Home Forex Analysis And Forecasts Weekly market preview – 1 September 2014

Weekly market preview – 1 September 2014

The week ahead is looking incredible busy for central banks, with policy decisions expected from the BoE, ECB, BoJ and RBA. We also have a number of speeches scheduled for members of the Federal Reserve ahead of the week long blackout period that precedes its own rate decision.

If that’s not enough the US jobs report will be released on Friday and this is an event that more often than not promises plenty of market volatility. The Fed may claim that a rate hike is not around the corner, but a lot of the economic data would suggest otherwise and dissenters are beginning to appear out of the woodwork. Another strong jobs report, potentially showing improvements in wage growth, would make the argument against a rate hike increasingly difficult.

Finally we have lots of tier one economic releases this week, with particular attention being paid to PMI readings from the US, UK, eurozone and China. Asia probably offers the most in terms of major events this week and will likely be a big driver behind opening market levels in Europe for much of the week.

 


US

The first week of the month is quite often the busiest in terms of major economic announcements for the US and as always, the majority of these are due towards the end of the week. The week actually starts with a bank holiday on Monday, making for a very quiet day of trading for the rest of us. The US is a major player in the markets so when these bank holiday’s come around, trading volumes tend to be severely depressed.

Fortunately things will pick up as the week goes on, starting with the release of the ISM manufacturing PMI on Tuesday. The key event on Wednesday will be the release of the Beige Book, which provides information on the economic conditions in each of the regions that the Federal Reserve operates. While this can give an idea of how each Fed member views the state of the economy which will then impact their voting, the Beige Book is only one of three produced. The Green Book and Blue Book are not made public and are believed to have a greater impact on the monetary policy decisions, making the Beige Book quite limited in how useful it actually is. It is generally viewed as useful for informational purposes but the actual market reaction to it tends to be minimal or even non-existent.

As we near the next FOMC decision in a couple of weeks, the number of scheduled Fed speeches tends to increase and that is certainly true this week. Fed members are prohibited from speaking in public during the blackout period that starts one week before the start of the meeting, making this the last opportunity we have to hear their views before the next decision. While many may not see this as hugely important this month as a rate hike is extremely unlikely, I would beg to differ. Should we get more dissenting voices at the next meeting, following Charles Plossers decision to do so last month, it could force people to bring forward their rate hike expectations from the middle of next year and that would undoubtedly have an impact on the markets. Taking comments from these speeches on board may allow people to anticipate such an outcome.

Without a doubt, the biggest event in the US this week will be the release of the US jobs report on Friday. The report includes the unemployment rate in August, as well as the number of jobs added (non-farm payrolls or NFP) and earnings data for the same month. We’ve seen plenty of evidence that the labour market is recovering in recent months which, in a way, takes away some of the importance of the unemployment and NFP figures, although they still have a significant market impact. The one that shouldn’t be overlooked related to earnings as this is one of the biggest concerns among policy makers right now. Should we see is significant improvement here in the coming months, along with productivity levels, the tone of the Fed could well become much more hawkish and the first rate hike would surely come earlier than the middle of next year.


 

UK

There isn’t a too much data coming from the UK this week, with the PMI readings for the manufacturing, construction and services sectors being the only notable releases. All of these are important readings for the UK economy regarding the sustainability of the recovery. As it stands, we’re seeing no concerning signs that the recovery is slowing or will slow in the foreseeable future, but that doesn’t mean we should get complacent. All three figures have edged a little lower from the highs they were at earlier this year but that was to be expected. It’s very difficult to sustain them at those levels for an extended period of time. As long as they stay well away from the 50 level that separates growth from contraction, there’ll be nothing to worry about.

The Bank of England decision on Thursday could potentially be the major event of the week of all the regions, although I highly doubt this will be the case. The two votes in favour of a rate hike last month has put everyone on red alert that the first rise in interest rates in more than seven years could be just around the corner. I still think it’s too early but of all the major central banks, I expect the BoE to be the ones that pull the trigger first. In all likeliness, this will be a non-event and people will turn their attentions to the release of the minutes in a couple of weeks, when the details of the meeting, including the latest vote, will be made public.


 

Eurozone

The story is pretty much the same in the eurozone, where the PMI readings dominate the early part of the week, while the ECB decision and press conference takes centre stage on Thursday. The eurozone recovery story has been a million miles from that of the UK, with the area at serious risk of falling into recession this year. The region ground to a halt in the second quarter but this could be revised lower in the coming months leaving the prospect of recession in the current quarter. This wouldn’t be surprising as the picture has worsened if anything in the first two months of it. The PMI readings are expected to add further weight to these expectations, with confidence seen falling again in August in both Spain and Italy. It seems those flickering signs of the light at the end of the tunnel earlier this year was just an illusion and this recovery still has a long way to go.

The ECB rate decision is unlikely to have any impact whatsoever on the markets this month for two reasons. Firstly, the stimulus package announced a few months ago needs time to find its way to the real economy and the results seen. Secondly, while inflation fell to 0.3% in August, core inflation, which strips out temporary volatile impact of things like fuel prices, rose to 0.9% in a sign that the benefits of the stimulus package are starting to be seen. What exactly has caused this is difficult to know, but I imagine the weaker currency since the announcement of the stimulus package is playing a part. The press conference after is likely to be the key event here as market volatility can increase dramatically as traders attempt to read between the lines of what Mario Draghi says and get ahead of the pack.


Asia & Oceania

This is likely to be the busiest region of the lot this week with some big numbers coming from China and the Bank of Japan announcing its latest policy decision on Thursday. For traders in Europe and the US, this means that early market sentiment is likely to be largely driven by the events in Asia and so its worth getting up to speed with this first thing. Chinese data tends to have the biggest potential to influence pre-markets in Europe and the US, simply because it’s the world’s second largest economy, and likely to be the largest in the coming years, and therefore the country’s economic performance has the potential to impact all others. The FTSE tends to be very responsive to Chinese data due to its huge exposure to the country with its large proportion of mining and industrial stocks.

This week it’s the HSBC and official PMI readings that we should be closely tracking. Both readings tell us slightly different things which is why the numbers can often be quite different. The HSBC reading focuses more of the privately run small and medium sized firms while the official reading is impacted more by the large state-owned firms. Many people believe that the HSBC readings give the most reliable readings as they are less likely to be tampered with in an attempt to paper over any cracks appearing in the economy. It’s also believe that the large state-owned enterprises would be the first to benefit from government stimulus and only once it’s filtered through to the smaller firms would it suggest that it is benefiting the wider economy.

The BoJ monetary policy decision and press conference are likely to get a lot more attention in the coming months now that people are talking about a second program of quantitative easing (QE) again. In recent months, the idea of another QE program had started to fade as the economy appeared to be dealing well with the sales tax hike and inflation was edging towards the BoJs 2% target (CPI is currently at 3.4% but 2% of this is attributed to the sales tax hike so is largely ignored). However, recent data has suggested otherwise with unemployment rising, some major economic indicators showing some weakness and inflation falling lower.

While I don’t expect the BoJ to announce any additional stimulus at the next couple of meetings as it will probably want further evidence that progress has slowed, we may get hints at it in the statement and press conference that could make waves in the markets. As a result, this could be a big event this week and in the months ahead.

Finally, we have a number of pieces of economic data being released in Australia, including building approvals, retail sales and trade balance, as well as the latest rate statement from the Reserve Bank of Australia. The latter is likely to be something of a non-event as the RBA has previously stated its intentions to leave policy unchanged for some time as the economy is performing better and no rate cuts are needed. In fact, the next rate change is more likely to be a hike, although I don’t expect that to come any time soon.

Author: Craig Erlam

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