St. Valentines Day Data Due
St. Valentines Day Data Due
The market traded both in currencies and equities traded broadly sideways last week as the market continued to digest the previous week’s stellar US data, particularly on the jobs front. As we touched on at the beginning of last week, the question is whether the US economy is facing a hard, soft or indeed no touchdown; the jury is still out on this as there was little fresh data released last week, and the market relied on instead upon the thoughts and opinions of the various speakers from the Federal reserve. The most prominent of them was, of course, its chairman Jerome Powell, who for once was relatively benign in his view, unlike some of his colleagues. One is certainly left with the impression that, without a doubt, rates will stay higher for longer. Indeed, the derivative markets are now starting to price in a terminal US rate of 6%, at least 50 bp higher than previously. Whether this comes to pass could well be determined by tomorrow’s CPI figure, which we will discuss a little later.
Elsewhere sterling stuttered and coughed as if it had a dose of the flu virus that so many people are suffering from. Playing out in the background are increasingly confused noises from the Bank of England, who certainly seem reluctant to raise rates any higher than they are now with a weak domestic real estate market playing on their minds. Irrespective of this, inflation is still way above the Bank’s target level and is starting to look the most stubborn of the developed nations. Adding to sterling’s woes are the ongoing strikes and increasing political problems, which will likely end with a change in Government next year. By the end of this week, we should get a clearer picture of how much trouble the UK economy is in as we have its monthly health check ahead. The flow of figures starts with the monthly jobs report tomorrow, followed by inflation data on Wednesday and retail sales on Friday.
Friday’s lacklustre GDP showed the UK just avoiding a recession, which a cynic would say was more by luck than by judgment. Every extenuating circumstance, from the World Cup to the lack of Premier League football through to strikes, has made the actual figure hard to evaluate. Still, it certainly looks like the UK will head into recession this quarter, albeit a technical one. As the picture of the economy is so confused, the Bank of England and the markets will pay even more attention to this week’s data dump than usual. Of course, of paramount importance will be Wednesday’s Consumer Price Index, with the Old Lady studying the core services level for signs of “inflation persistence”, which we fear they may see. If inflation appears to be becoming entrenched, then the odds of at least one more 25bp hike in Base Rate will shorten. Also scheduled are December’s Employment Report tomorrow, which will be watched closely for signs of wage inflation and Retail Sales on Friday.
As Fed committee member Neel Kashkari mentioned last week, he is aware that food prices were still rising in the US, citing a “large tray of Lasagna that I used to buy that used to cost around $16. Now it’s around $21 “. Tomorrow we will see whether or not inflation is actually falling when the US releases its Consumer Price Index. There is, without a doubt, a feeling it may not be much more than a hope in the markets that the battle against rising prices is won. Indeed, many traders are convinced that the Fed’s conviction is wavering and that sooner rather than later, rate cuts will be on the agenda leading to a generally softer dollar. It is worth noting, though, that the calculation methodology of the CPI has changed which may make the figure harder to interpret We are not so sure, and interestingly neither is the Cleveland Federal Reserve, which is expecting tomorrow’s figures to be higher than anticipated. If this is the case, there will be a realisation that the predicted peak of interest rates in the US may have been too low. Interest rate option markets are already anticipating this and pricing a Fed Funds rate of nearer to 6% at the year’s end. Whether we will have a Valentine’s day massacre in the markets caused by the inflation number is uncertain, but it will undoubtedly be an exciting afternoon ahead of another two critical sets of data later in the week, Retail Sales and Industrial Production
Europe, of course, has its issues despite the seemingly unified front on interest rates, which may have to rise higher than anticipated if the recently released German inflation data is anything to go by. This week there are some data points scheduled, the pick of which is probably the Eurozone’s GDP released tomorrow. It does feel like the euro will be in the back seat this week with so much at stake in the US and UK, although no doubt Christine Lagarde and her cohorts will have their say at every opportunity to reiterate their hawkish credentials. Finally we feel we really should mention that if the US Airforce is actually shooting down UFO’s from outer space we will be left well , speechless for once!
Have a great week!
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