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News That Matters - Week Beginning June 17th

Although a slew of tier one economic data is due to be released in the week ahead, all eyes will be firmly focussed on the Federal Reserve’s policy meeting and Fed chairman Ben Bernanke’s press conference.

Since Bernanke’s testimony to congress a few weeks ago, markets have increasingly become jittery and volatility has returned with a vengeance, as traders try to price in the Fed’s tapering of its asset purchase programme.

We have seen the impact of market uncertainty not only in the US, but across all financial markets, with emerging markets bearing the brunt of the market’s wrath. And news from the US is likely to shape traders’ focus in the weeks ahead.

We also have a G8 meeting this week, and there seems to be some tensions going into the meeting. Europe is keen to tie up a trade agreement with the US, however, France has dampened the prospects of a deal by adopting a stubbornly protectionist stance with regards to some industry.

So expect the G8 summit to be dominated by talk of a trade deal, protectionism, tax havens, and also further discussion of Japan’s monetary policy, as well as touching on Syria.

NORTH AMERICA

While many traders are anticipating the Fed to scale back its programme of quantitative easing before the end of 2013 – the Wall Street Journal’s influential Fed watcher, Jon Hilsenrath, reminded us in an article that the Fed is unlikely to go cold turkey, switch off the monetary taps and raise rates immediately.

In the article, Hilsenrath writes “chatter about pulling back the bond program has pushed up a wide range of interest rates and appears to have investors second-guessing the Fed’s broader commitment to keeping rates low. This is exactly what the Fed doesn’t want. Officials see bond buying as added fuel they are providing to a limp economy. Once the economy is strong enough to live without the added fuel, they still expect to keep rates low to ensure the economy keeps moving forward.”

Hilsenrath also believes that Bernanke will be pushing home the point that there will be “considerable” time between ending bond buying and raising rates in his press conference.

Elsewhere, we will get the latest US CPI reading – another essential data release, given that the market has been led to believe that the Fed will continue to keep short-term interest rates near zero so long as inflation does not exceed 2.5%, and unemployment moves towards 6.5% (at the current rate of adding jobs, unemployment won’t hit that level until 2015, some analysts predict).

Inflation expectations have been anchored as of late. In April, CPI rose by just 0.5%, the slowest increase since October 2010. “We think this drop was a temporary phenomenon,” says Madhur Jha, an economist at HSBC, who expects the CPI rate to be maintained at 1.7% on an annualised basis.

Also instrumental in shaping the immediate trading environment will be the Fed’s updated economic projections, which should give us some colour behind the recent comments by FOMC policymakers.

EUROPE

It is a heavy week for data in Europe, with unemployment, trade and confidence data due for release. Additionally, a host of PMI data will be released too.

The tone of economic data coming out of the Eurozone has improved somewhat from the crisis days of 2011/12. The recent pickup in CPI inflation to 1.4%, from the 38-month low of 1.2% in April, has quashed the spectre of deflation. However, the economic bloc still has a long way to go before we can see any green shoots of recovery.

“Despite improved survey evidence for May, we suspect that the Eurozone will continue to struggle for growth over the coming months. Consequently, we believe there is a strong chance that the ECB will end up taking interest rates down from 0.50% to 0.25% within the next few months,” says Howard Archer, chief economist at IHS Global Insight.

And the employment situation also remains fragile, with recent data highlighting that Eurozone employment has been falling since the middle of 2011. “The latest employment data remain worrying,” says Archer, adding that “overall Eurozone economic activity is likely to remain far too weak through 2013, and very possibly during the early months of 2014, to prevent unemployment from rising further.”

The ZEW surveys for Germany and the Eurozone are likely to highlight the two-speed nature of the Eurozone economy. But analysts are still wary, and HSBC’s Jha does not expect any major improvement in sentiment.

Eurozone PMI data is likely to confirm that challenging environment. Chris Williamson, chief economist at Markit, says “the Eurozone’s downturn shows signs of easing, and the region’s recession looks likely to have dragged on for a seventh successive quarter.”

Elsewhere in Europe, the UK will also be in focus this week, with the BoE’s latest policy meeting minutes, as well as the annual Mansion House dinner, where outgoing BoE governor Sir Mervyn King and UK chancellor George Osborne are due to speak. Last year, the chancellor outlined additional stimulus measures, and traders will be listening carefully to see how Osborne intends to support the UK economy going forward.

Most analysts predict that the doves on the BoE’s MPC – including King – will have been outvoted by 6-3 again in their quest to add to the BoE’s programme of easing. Recent UK data has been encouraging, and HSBC’s Jha believes “the MPC is likely to be in wait-and-see mode awaiting the arrival of Mark Carney.”

ASIA-PACIFIC

Japanese equities have endured a torrid few weeks. Although the Nikkei 225 is still up by around 20% year-to-date, the index has fallen from its highs in May, and is now in a technical bear market. Additionally, we have seen JGB’s yields bounce higher.

Markets have been disappointed with Japan in recent days. At its latest policy meeting, the BoJ disappointed traders by not introducing further measures to curb volatility in the JGB market. Also, prime minister Shinzo Abe’s growth strategy lacks crucial details, which we are unlikely to learn about until after Japan’s upper house elections in July.

Barring some trade and industrial production data, economic releases out of Japan are light this week. However, we will hear from Abe, and most likely other BoJ policymakers, including governor Kurodo.

Elsewhere in Asia, HSBC releases its final PMI reading for China this week. This is considered the more reliable, indicative measure of Chinese PMI – official data has faced accusations of inaccuracy in the past.

Growth has slowed in China to the slowest rate in 13 years, which has once again prompted concerns about a hard landing. The weaker export data, for example, raises the risk that China’s economic growth will fall further in the second-quarter of 2013, and may possibly undershoot the government’s target of 7.5% growth.

“Growth remains unconvincing and the momentum seems to have lost pace in May," says Louis Kuijs, an economist at RBS. He adds “the short-term growth outlook remains subject to risks and we may well end up revising down our growth forecast for 2013 further.”

The second reading of the manufacturing PMI data is likely to confirm the bearish sentiment, according to analysts, showing that factory activity shrank for the first time in seven months, which will weigh on growth.

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