Data Packed Week Ahead
Data Packed Week Ahead
As is often the case in markets, we waited all week for a data point, US inflation. When it eventually came on Thursday, the headline number was pretty much as forecast leaving traders and economists scrabbling around for something of note in the detail. The takeaway was that the cost of shelter is holding the numbers up, and that should start dropping quickly in the second quarter of the year, pulling inflation down. Despite the inflation rate still being three times the Federal Reserve’s target level, the consensus is that the next move up in rates, due in February, will be 25bp, not 50bp as previously forecast. Financial markets now firmly believe that we are approaching the end of the tightening cycle and that the Fed will start easing by the end of the third quarter. We think this is wishful thinking, and the current weakness in the dollar and appetite for risk assets is overdone. Indeed, a glass-half-full view of events and if the Fed lives up to the maxim of “don’t fight the Fed”, a 50bp rise is certainly not out of the question.
On this side of the pond, the key release was last Friday’s UK GDP data for November, which showed that the economy had grown by 0.1%. The growth, albeit sluggish, helped by all the beers we consumed during the World Cup, was a surprise for analysts who had forecast a fall. However, with growth falling quite sharply from October, the Office for Budget Responsibility claims that we are already in recession. Whether we are or not looks closer than yesterday’s North London derby match was, and in truth, we are probably flatlining. With the jury out over whether we are in a recession, the Bank of England may have a little more flexibility to tighten rates than previously thought at its meeting in early February. Despite this optimism based on what, in all honesty, is pretty weak growth, sterling looks set to stay under pressure, especially if the European Central Bank continues with its hawkish rhetoric.
UK has its monthly MOT on the agenda this week which will help form not only the market’s view on the next interest rate move but also that of the Bank of England. First up, we will get employment data tomorrow. Whether wage growth is continuing at or around the 6% level is probably the key component and arguably more important than the actual employment level. With unions still agitating for increases in their members’ salaries, wage-led inflation is a real danger, and if the signs are still there, it will pressure the Old Lady to hike rates by 50bp, which, in fairness, would help sterling. Conversely, if Wednesday’s figures, as expected, show that inflation has peaked, particularly the Banks favoured measure of the “core services” element, then expectations of a 50bp rise will recede. Finally, December’s Retail sales will be released on Friday, naturally distorted by Christmas and, as such harder to read.
This week will also help set expectations over the next move by the Federal Reserve with Retail Sales, Industrial Production, Producer Price inflation and housing data. Bad weather in the way of snow and storms hit much of America during December, and this will, without doubt, have impacted their retail sales data, due on Wednesday, which is expected to show a drop in activity. The numbers may be more distorted by the lack of auto sales due to the harsh Winter weather. Also released on Wednesday are Industrial Production and the Producer Price Index, again expected to have retreated, as is the number for existing home sales scheduled for Friday. Also worth watching will be the level of weekly jobless claims, published on Thursday, as traders continue to search for clues to the Fed’s next move.
Unusually the Japanese yen could take centre stage in the week ahead following what appears to be a sea change in policy from the Bank of Japan. Indeed, the derivative markets have been pointing towards increased volatility when the BoJ meets the day after tomorrow with a policy change on the agenda. The yen has appreciated rapidly since the central bank’s intervention back in October when it was trading at 145, and the market feels like it still has some way to go before it tops out. Meanwhile, the euro looks in for a quiet week as there is little on the horizon to move it until the middle of the week when eurozone CPI is released. With the ECB hawks squawking louder, the euro will likely find good support against the dollar and sterling as interest rates in the bloc continue to rise.
In conclusion, we could see a frenetic week for sterling as analysts digest the data dump that the ONS is providing and try and anticipate what the Bank of England will do at their next meeting, and as they say, good luck with that. Meanwhile, the dollar looks likely to continue to soften as optimism replaces last year’s pessimism on inflation. Still, no doubt the plethora of Federal Reserve speakers will try to keep the hawkish mood for a while longer.