US
The uncertainty about when the Fed will begin tapering its programme of asset purchases has increased volatility, both pushing and pulling on global financial markets. “at this juncture, the markets are more concerned about tapering than about weak [US and global] growth,” says MIG Bank’s Chief Economist, Luciano Jannelli.
And Kit Juckes, an economist at Societe Generale says “there is absolutely no unanimity of opinion about when, how fast or even if the Fed will slow bond purchases. The consensus is that [Fed Chairman] Ben Bernanke flew a trial balloon to test the mood, and that he probably wasn’t unhappy to see yields a bit higher, but will be alarmed to see equity price action.”
Given that US inflation remains subdued – the latest reading of the PCE measure on inflation, the Fed’s preferred measure, came in at just 1% – the QE programme is now effectively contingent upon US employment conditions. Therefore, the market will be paying close attention to Tuesday’s job openings and labour turnover data, and Thursday’s weekly jobless claims data to shine more light on the underlying employment situation.
Recent measures of US employment have been somewhat encouraging. The latest non-farm payrolls reading for may came in at 175,000, ahead of analysts’ expectations of 165,000 (which was also the reading for April). The participation rate was also higher by 0.1 percentages point at 63.4%.
Some will still question whether this pace of job growth is sufficient to reach a 6.5% unemployment rate. However, recent comments from the Fed, as reported by MNSI, seem to indicate that it would be prepared to accept a lower pace of job growth before they start tapering.
Towards the end of the upcoming week, traders will turn their attention to US demand fundamentals as well as the supply-side situation.
Thursday’s retail sales and Friday’s University of Michigan consumer confidence levels will give us an idea of how healthy the US consumer is. In May, the University of Michigan confidence survey jumped by 8.1 percentage points to 84.5 – its highest since 2007. Madhur Jha of HSBC says “this month’s reading could be volatile, as some of the key drivers of sentiment are working in opposite directions,” especially given the increased volatility in financial markets over the last fortnight.
US retail sales (excluding autos, gasoline and building materials) have been weak as of late, and April’s reading showed a decline of 0.1%. Thursday’s reading is also expected to be weak, and the median estimate by analysts is for growth of 0.4%.
On Friday, PPI data is likely to show that producer prices swung from -0.7% to 0.1% m-o-m, and core producer prices are also expected to have increased by 0.1% m-o-m. Industrial production, also released on Friday, is likely to have recovered after declines in March and April.
EUROZONE
Perhaps the most important event to occur next week in Europe will be the German Constitutional Court hearing on the ECB’s Outright Monetary Transactions (OMT) programme and the European Stability Mechanism (ESM). Beginning Tuesday 11th June (starting at 10:00 BST), the court is expected to hold a public hearing on the legal aspect of these measures. Germany’s Bundesbank will argue that the OMT and other rescue packages undermine financial stability; Mario Draghi – who reiterated his position after the rate decision meeting this week – believes the programme is above-board, and confirmed that “the legal documentation … is ready and it’s about to come out”.
HSBC analysts provide further detail on the hearing: “During the hearing different assessments should be expected from the president of the Bundesbank Jens Weidmann and the ECB board member Jörg Asmussen. The judges will deliberate over the summer and will then issue a ruling on the ESM and OMT, most likely after Germany’s federal elections on 22 September. There is a possibility that the judges could yet ask the European Court of Justice for its opinion.”
On the possible outcome, economists at Morgan Stanley note that “past Constitutional Court decisions have revealed a quite constructive approach taken by judge Vosskuhle and his colleagues. The most likely outcome will be the Court attaches additional strings to the OMT – meaning more Parliamentarian control. However, this will be a story for the autumn and not for now. In autumn, we might have to debate if the strings the German Court may attach to the OMT convert the instrument into a non-practical device.”
In terms of data, industrial production from the Eurozone as a whole, and France and Italy separately, is due next week. “The Eurozone PMI has indicated an easing in the region’s manufacturing downturn, though suggest that the increase in production seen in March’s official data will prove short-lived, and that the underlying trend remains one of contraction,” write Morgan Stanley analysts. Industrial production rose 1.0% m-o-m in March, and HSBC predicts that data already released for the Eurozone economies “point to production increasing by 0.2% m-o-m in April, which would cause an annual fall of 0.8% y-o-y”.
In France, analysts are expecting industrial production to have bounced in April after falling in March. An increase in energy production last month is expected to help production this month, and other data points released recently suggest an improvement on the previous figure. Gains, however, are only expected to be slight – HSBC are looking for a 0.8% m-o-m rise after dropping 0.9% m-o-m in March.
The final release of Eurozone HICP for May due at the end of the week is expected to match the flash reading of 1.4% in May. Looking ahead, HSBC “expect base effects to continue to have an impact on Eurozone inflation in the next two months, when they will again turn more favourable, and inflation should resume its decline towards 1.2% by the end of 2013, assuming that oil prices stay unchanged.”
Again, France are due to release their national data, and the weather, along with tourism service prices, are expected to have driven consumer prices up in May; this will be partially offset by falling gasoline prices.
UK
UK data has impressed over the course of the second quarter of 2013. February and March data has seen two solid months of gains for industrial production, and many economists believe we are due some ‘payback’ for the month of April. Expectations are that industrial production flat-lined for the month, and fell 0.7% y-o-y. Manufacturing production is seen falling 0.2% m-o-m in April, with an annual decline of 0.5%.
Wednesday sees unemployment data from the UK, and evidence over the last couple of months point to a dip in the pace of hiring. Low labour costs continue to prevail with economists at HSBC expecting “nominal wage growth excluding bonuses to remain at all-time lows”. The ILO rate is forecast to remain unchanged at 7.8% between February and April; average weekly earnings are expected at 0.2% for the same period.
CHINA
The tone of Asian trading for the week will be set over the weekend, when a slew of Chinese data is released, including the latest trade balance data, CPI, industrial production, retail sales and fixed-asset investments. And during the week, we’ll see the release of Chinese money supply data.
In recent weeks, the softer tone of Chinese data has led to concerns once again that the world’s second largest economy is on course for a “hard landing” – a concern that dogged traders last year. However, Michala Marcussen, an economist at Societe Generale, says “there is little to suggest that the Chinese economy is in any immediate danger of hard landing.”
Marcussen points to May’s composite PMIs, which nudged higher to 50.8, from 50.6 in April. And while there are concerns about how credit growth is not having an impact on economic growth, she says that the state is still giving strong backing to the Chinese economy. “The approach by the new China leadership to accept slower growth and not succumb to the temptation of a monetary boost helps by not making the problem even bigger,” Marcussen adds.
JAPAN
The main event of the week in Asia will be the Bank of Japan’s latest rate decision. Over the last fortnight, question marks have been raised over the BoJ’s credibility in engineering 2% inflation. Indeed, minutes from its previous policy meeting highlighted that “a few” board members are concerned that inflation expectations will fail to translate into price increases.
And this week the market seemed rather unimpressed by prime minister Shinzo Abe’s “third arrow” plan to deregulate the Japanese economy and slash taxes to help spur activity.
The combination of Fed concerns, question marks over BoJ policy and Shinzo Abe’s third arrow have formed a perfect storm that has wreaked havoc upon Japanese shares. At pixel time, Japan’s Nikkei index has fallen by 20% since the peaks in May, entering bear market territory. The yen, a perceived safe haven, has also surged against the dollar, now trading in the Y95 bracket, from over Y100 at the start of the week.
But fears may have been overdone. For instance, Tokyo’s CPI in May – a leading inflation indicator – turned positive for the first time since April 2009. “This suggests that deflationary pressures are gradually easing back,” says HSBC’s Jha. Combine with Japan’s pickup in growth, these data should be enough for the BoJ to leave policy unamended on Tuesday.
No comments:
Post a Comment