News That Matters - Week Beginning July 8th

NORTH AMERICA

The new quarter got off to a slow start, what with Independence Day falling on the Thursday of last week.

Mixed ISM data Monday and Wednesday left markets none the clearer on likely Fed tapering intentions and it took Wednesday’s ADP report before traders got a flavour of the state of the jobs market. Non-farm payrolls came the day after the 4th July US holiday, and highlighted the steady, but unspectacular recovery in the labour market.

Banks and brokers quickly adjusted their predictions for when we may see the US central bank begin to taper the current $85bln worth of monthly bond buys. Consensus for drawing back on the current stimulus is now September.

Both equity and fixed income markets found buyers were absent as markets declined following Friday’s jobs data.

Shavaz Dalla of Spreadex speculated that “perhaps the markets are still not really convinced that improving data from the US will be enough to subsidise the detrimental effects if, and when, there is a tapering of quantitative easing”.

Looking ahead, in what is generally a quiet week for US data, we’ll get the minutes of the latest FOMC rate decision on Wednesday. Over the past fortnight we have heard from a number of voting members and the release may have to go a long way to change perceptions on the board’s policy ‘thought processes’.

Following the minutes, Fed President Bernanke will speak on economic policy, from Boston.

At the back-end of the week we’ll also here from Fed officials attending the Jackson Hole Symposium in Wyoming. Many will be hoping for further clarification on tapering; although well publicised, it is worth noting that Bernanke will not be attending the event.

EUROPE

Events in Europe were dominated by two central bank meetings. The European Central Bank (ECB) and Bank of England (BoE) both met on Thursday, and both broke with tradition and chose to implement ‘forward guidance’.

For the BoE, the surprise wasn’t the forward guidance as such, but the premature release of it. Many had thought we’d have to wait until the Bank had assessed the likely merits of providing guidance and reported back to the UK chancellor in August.

You get the feeling the data will have to consistently outperform for a number of months before the MPC is convinced the UK economy is in escape velocity.

From the BoE statement on 4th July: “At its meeting today, the Committee noted that the incoming data over the past couple of months had been broadly consistent with the central outlook for output growth and inflation contained in the May Report … In the Committee’s view, the implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy.”

Data releases this week will likely add to the recent feel good factor for the UK economy. Industrial and manufacturing production data should reflect the improvement seen in May’s manufacturing PMI, having risen to more than 2-year highs.

Markit’s chief economist, Chris Williamson, writes, “Trade balance data also out next week will … provide a deeper understanding of the UK exports situation. Both the trade and production data, plus new data on construction, will give guidance on UK economic growth in the second quarter, which is currently looking set to impress.”

BoE speakers (Bailey and Miles) may give observers further insight into the new governor Mark Carney’s thinking on policy when they appear at separate events during the week.

Over at the ECB, President Mario Draghi also took the unprecedented step of declaring ‘forward guidance’ to the public. He called the timing of the announcement a coincidence, when asked if it was introduced to chime with the BoE’s release.

He said that interest rates would remain low for an extended period because of an “overall subdued outlook for inflation into the medium term” due to weaknesses in the economy.

The Eurogroup ministers will meet Monday afternoon to discuss the next disbursement of funds to Greece; uncertainty is high as to whether the group will accept the Troika report and pay out the full €8bln due.

Draghi will get the opportunity to explain current policy further on Monday afternoon, when he speaks alongside EIB’s Hoyer in Brussels.

Data across the week will highlight the industrial strength of the key Eurozone nations, with Germany, France, Italy and the wider euro area all reporting May data. Other economic data-points include consumer prices updates for Germany and France.

ASIA-PACIFIC

Asian markets generally followed events in Europe and North America last week, but will get the opportunity to forge their own paths during the week ahead.

The Japanese Eco Watchers survey is released on Monday, with a further consumer sentiment indicator out on Wednesday. However, Thursday’s conclusion of the Bank of Japan’s policy board meeting is the main event for traders.

Capital Economics believes that “the Bank will surely have been pleased by recent economic and market developments, particularly the still-low level of JGB yields despite the surges elsewhere, and the immediate pressure for additional easing has faded.” Consequently they do not see any major policy announcements this week.

Key gauges to China’s economic health will come throughout the course of the week, starting on Tuesday with inflation data. Prices are expected to have accelerated during the month of June, partly down to the rise in food costs.

Trade balance data is expected on Wednesday, and annual base effects should have receded enough to provide a clearer picture of import/exports into/from the world’s second largest economy.

But, Capital Economics asks the question, will the “cash crunch” have caused a sharp pull-back in bank lending in China? (Suspected strong bank lending at the start of June led authorities to curb money-flow later in the month, which caused the subsequent credit-crunch.)

Well, on Friday, Chinese financial regulators introduced a number of measures to help improve the allocation of capital and provide support to the financial sector. In a joint statement, the PBOC also added that it would keep its prudent monetary policy stance, whilst ensuring growth and pressing ahead with reforms.

In other Asia-Pacific releases, the Bank of Korea interest rate announcement is due next week, but is unlikely to produce any change in policy; Singapore will also release its 2nd quarter GDP statistics.

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