The Week Ahead in Financial Markets: 24 February 2014

Last week’s economic data confirmed an emerging trend, with inflation in the developed world consistently falling. Meanwhile, US Housing Starts fell off rather sharply.

While the powers that be were keen to peddle the idea that it was down to bad weather, it seems much more credible that house builders may well be reacting to an expected rise in the long term interest rates reducing the demand for mortgages.

So, what does the week ahead have in store for us?

24th Feb: Eurozone inflation figures (10:00 GMT): Forecast at -1.1% month on month, and up 0.7% year on year.  With another month of deflation expected, the Eurozone could be confirmed as having spent three of the last six months with negative price movements.

With inflation in Italy being confirmed last week at a rock bottom 0.2% and France careering towards deflation, the case for Quantitative Easing to expand the money supply by the European Central Bank will surely continue to mount.

To date, all sovereign bond purchases by the European Central bank have been ‘sterilised’, meaning there has been no effect on the money supply. Confirmation that inflation remains low should cement expectations of low rates for the foreseeable future in the Eurozone and will likely send the Euro lower against the US Dollar and Sterling.

That said, given the strength of the Euro, it’s not inconceivable that such a move would be welcomed by the ECB and the struggling periphery countries.

25th Feb: German GDP (07:00 GMT): Detailed guidance on Q4, where there was a rise of 0.4% q/q and up 1.3% year on year, and US Home Prices Case-Shiller 20 y/y (14:00 GMT) forecast rise of 13.3,%, down from 13.7%.

It will be worth delving through the information regarding the last Quarter’s 0.4% growth in Germany. With the Eurozone’s largest economy only experiencing fairly tame growth, resistance there to monetary easing by the European Central bank may begin to soften. What’s more, inflation in Germany has been running at 1.3% which would suggest ample potential to do so without inducing rampant inflation.

Meanwhile, the S&P Case-Shiller, which is the primary indicator of real estate prices in the US, is expected to show real estate prices continuing to motor ahead, with another rise of 13.3%.

With wage growth having remained muted to date, there are only two ways such rapid growth can end: an explosion in wage growth, as ‘rational expectations’ of a booming economy play out, and workers demanding wages to match; or a rapid reversal in prices.

The chart below is a nice demonstration of what happened last time prices gathered this kind of momentum, though that was before the Federal Reserve undertook significant monetary expansion. QE may well make the inflation scenario a more likely option this time around.

26th Feb: UK Second Estimate of Q4 GDP (09:30GMT) forecast up 2.8% and US New Home Sales (15:00 GMT), forecast 400,000 against previous 414,000: Meanwhile, numbers of home sales are expected to cool a little.

27th Feb: Q4 GDP data in Brazil, likely to show Brazil nearing recession by end of 2013 (12:00 GMT) following a previous decline of 0.5% in Q3. One effect of the Federal Reserve winding down its Quantitative Easing has been a repatriation of investment flows to the US, where a higher return is now available with 2.7% on offer for a 10 Year Treasury.

A significant decline in Brazilian GDP could well send tremors through global markets if it starts to look as though the states affected may begin to struggle under their debt pile that has built up, with rates moving artificially low following US investors hunting overseas for yields that weren’t available at home.

28th Feb:  France Producer prices (07:30GMT): Forecast decline of 0.3%. Another indicator that could well show a Eurozone country moving in to deflationary territory. The case for an ECB stimulus will mount and pressure for Germany to ease its resistance to such a measure will grow. With elections now behind Frau Merkel, the government is not likely to put up such a tough fight against any such move.

Interesting chart: A rather interesting chart comparing the recent rally to the 1928/29 rally. It, of course, remains to be seen if the Federal Reserve will slam on the brakes as it did back before then, but it is nonetheless one to be aware of and hope that history doesn’t repeat itself!

 


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