Weekly Market Preview

The events that occurred in eastern Ukraine and the Gaza strip last week are likely to continue to play a major part again in the coming week, with some form of escalation further adding to the uncertainty in the markets, while an attempt to resolve the issues could provide a massive boost to investor sentiment. As always, these matters are never straight forward and therefore I expect some uncertainty to linger whatever happens.

Elsewhere, it’s looking like a fairly busy week, not necessarily in terms of the volume of economic releases and events, but the importance of what is scheduled. The UK and US stand out this week, with minutes from the Bank of England potentially showing more hawkish undertones appearing among policy makers, hinting at earlier rate hike, while the US has a number of big economic releases due for release that could provide a welcome distraction to the events events in Ukraine and Israel.

US

There may not be an abundance of data coming from the US this week, but the majority of the data that is due out is widely viewed as potentially high impact and should therefore be closely followed. The week effectively starts on Tuesday (no data or events on Monday) with the release of the CPI inflation data for June. For quite a while, despite being a tier one release, this has not been viewed by most as an overly important release as inflation has been close to 1% for so long. On top of this, the Fed’s preferred measure of inflation is the core personal consumption expenditure price index and therefore, this number is unlikely to directly influence its decision.

That said, as with many other data releases, it can give an indication of the future path of inflation, as measured by the core PCE, and therefore it should not be overlooked. With the latter closing in on the Fed’s 2% target, traders are likely to pay close attention to the CPI reading for further inflationary signs. The Fed is running out of reasons not to raise interest rates earlier than it clearly wants to and inflation surpassing its target would be another ticked off the list.

Another area of the economy being closely monitored by the Fed is the housing market which Chairwoman Janet Yellen recently described as disappointing. Even a dramatic improvement here is unlikely to make much of a difference to the Fed’s monetary policy decision as it will want to see sustainable strength, but it could be an early sign of things to come making their decision even more difficult later this year. The existing and new home sales data, released this week, may give such an indication, having picked up over the last couple of months, although I wouldn’t get my hopes up too much.

Aside from this, the durable goods orders stands out as a significant release given that this gives a good indication of how people and businesses view the long term health of the economy. If people are buying more of these products, it tends to suggest that they are confident that the economic situation is improving. These numbers can be quite volatile but in general have been improving and another good number is expected for June, with 0.6% growth expected.

UK

The UK doesn’t have much to offer this week in terms of data and events, but what is does have is quite significant and should certainly not be overlooked. It’s difficult to pick the highlight of the week, with Bank of England minutes, retail sales and the preliminary GDP reading for the second quarter being released, but on this occasion I think the minutes have to take it marginally.

I may not be in the camp that thinks the BoE will raise interest rates in the next couple of months, or even before the end of the year for that matter, but that doesn’t mean I don’t think the minutes for the previous meeting will be important. Even if the language used in the minutes suggests certain members are getting a little uncomfortable with the current level of interest rates, without actually dissenting, I would expect the markets to react, particularly sterling which is likely to rally in such an event. This makes the minutes a very important event for a change.

The GDP figure and retail sales releases are, as always, very important releases, but don’t quite carry the weight that the minutes does simply because they’re likely to confirm what we already know, even if this is the success story that is the UK recovery. The UK is expected to have grown by 0.8% in the second quarter, which is pretty much in line with the three quarters that preceded it. As for retail sales, a 0.3% jump in June would not a bad rebound following the 0.5% decline in May and would mean we’ve seen four positive months in five. This is not necessarily enough to point to the type of recovery that forces the BoE to hike rates any time soon but good enough to suggest its sustainable, the perfect mix in most people’s eyes.

Eurozone

Aside from Thursday, which offers plenty in terms of economic data, the rest of the week is looking fairly quiet. The German Ifo business climate figure on Friday could shake things up a little, especially given the decline in German data this year. This is expected to continue on Friday which doesn’t fill us with hope for the eurozone as we head into the summer, given that Germany is the main engine of growth for the region. This could be the first real test of whether the eurozone can in fact cope without a strong Germany. If it can, maybe there’s more to be optimistic about going forward but, unfortunately, I don’t see it at this stage.

Sticking with Germany, we’ll also have the Gfk consumer climate figure for July which is expected to remain at 8.9, following the unexpected spike higher last month. If this number can be maintained, it will be an encouraging sign for Germany which is trying to improve on the consumer side, for example with the introduction of the minimum wage.

As already mentioned, Thursday offers the majority of the economic data for the eurozone, with manufacturing and services PMIs being released for Germany, France and the eurozone. Aside from the German services sector, these numbers have disappointed on quite a few occasions this year so, despite the optimistic forecasts of a small improvement from the June numbers, I’m not overly hopeful. As long as we see numbers roughly in line with estimates though, I think traders will be relieved as it may suggest the decline is slowing.

Asia & Oceania

It’s looking like a very quiet week here, with the only significant releases coming later in the week from China and Japan. Of course, we have some inflation data from Australia and speeches from Reserve Bank of Australia Governor Glenn Stevens and Assistance Governor Guy Debelle earlier in the week, but at a time when the central bank has made it clear that it doesn’t intend to alter its policy stance, these are likely to have only a limited impact. That said, it’s still worth monitoring the speeches on Tuesday, as central bankers can occasionally spring a surprise on investors and send shock waves through the markets.

From Japan we’ll get trade balance data on Thursday, which is expected to show a 39th deficit, with the number in June rising to ¥1.11 trillion. This will be followed on Friday by the inflation data for July. Given the focus from the Bank of Japan on inflation, in fact this was the entire reason behind its asset purchase program, many traders are likely to be following these releases. We can’t get too carried away with them due to the sales tax hike back in April as this will have a significant impact, but we are likely to get a good idea of how much this contributed to the overall number. This could therefore help us determine how likely the BoJ is to announce additional monetary stimulus this year, which based on recent comments, they appear less inclined to do.

Finally, we have the Chinese HSBC manufacturing PMI for July, which is expected to rise to 51.2 following the move back into growth territory in June. This was the first growth figure of the year so far, so an improvement on top of this should be viewed as a sign that the manufacturing sector is on the mend following the slow start to the year. Of course, it is clear that this is probably down to the targeted stimulus efforts from the government and the Peoples Bank of China, but as long as they’re working and not posing any additional risk to future growth, investors are not likely to mind.