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The Marketplace - October 27th 2014
27/10/2014
A busy week ahead for the markets, where the US and Eurozone are expected to provide the most interest. UK retail sales disappointed last week as a rate hike now looks less and less likely from the Bank of England in the near term.
The US FOMC announcement will no doubt be one of if not the main event of the week, when markets look out for a potential end to asset purchases, a signal from the Federal Reserve that the US recovery stabilising. In the Eurozone, the latest consumer inflation figure is certain to bring the problem of disinflation back to the forefront following a year long downtrend.
GBP
The Pound gradually fell against the US Dollar last week, as UK economic data and continued to disappoint despite an upbeat reading for Q3 GDP growth. MPC minutes last Wednesday painted a fairly dovish picture of what lay ahead for future monetary policy, suggesting that weaker growth and low Eurozone inflation had increased downside risks to the UK.
With average earnings still struggling to keep pace with the low level of inflation, a rate hike wasn’t justified in October, or anytime soon for that matter. Less and less we’re hearing calls for a rate hike early next year and, if things continue as they are, it might not be long before we see the first hike priced in for early 2016.
Market focus will likely be elsewhere on a particularly lighter week for economic releases from the UK.
USD
The market will be paying close attention to this week’s main calendar event on Wednesday where the FOMC is expected to announce the end of its asset purchase programme on the basis of lower inflation expectations and recent market volatility. The Central Bank has held rates at record lows since 2008, a hike is expected sometime next year as inflation moves closer to the Fed’s target of 2%.
On Tuesday, the CB consumer confidence figure is due out, with many expecting to see another positive release that has been evident throughout the majority of 2014. The US economy is driven to a large extent by domestic consumption, which dominates growth levels given that around 70% of GDP is accounted for by domestic consumer activity. This highlights the importance of the consumer base within the US and as such, confidence is surely a precursor to strong activity from consumers. Market estimates put this months figure around 87.7, following last months number of 86.0.
On Thursday, the release of the US GDP figure is sure to draw attention from the market as dollar strength and resurgent stock markets highlight an economy which many believe will be the strongest developed economy in 2015. The annualised GDP figure is set to be the main attraction, where the previous number of 4.6% is widely expected to fall back towards the 3.1% region. Ultimately, the US appears to be best positioned to move forward and this is set to be tested once more with Thursday’s figure.
EUR
The main event of the week is going to be Friday’s CPI flash estimate reading, where the pressure could be ratcheted up yet again upon Mario Draghi should disinflation persist in the eurozone. A move in this figure could be major for the markets, with any move lower likely to spark fresh calls for further actions from the ECB.
The rest of the focus this week is going to be directed towards the German economy, where the business climate survey and retail sales numbers are due out. The Ifo business climate survey is going to be key given the downturn that has been evident in recent months. The deterioration in sales, employment, GDP growth and more means that business leaders are likely to be finely attuned to exactly how bad it is in the economy at the moment.
On Friday, the German retail sales provides a good indication of demand within the German economy, with the consumer making up a considerable amount of demand for services and alike. The ability of the German economy to move out of this current downturn is going to be largely down to domestic consumption, given the weakness within the Eurozone and imposition of sanctions.
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