The Week Ahead in Financial Markets
With the Federal Reserve having finally commenced tapering, investors are tentatively watching every data announcement for signs that it may have an adverse impact on the economy.
The Fed is beginning its third attempt to wean the U.S. financial sector off life support by reducing asset purchases from $85bn to $65bn and is seemingly set on a trajectory to reduce the pace by $10bn at each monthly Federal Open Market Committee (FOMC) meeting. Furthermore, with unemployment continuing to fall, speculation continues to mount that interest rates must rise in the near future.
That said, Central Banks are seemingly reluctant to end the era of low rates, having secured trillions of government debt at long maturities at low rates. Millions of mortgages are now reliant on these low rates and businesses are similarly dependent on borrowing at low rates to fuel what limited investment they are undertaking.
Nevertheless, with every downward move in unemployment bringing us closer to a scenario where a rate hike will appear on the agenda, each announcement is being closely watched. As long as inflation remains low, however, it’s unlikely Central Banks will feel compelled to rock the boat. So, what are some of this week’s key announcements and what impact could they have?
Tuesday 18th Feb - UK inflation figures (CPI and RPI, at 09:30GMT):
CPI is forecast at 2 percent year on year, down from 2.03 percent, whilst RPI is forecast at 2.7 percent, up from 2.67 percent. With heavy discounting having been evident in January combined with continued resilience from Sterling and a relatively static period for the price of Brent Crude (both factors that affect the price of UK imports), it would be a surprise to see an inflation figure that was higher than forecast.
Downside potential exists, however, in which case the pressure for the Bank of England (BoE) to raise rates in the near term would be suppressed further -- especially since Bank of England Governor Mark Carney ditched Forward Guidance.
A lower inflation figure than forecast would likely result in an expectation of low interest rates for longer and could result in an uptick for the price of short-dated gilts and a downward movement for GBP/USD (Cable) in the Forex markets.
Wednesday 19th Feb
1) UK Bank of England Monetary Policy Committee (MPC) minutes & unemployment figures (09:30GMT):
Minutes from the last BoE meeting, whereby interest rates were left unchanged, may shed some light on as and when the Bank of England sees fit to raise rates. If previous form is anything to go by, it’s likely the Bank will continue to stress that rates will remain low for the foreseeable future. Watch out to see what labour market indicators other than employment the bank will be monitoring now it has ditched unemployment as its key determinant of when it will cut rates. Unemployment figures are expected to hold at around 7.1 percent.
2) U.S. Housing starts (13:30GMT):
A second monthly decline in a row is forecast (to 950k from 1m). Of course, this has nothing to do with the Federal Reserve’s third attempt at weaning the U.S. economy off of ‘Quantitative Easing’ and is all to do with the weather. Building permits are less affected by the weather, however, and are also due on the same time and date. That these are also set to decline slightly (from 990k to 980k), suggests the initial burst of activity in the housing sector may well be starting to slow already.
Thursday 20th Feb
1) Euro Zone & Germany Purchasing Managers Index (PMI) between 08:00 and 09:00GMT:
No radical change is expected (forecast 53.4 for Germany and 53.1 for the Eurozone) though recent soft data from Germany suggests downside potential may exist. A slowdown in Germany would certainly soften some of the resistance for the European Central Bank to embark on Quantitative Easing in Europe (although it has purchased bonds from banks, these purchases have been sterilised meaning the monetary base hasn’t been expanded). These indicators may give another indicator as to just how likely this is.
2) U.S. Jobless claims (13:30GMT):
A decline from 339,000 to 335,000 is forecast. If correct, this means we can expect another $10bn of tapering at the next FOMC meeting. A significant blip with figures rising significantly would raise concerns that the recovery may not be as resilient as expected, however, and likely lead to a rise in the price of gold.
Friday 21st Feb
1) Italian inflation figures (09:00 GMT):
Following Italy’s return to growth, albeit at 0.1 percent, CPI inflation is forecast to remain subdued at 0.6 percent (down from 0.67 percent). Mario Draghi appeared to dismiss the possibility of deflation in his last press conference, but the trend for inflation across the Eurozone is undoubtedly downward.
2) U.S. Existing home sales (15:00GMT):
Forecast to decline to 4.67m from 4.87m. If this figure is correct, it would appear to offer some proof that the U.S. housing market really will struggle to endure higher rates.
With buying data reflecting decisions made months before the close of the deal, the weather is not a factor for this set of data in the same way as it is for Housing Starts. It would also be the weakest set of data since 2012 and would almost certainly be reflective of higher mortgage rates than anything else.
Until it has an impact on unemployment, however, it is unlikely the Federal Reserve will pay too much attention to housing data. Nevertheless, any significant slippage will have an impact on consumer confidence as well as indicating a lack of resilience in the U.S. economy. A significant shortfall could lead to a rally in the gold price if it suggests the Fed may ease on its pace of tapering.
Luke Springthorpe is a finance expert working in the City of London, he tweets at @L_Springthorpe