Friday saw the euro and European stocks sink as investors fretted over a potential recession in the single currency bloc after the latest PMI data there missed expectations quite badly. Yields fell further as investors piled into safe-haven bonds. It came after the Fed revised down its growth forecasts and suggested rates would remain low for even longer than expected. Although stocks on Wall Street initially rose as investors welcomed the news, Friday’s sell-off in Europe weighed on US equities. Things could turn uglier in early next week for stocks, although with all the major central banks being dovish the downside could be limited in the medium term. But after an eventful week, next week is understandably quieter from a data point of view. However, the ongoing Brexit situation should keep traders busy all week, while the Reserve Bank of New Zealand will garner some attention as it is the sole major central bank meeting next week.
The UK was meant to officially leave the EU with or without a deal next Friday, March 29. But the deadlock in parliament meant an extension was required. The EU agreed to delay the Brexit date until 22 May but only if Theresa May's deal is approved by MPs in the next week. However, if MPs reject May's deal yet again, then the UK will have a shorter delay of April 12, by which date it must tell the EU what it wants to do next. A third rejection of May’s divorce bill would further raise the prospects of a no-deal Brexit, which could be pound-negative.
Will RBNZ join dovish central banks?
Despite the RBA joining the Fed and ECB in delivering dovish assessments of the economy and interest rates outlook, the RBNZ was more neutral at its previous meeting last month. In February, we learnt that Q4 was a disappointing quarter for jobs but a good one for retail sales. This month we had some mixed-bag data, although quarterly GDP came in at a good +0.6% after a disappointing +0.3% in Q3. Overall, though, not a lot has fundamentally changed in New Zealand, but the RBNZ may want to align itself closer to the other major central banks, or risk accepting a higher exchange rate. So, don’t be surprised if the RBNZ becomes the latest central bank to turn decidedly dovish.
Next week’s data highlights:
- German Ifo Business Climate
- US Building Permits and CB Consumer Confidence
- Canadian trade balance
- ANZ Business Confidence
- German Prelim CPI
- US Final GDP
- UK Final GDP
- Eurozone Flash CPI
- Canadian GDP
- US Core PCE Price Index, Personal Spending and Chicago PMI
Overall, the upcoming week’s data releases are unlikely to be too significant in terms of market impact. However, Brexit and the upcoming RBNZ decision have the potential to cause volatility in the GBP and NZD, respectively. Meanwhile we may also see further adjustments to a significantly more dovish outlook from the Fed last week, which may mean renewed weakness for the dollar and strength for metals. Stock market participants must weigh the impact of bad data on future rate hikes (bullish) against the potential for disappointing earnings (bearish).
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