Home Forex Analysis And Forecasts Weekly market preview – 29 September 2014

Weekly market preview – 29 September 2014

The first week of the month means one thing, and that is the return of fundamental risk driven by notable data and central bank releases. In the US, we are expecting to see the week dominated by employment data, starting with the ADP figure, culminating in Fridays unemployment rate and non-farm payrolls number. Meanwhile, the UK will be on the lookout for the monthly fill of PMI releases, which peaks at Friday with the services PMI figure. Looking across at the eurozone, the theme will be one of inflation and potential ECB action as Tuesday’s CPI figure precedes Thursday’s massive ECB monetary policy announcement from Mario Draghi.

In Asia, both China and Japan have a substantial amount of figures to be on the look out for. China is going to be geared mainly towards manufacturing PMI figures, with Tuesday’s final HSBC number leading to the headline manufacturing PMI release on Wednesday. Over in Japan, the release of retail sales, household spending and average earnings figures will provide us with an idea of exactly how well the economy is recovering following the sales tax hike. A similar story in Australia, where retail sales can provide an idea of how domestic consumption is developing as they seek to reposition the economy away from export reliance.

US

The return of jobs week is always welcome in the markets as a source of major volatility, with the release of employment data leading to renewed or revised outlooks for FOMC monetary policy action (or inaction). Given that there are such key jobs releases throughout the week, it means that there is a tendency to ignore some of the other lesser figures, with the main events to watch out for being the ADP non-farm payrolls, unemployment rate and headline non-farm payrolls figures.

The ADP non-farm payrolls figure on Wednesday will provide the first opportunity to gauge the conditions of the jobs market in September. There is an ongoing discussion over the validity of this release as an indicator of where we could see the headline figure come in, which in general has been a tenuous correlation at best. However, despite this fact, it is certainly well worth watching out for this figure as it still a valid and notable reading of how employment conditions are within the economy. With the FOMC moving closer towards an interest rate hike, members have begun speaking out to express their belief with regards to whether the economy is ready to that first shift. The employment data is absolutely key in that decision and thus this ADP figure along with Friday’s jobs report will be the type of data points that the Fed will be watching closely.

Friday brings out the big guns, with the jobs report representing the most reliable source of volatility out of any data releases. The non-farm payrolls and unemployment rate figures have always dominated the jobs report as the two main figures. However, it is well worth watching out for the measures that provide more information regarding the quality of the employment environment such as the participation rate, average earnings and the average weekly hours worked. With the FOMC focusing more on reducing the slack or spare capacity’ within the economy, this will be denoted by an economy where people work more hours, for more money and where fewer people are voluntarily outside of the labour force. Despite this, the initial reaction within the markets is typically in response to the unemployment rate and non-farm payrolls figures.

The non-farm payrolls figure is expected to rise back above the 200k month after tanking to 142k last month. With such a poor number last month, be on the lookout for any positive revision which I would not be surprised to see. Meanwhile, the unemployment rate is expected to remain steady at 6.1%.

UK

The first week of the month usually means that the UK economy will be looking out for three major PMI figures to give a solid understanding of where the manufacturing, construction and services sectors are currently positioned. The first of these is Wednesday’s manufacturing PMI figure, which is expected to remain at 52.5. Despite pulling back somewhat in the past two months, the manufacturing sector has been resilient over the past year, remaining well above the 50 mark since April 2013. Thus a steady figure would not necessarily be such a bad thing.

The construction PMI, due on Thursday is also a very positive story, with 2014 representing a boom in the sector which saw house prices rise back to pre-crisis levels in many areas. This has been reflected in the PMI figures, with the latest reading of 64.0 representing the second highest reading since the crises began in 2007. It is worth noting that the construction sector is likely to weaken somewhat from a new homes standpoint once interest rates start to rise in 2015. However, with many of the new homeowners likely to start refurbishing their properties, I expect to see further strength in the construction sector going forward. That being said, with such lofty levels in the figure, it is only a matter of time until the slowdown in the market is reflected and thus this months estimated fall from 64.0 to 63.3 would not come as a surprise.

Finally, the release of the services PMI on Friday is likely to draw the most attention given that the sector accounts for two thirds of the UK GDP. The growth and strength of the UK’s world beating services sector can therefore be held responsible for much of the performance that has led to many expecting the UK to lead the western world out of this downturn. Therefore, it is imperative that it continues to perform and grow strongly. However, with markets expecting a sizable reduction from 60.5 to 59.0, this could be the biggest drop in 2014. Either way, be aware of this figure as a potential source of volatility due to the impact the services sector can and does have upon UK growth.

Eurozone

A major week ahead for the eurozone, where the release of inflation data on Tuesday makes way for the October meeting at the ECB. The CPI measure of inflation has been the thorn in the side of the ECB since it began to tumble a year ago and unfortunately this trend has continued apace up until this day. Mario Draghi’s attempts to reignite price growth has failed miserably in the past 6 months and this has led to continued calls for asset purchases by those within the markets. However, with the TLTRO’s and ABS programmes coming into play, there is a hope that gradually we will start to see some upside in this measure, which could give Mario Draghi a breather. However, markets do not expect this to come on Tuesday, with estimates pointing towards the number remaining around the 5 year low of 0.3%. It is worthwhile noting that Mario Draghi will also be on the lookout for the core CPI figure as much as the headline number, given that it strips out factors such as energy, food, alcohol and tobacco prices. Certainly for the likes of energy prices, a change in monetary policy will make precious little difference to the change in price growth and thus it does make sense to discount if from the data. Currently standing at 0.9%, the markets are estimating this to also remain steady. However, a move in either figure could either put pressure or alleviate pressure upon the ECB to take further action.

On Thursday, the ECB will meet again for their monthly monetary policy decision. For the most part this is going to be determined by two things; eurozone data for the month and the current state of ECB monetary policy. Bearing this in mind, it is clear that from a data standpoint there is a need for further stimulus, with eurozone, French and German GDP at or below 0%, PMI figures at or close to contraction, whilst unemployment remains at 11.5% which is almost double that of the US. However, from a policy standpoint, I believe there is little chance of a shift this month, given Mario Draghi’s recent implementation of the ABS and TLTRO schemes. It is clear that Mario Draghi is willing to act if necessary yet to make two major moves in two consecutive months would be highly unlikely as it removes the ability to properly monitor the impact of those previous actions. However, while I expect policy to remain, I will be watching the statement and Q&A session closely, where Draghi will be expected to continue talk of the ECB being willing to act if necessary.

Asia & Oceania

The Chinese week will be geared predominantly towards the release of two manufacturing PMI figures, as the final HSBC number on Tuesday is followed by the headline manufacturing PMI figure on Wednesday. Tuesday’s HSBC manufacturing PMI provides an idea of how the small and medium sized businesses are performing at a time when the slowdown that has dominated the first half of the year appears to be coming to an end. This is a final figure and thus there is less expectations for either a surprise or any major market movement, especially given that markets have estimated the number to remain at 50.5. However, the headline manufacturing PMI figure is a different matter, with markets keenly watching for any move given that this is the first and final figure for September. The release of disappointing fixed asset investment, industrial production and retail sales number have highlighted underlying weaknesses within the Chinese economy and thus there is a need for this week’s figures to provide a boost. With the headline figure also expected to remain steady, there is the opportunity for a surprise in either direction this week.

In Japan, Monday brings about the release of a handful of consumer based figures, with household spending and retail sales in particular providing an idea of where the economy is moving following the April sales tax hike. Rumours have persisted of another tax hike in early 2015, and thus the recovery of consumer spending within Japan is going to be key to understanding the future actions of Shinzo Abe. Market estimates are somewhat mixed, pointing towards a mild improvement in household spending to -3.5% from -5.9%, whilst retail sales are forecast to fall from 0.6% to 0.4%. However, I will be looking out for some sort of convergence in trend between the two to be able to really move the markets.

Finally, in Australia, the release of retail sales figures will provide us with an idea of how successful the shift towards domestic consumption has been. Coming off the back of a downturn, driven largely by the slowdown in China, Tony Abbot’s appointment as Prime Minister was on the back of a pledge to bring the economy back from the brink by realigning towards domestic consumption and away from the export led model of old. This was never going to be easy, simply due to the strength and size of their commodity industry which will always draw resources and labour. However, for domestic consumption to truly support the economy, we would have to see substantial growth and thus the likes of retail sales data will be key. Markets expect the figure to remain steady at 0.4% in August.

Author: Joshua Mahony

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