Mixed messages from Janet Yellen in day one of her testimony;
Strong Chinese data leaves Asian markets somewhat underwhelmed;
UK jobs report absolutely key after yesterdays CPI reading.
A surprising degree of indecision seems to be creeping into the markets today despite better than expected figures out of China and an ongoing accommodative stance from Janet Yellen yesterday. Asian stocks saw a choppy session which ended without any clear direction and this appears to be creeping into the European mindset where we are expecting a mixed open. The FTSE100 is expected to open flat, CAC +5 and DAX -6 points.
Yesterday saw Janet Yellen take to the stand in what was the first in two days of testimony at the semi annual monetary policy report. Perhaps it was her way or trying to bring the much needed volatility back into the markets, but Yellen seemed to be both dovish and hawkish at different points within her testimony. She warned that should the labour market continue to improve faster than expected, then the rate hike would happen sooner and more rapidly than currently envisioned. However, she also later noted that the labour market remained weak and that an accommodative stance still remains necessary. So no more clarity there then.
In fact, the markets had managed to see some significant volatility yesterday well ahead of Janet Yellen even taking the stand. The release of a shocking spike in UK CPI (the highest jump in 20 months) followed by yet another very poor ZEW figure out of Germany meant that the likes of GBPUSD and EURUSD saw some major moves and subsequent retracements (certainly in the case of the EURUSD).
This volatility was expected to continue overnight, with the release of some absolutely key figures out of China, yet it seems markets do not know exactly how to take them given the mixed response. The release of Chinese growth, industrial production and fixed asset investment all gave us a pleasant surprise, showing that the slowdown within China was largely overstated and gives me greater confidence that within H2, the Asian powerhouse will be able to really kick on. However, we did not see the major market moves that would be expected and this is likely to be down to the fact that growth still remains relatively weak despite the rise from 7.4% to 7.5%. Yes this is the first rise in three quarters for China, but this is also only 0.1% higher than the slowest rate of growth since Q2 2009. It is not necessarily something to make a song and dance about. That being said, industrial production rose significantly more than expected and fixed asset investment also came in to the upside, so things should begin to pick up from here. It just seems that in Asia, they are not quite yet ready to become too enamoured by a single GDP print that is 0.1% higher than a multiyear low.
The UK comes back into focus this morning, when the release of employment figures will bring both the strength of the economic recovery and the timing of monetary policy from the BoE back into focus. Yesterday’s CPI reading of 1.9% provided us with a heightened awareness of exactly why today’s jobs report is so important. On one hand, the rapidly rising inflation rate is something which Mark Carney and co cannot tolerate for very long, and thus where we see a strengthening jobs market, it is safe to say that rates will be rising sooner rather than later. However, with Mark Carney also utilising the ‘spare capacity’ mindset, elements such as real wage growth become more important to such decision. Therefore, unless we start to see average earnings rise rapidly, there is going to be an issue at hand because the BoE will have to decide whether they are comfortable raising rates at a time when real wages are tumbling. Expectations for average earnings point towards a fall from 0.7% to 0.5%, standing in stark contrast to yesterdays spike in CPI. However, both claimant the count and unemployment rate figures are expected to come in steady following a very strong release last month and thus this current predicament is going to pose a problem for those at the MPC unless one of these measures begins to reverse their trend.
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