Weekly Market Preview


The biggest week of the month ahead in terms of economic releases, as the focus returns to central banking, employment and PMI readings among other things. In the US, the week will be dominated by labour statistics as we see a crescendo of figures reach a pinnacle on Friday with the release of the jobs report. In the UK, the services PMI figure is going to be key as an indicator of growth going forward. Meanwhile, the eurozone we will see Mario Draghi take the stand once more as the ECB rate decision and press conference dominate Thursday’s European session.

Asian markets will be on the lookout for the Chinese manufacturing PMI number on Monday which will provide a dominant impact upon the start of the new trading week. In Australia, the release of the Q3 GDP figure is sure to be key in what is a particularly busy week for the country.

US

The US markets always brace themselves for volatility on the first week of the month, predominantly due to the release of the non-farm payrolls figure on Friday, which near enough guarantees strong market moves. The current economic backdrop within the US is a mixed one, in large part due to the recent moves in oil prices which were compounded even further by OPEC. Their decision to push prices lower by keeping output at the long term average of 30 million barrels per day sent prices tumbling, which is likely to impact the US in a number of ways. Firstly, the reduction in oil prices is likely to push a number of US shale producers out of business or at least stop production due to costs being above market price. This should lower GDP in the future for the US. Alongside this the falling price of oil will have a disinflationary impact, leading to a cautious Fed when it comes to monetary policy tightening. Finally, with less money being spent at the pumps, there is likely to be a stronger retail sector as consumers gain a greater spending power which should spell out a strong festive period in the US and globally.

The main events I am watching out for revolve around the labour markets, with the ADP non-farm payrolls figure, followed by Friday’s jobs report. This is also accompanied by a whole host of speeches from Fed members (10 in total), which have the potential to move the markets should they begin to move the goalposts in relation to monetary policy.

On Wednesday, the ADP non-farm payrolls figure will give us the first indication of how the labour market has fared in November, with expectations pointing towards a fall back to 228k from 230k last month. This ADP measure is a privately run study and this means they do not have access to public sector data. Partly due to this difference, the ADP and official non-farm payrolls figures can sometimes be unreliable in their correlations. However, this is a highly notable data point and we have seen significant volatility in the past upon release.

The main event of the week is going to be the jobs report, where a whole raft of labour market statistics are released. Arguably the biggest number is the non-farm payrolls figure, which due to its volatile nature has an ability to move the markets significantly. That being said, even when the figure remains stable or comes in as expected, there is often a response simply due to the fact that many will trade the release due to the consistent volatility. It seems the forecasters are expecting to see some correlation with the ADP number this week as they expect a number of 228k also, which would be a rise following last month’s 214k number. Be very aware of this figure as it has the ability to really move the markets.

Also released alongside the payrolls figure is the unemployment rate, which is often a headline grabbing number and thus is also very influential upon monetary policy. On this case, we are expecting a number of 5.8%, which would represent a steady number over last month. Finally, be aware of the qualitative statistics, such as average hours worked, average hourly earnings and the participation rate. These figures have become increasingly significant as Janet Yellen is on the lookout for the degree of ‘slack’ within the economy.

UK

A busy week in the UK, where the release of PMI numbers and the latest BoE monetary policy decision means that almost every day has something to keep an eye out for. The PMI surveys are particularly important as they provide a leading indicator of health or weakness in a given sector prior to those changes being reflected in the statistical data. In the UK, the most important industry is the services sector, which accounts for around 80% of UK GDP and thus I use the services PMI (Wednesday) as a great leading indicator of where jobs, spending and ultimately GDP are going to move in the coming months. This month markets expect to see a moderate rise from 56.2 to 56.6, which is coming off the back of two months of very poor figures. Therefore any movement to the upside in that figure at least provides me with an idea that the sector is stabilising and gaining some ground back again.

Also be on the lookout for the manufacturing PMI (Monday) and construction PMI (Tuesday) figures. In particular the construction sector has been having a great time of it in 2014, with a buoyant housing market expected to provide continued support for new builds given the new valuations achievable. Despite the recent slowdown in the UK housing market, much of which I believe is cyclical to this time of the year, I expect new homeowners to be investing in their new properties which should keep the sector vibrant for some time yet.

Finally, Thursday sees the BoE provide their latest monetary policy decision which has been a major cause for volatility in the past. However, with a high likeliness that Carney and co will keep rates and QE unchanged, I do not expect this to be a particularly interesting event. For this reason, the release of minutes later in the month now appears to be a more noteworthy event as it provides us with clues as to when the MPC will seek to raise rates.

Eurozone

The eurozone area is set for a relatively relaxed week in comparison with the other regions, where the main event to be watching out for will be the ECB monetary policy decision on Thursday. Given the recent implementation of an ABS purchase programme, along with the ongoing TLTRO’s scheme, I do not foresee any big change in policy on Thursday. However, given that the announcement is followed by a press conference, I expect to see pressure put upon Draghi regarding a QE programme down the line given the persistent disinflationary pressures. Much has been made of a possible corporate or sovereign bond buying policy from the ECB and thus we could see some light shed on that element and how it could make up some part of the 1 trillion euro expansionary policy that has previously been mentioned by Draghi.

Asia & Oceania

A somewhat quiet week in Asia, where the lack of any Japanese figures means that the focus will be solely placed upon China. The release of the Chinese manufacturing PMI figure in the early hours of Monday means that for the most part, this coming week will be set on either a positive or negative footing by that release. Given that this figure has been at the forefront of the multiple downturns seen throughout the past year, it is absolutely key that we continue to see the sector grow, which is beginning to be questionable given the fall over recent months. With the sub-50 mark denoting a sector in contraction, the figure of 50.8 seen last month means China is in dangerous territory should we see any further movement to the downside. Estimates point towards a figure closer to 50.6, which would mean yet another step towards that dreaded scenario of a sub 50 survey.

Finally, the Australian economy has a very busy week ahead, where GDP and a RBA monetary policy decision are likely to dominate. On Tuesday, the RBA monetary policy announcement is going to be interesting predominantly for the statement that comes after. The weaknesses still evident within the economy means that I do not foresee any move higher in rates any time soon. However, with real estate prices rising to worrying levels, it is also unlikely we are going to see the RBA lower rates to stimulate jobs and growth. Thus for the time being I believe it is unlikely that there is going to be any shift in policy.

The second estimate Q3 GDP figure is of course absolutely massive, given the worries surrounding the economy within recent times. The mixed signals out of China means that the Australian economy has been slowing in recent quarters, with the initial 0.5% figure for Q3 being the lowest in 10 quarters. For the most part, this weakness has been attributed to a deterioration in net trade. However, with estimates pointing towards a better number of 0.7% on Wednesday, it is clear that the effects of a weakened Aussie dollar is finally being felt.



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