figures that initially recently would have propelled the dollar higher only produced a moderate rise to the puzzlement of most seasoned market participants. Meanwhile, stock markets remained resilient whilst bonds sold off, which has caused the differential between the two-year and ten-year bonds to reach a historic level. What I hear you ask is the bond differential. Well, it is widely seen as one of the most reliable indicators of an impending recession in the US. Indeed, this spread has predicted the last seven recessions. Will it be correct this time? We will see …
Currency movements in the week ahead are likely to be driven mainly by the US data and the reaction of the numerous speakers from the Federal Reserve who are virtually queueing at the rostrum. The data run starts with Purchasing Managers Indexes released tomorrow, which should only move the markets a little ahead of Wednesday’s release of the minutes from last month’s Federal Open Market Committee. The minutes will reveal how close the Fed was to hiking by 50bp last month, which we believe was tighter than the market thinks. After the recent strong data in the US, there is a chance that the market ignores any dovishness in the minutes and maintains its hawkish take on the economy. If we are correct and the Fedspeak endorses this, the dollar should attract some admiring glances again. The minutes should set the tone for Personal Consumption figures due on Friday. The PCE numbers include the exotically named Core Deflator, one of the Fed’s chosen measures of inflation which is forecast to rise by .4%, twice the desired number. The run of data from Retail Sales through to employment paints a picture of a resilient economy, and there is only one likely outcome further increases in interest rates in the US, probably at their next two meetings. With this in mind, the dollar should continue to show strength at the expense of its peers, leading us to believe that sterling will suffer some more. Back nearer home, the Eurozone has a relatively busy week in terms of macroeconomic data starting this afternoon with February’s Consumer Confidence which is expected to have dipped slightly. Tomorrow S&P will release their diffusion indexes across Europe, which will give further clues to sentiment across the block. Despite continued hawkishness from Christine Lagarde and her cohorts at the ECB, sentiment is expected to hold up relatively well; however, the recovery is from a low level, so any blip upwards will look slightly better than it should. The most interesting report from the Eurozone may well be the final reading of February’s Consumer Price Index. Interestingly the final CPI will include the data from Germany, which was excluded the first time around. Sterling will likely be buffeted again from all sides and will not be helped by the dearth of new data in a quiet week for release apart from S&P’s Purchasing Managers Indexes tomorrow. After last week’s mixed bag of data, the Bank of England is left in an awkward position of whether should they /shouldn’t they raise rates further, and this week’s roster of speakers may shed some light on this. Finally, today is a US holiday, so a quiet start to what could be a challenging week ahead for dollar bears.
Have a great week!