Weekly market preview from Alpari UK – 15 December 2014
The markets are set for a major week, where almost every region is expected to see something that could really provide volatility. In the US, the focus will certainly be upon Janet Yellen and the FOMC when they decide whether to keep their statement the same or not. In the UK, the jobs report looks set to provide an insight into the health of the labour market in November. Meanwhile, the eurozone PMI figures are going to be crucial following disappointing figures last month.
In Asia, the Japanese snap elections on Sunday are going to provide the setup to a big week which ends in the latest BoJ decision on Friday. On he other hand, the Chinese focus looks to be upon the HSBC manufacturing PMI which represents the only event of note to watch out for. Finally, the Australian traders will be well aware of the release of RBA minutes on Tuesday following the recent decision to keep rates stable.
US
A crucial week in the US markets, predominantly due to the release of the FOMC monetary policy decision on Wednesday. However, with the release of data points such as the CPI and the Philly Fed manufacturing index also being released, there is more to look out for other than the FOMC.
That being said, Wednesday’s FOMC meeting is certainly the main event of the week given the impact that this month’s jobs report has had upon expectations of a shift in tone this week. No change in actual policy is expected given the fact that the earliest most analysts see any change is mid to late 2015. However, the tone of the statement is going to be absolutely crucial this week, with many expecting Janet Yellen to remove the ‘considerable time’ comment with regards to how long rates would remain at the current lows. This month’s jobs report was overwhelmingly positive, with payrolls, average earnings and hours worked all improving. As a result, Yellen will be under greater pressure to make a move, yet with disinflationary pressures likely to persist due to falling oil prices, it is going to be interesting to see whether the committee chooses to keep the comment in or not. Given that opinions are split within the markets, I expect to see some volatility irrespective of the decision by the Fed. Also be aware that the Fed are due to release the latest FOMC economic projections, with growth and inflation the most important to watch out for in terms of any revisions.
Also on Wednesday, the latest US CPI figure will provide greater clarity upon whether the disinflationary pressures that have been evident amongst the likes of the UK, China, Japan and most notably the eurozone. As yet, the US has remained relatively resilient, with last month’s reading of 1.7% representing a pretty untroubling figure for the Fed. However, the global trend is certainly to the downside and thus it will be interesting to see if this is finally represented in the US. Should we see a big move lower, it could impact future expectations of monetary policy at the Fed. Expectations point towards a fall from 0% to -0.1% on a month-on-month basis.
UK
A big week ahead in the UK, where the bank stress test results, CPI figure and jobs report means that we will certainly have alot to get stuck into as the week progresses. Tuesday’s stress test results will be watched closely within the markets, with particular attention being paid by those investing in the banking sector. Given the size and importance of the banking sector in the UK, it is going to be absolutely crucial to know that the top banks are adequately prepared for a potential crash going forward. Whilst we have seen the results from the European stress tests not so long ago, this round of tests are expected to be tougher and thus there is likely to be a higher fail rate. Unlike the European tests, this will be a small scale thing, comprising of just the eight largest lenders. Watch out for how many and by how much different banks have failed to gauge exactly how much market impact this could make.
Later on Tuesday, the CPI figure for November is going to provide us with a clear idea of whether inflation is going to continue the downward trajectory seen since the 3.7% peak in 2011. Currently at 1.3%, the threat to BoE policy isn’t massive right now, but with oil prices falling it is clear that as time goes on, there will be downward pressures upon this figure. For the most part, the fall in oil prices will not be felt for the consumer yet at the pump given that oil is generally bought in the futures market and thus any major gas station will generally have prices fixed for a given time frame. However, the likeliness is that once that contract runs out, there will be a fall in petrol prices and thus CPI will fall more sharply. Therefore BoE inflation expectations will certainly be downward in the future months and this means that I expect CPI to continue to fall going forward. Perhaps not at the rate that the likes of Brent and WTI have been moving for the reasons above but it is likely to be the case that inflation will continue to fall for some time yet.
Given the influence of the oil prices on this figure, it is worthwhile also watching the core CPI figure which strips out volatile elements such as energy. This month both the core and headline figures are expected to remain steady, yet with the influence of oil prices likely to continue to persist, I would expect a greater disparity between the two as we go into 2015.
Wednesday sees the release of the November jobs report, with the claimant count and unemployment rates representing the most commonly watched elements. The jobs market, just like in the US, is absolutely crucial for monetary policy going forward. The outlook from the MPC is likely to be influenced heavily by the jobs data and thus any big move on Wednesday not only impacts the view of how healthy the UK economy and growth is going to be going forward, but also the BoE actions going forward.
The unemployment rate is likely to be the main figure which newspapers grab on to given its simplicity. Therefore people will grab onto this as a gauge of where the UK economy is currently. Market estimates to the figure remaining at 6%, yet with the trend certainly to the downside, I wouldn’t be surprised to see a move lower. The claimant count figure is the more volatile of the two and for that reason it can bring about a greater impact upon the markets. This month’s figure is ex[expected to fall to -22k, from -20.4k last month.
Eurozone
The eurozone region is looking forward to a key week, given the release of the PMI and final CPI figures. The first of these events comes in the form of a whole raft of PMI numbers, which provide a forward looking idea of what each sector is looking like from the perspective of purchasing managers. These figures can typically provide a great indication of what the economy is looking like right now. Given that figures such as jobs and growth data typically lag somewhat, the PMI numbers will give us an idea of which direction they could go in. The most important of these is the German manufacturing PMI and eurozone manufacturing PMI figures owing to their size and proximity to the 50 mark (which separates contraction from expansion). With the German manufacturing PMI currently in contraction at 49.5 and eurozone manufacturing PMI moderately expanding at 50.1, it will be crucial to see if either moves above or below that 50 mark to spark market interests.
Wednesday’s final CPI reading is crucial simply due to the pressure that inflation has placed upon Mario Draghi and the ECB. Following a poor TLTRO takeup, it is expected that the ECB are moving closer to QE and any move lower in this could push him closer towards that move. However, this is a final number and thus we have already seen the first estimate come in at 0.3%. Expectations point towards it remaining there, but any move could really spark interest in the markets.
Asia & Oceania
A big week ahead in Asia, where Japan in particular has alot to look out for given Sundays snap elections and BoJ announcement later in the week. Sunday’s election in Japan took many by surprise given that most do not see Shinzo Abe’s role as being jeopardy at all. The ability to finally end a decade of deflation and poor growth means Abe has a great degree of support in Japan. However, he clearly feels there is the need to gain a greater majority and thus he used this election as a means to both gain that along with the ability to ratify public opinion on the very divisive issue of an increased military force. However, Abe will be less than happy by recent developments, which have seen the economy move into recession. Thus it is unlikely that Abe will gain much ground at this election, yet I also do not think he is going to be suffering too much given the impact his measures have had. Therefore I do not think we will see too much of a difference in the voting and ultimately I believe Abe will be re-elected quite comfortably.
Friday sees the BoJ make yet another crucial decision in relation to monetary policy, following a much more dovish stance in recent months. The decision to ease further, raising asset purchases from 50 to 80 trillion yen was a big surprise and has led to major selling of the currency in the FX markets. However, with disinflation persisting and the country now in recession, it is possible we could see another move in the next few months. Therefore keep a keen eye out for this release as a potential source of volatility.
Finally, the Chinese HSBC manufacturing PMI figure is going to be the only figure out of China to be watching out for. This focuses predominantly upon the smaller to medium sized firms (SMEs) and thus any downturn in the region will often show on this measure first. Given last month’s number of 50, the measure is teetering on contraction, leading many to believe we could see that fall back below 50 following 5 months of positive growth. Therefore, keep on the look out for a potential drop below 50 to spark off fears of yet another deterioration in the Chinese region which typically has an impact upon the global market sentiment.
