Weekly Market Preview

A busy week ahead in the markets following a particularly quiet one just gone. The return of substantial economic events out of the US is particularly encouraging for volatility, where Janet Yellen’s testimony at Tuesday’s monetary policy report is likely to take centre stage. In the UK, the announcement of employment data on Wednesday is likely to contribute to a volatile start to the week. Meanwhile, the eurozone inflation rate will no doubt be absolutely key following the introduction of various easing measures by Mario Draghi.

In Asia, the release of Chinese GDP on Wednesday will provide a substantial degree of interest as the impact of the 2014 slowdown looks set to lower growth expectations for Q2. Meanwhile, the Japanese focus will be dominated by monetary policy statement on Tuesday where expectations of further easing are driven by a slowdown in the economy following the sales tax hike in April.

US

An interesting week ahead for the US economy, where the release of retail sales and consumer sentiment data is joined by two major testimonies from Fed chair Janet Yellen. It is those two speeches from Yellen which I believe could significantly move markets, as she addresses the Senate Banking Committee for the Fed’s semi-annual monetary policy report. The focus within markets has well and truly shifted away from asset purchases and towards interest rates in recent months and this is likely to be key this week. The end of asset purchases in October is now all but certain, yet there remains significant uncertainty surrounding the timeline for interest rate hikes. Yellen has been keen to stress that rates will rise gradually and there will likely be some time between the end of asset purchases and the start of the rate hikes. However, with economic indicators pointing to a booming US economy, there is the potential for this timeline to be pushed forward somewhat and this is what the markets are looking for to drive volatility. Personally I believe that rates will rise in Q1 2015 which is likely to remain as a timeline despite strong macro figures. The Fed has been very careful not to shock the markets in the past and Yellen will not want to spark a major sell-off should she not prepare the markets properly.

On Tuesday, the retail sales figure will be hugely important at a time when the economic picture is really looking positive for H2. The retail sales data is crucial because it is a quantitative representation of consumer behaviour in an economy largely driven by domestic consumption. As such, strong retail sales give a great gauge of where GDP growth is moving in that quarter. This release also has a qualitative element which reflects the fact that people spend money when they are both confident in their own situation and the future conditions of the economy. Thus should we see a strong retail sales release, it leads me to believe that consumers see economic growth continuing for some time and employment conditions also being supportive to major expenditure. This month’s release is expected to move higher towards 0.6% following the 0.3% seen for April. That would reflect a fifth consecutive positive figure which goes some way to explaining the strength we’ve seen in indicators such as GDP recently.

Finally, the consumer sentiment survey released on Friday gives a more qualitative focused release of consumer attitudes. This is the July reading, compared to the retail sales figure which is for May. Subsequently while it is not something which reflects the spending behaviour, the timing of it means that we can gauge how July retail sales data is going to look when it is released in two months. Given that a survey will typically not affect an economy in the way sales data would, I do not expect as much volatility. However, it is key in understanding how the likes of retail sales could move in the coming months. This month the markets are expecting a figure close to 83.2 following a figure of 82.5 last time round.

UK

An interesting week ahead in the UK, where the release the jobs report is preceded by a speech from the BoE governor Mark Carney. On Tuesday, Carney will face yet another treasury select committee hearing with the focus set to be upon financial stability. With that, we are more than likely to revisit the threats of the housing market and whether the steps introduced by the BoE at last months meeting will be adequate to stem the much discussed risks. Ultimately, the question may come down to whether the main tool that should be used is interest rates, thus pushing for a hike sooner rather than later. Given the changing perception of when rates are set to be hiked, we are still in a stage of price discovery as people seek to buy or sell according to any change in expectations of when rates are to rise. For this reason, any hints at sooner or later than expected rate hikes will likely drive market volatility.

On Wednesday, the release of the unemployment rate and claimant count data is going to be crucial in determining if this period of positivity is set to continue for the UK economy. The tumbling rate of unemployment last month really took the headlines as we reached 6.6% for the first time since March 2009. Given this major fall last month I do not expect to see any further drop this month, but it is just important that the figure does not rise yet again. Thus the focus could yet be the claimant count change, which is more of a detailed release. The markets expect to see very little change from last month’s 27.4k and in which case, the scene is set for a possible miss which could bring volatility. Thus I expect to see the unemployment rate remain at 6.6% with the focus possibly centred upon the claimant count figure.

Eurozone

A similar story to the other regions, where the existence of multiple major events means that there is a possibility of volatility within the markets. The first of these is the speech by Mario Draghi at the committee on economic and monetary affairs of the European Parliament. This testimony is predominantly focused upon monetary policy at the ECB which of course is one of the most likely drivers of volatility in the markets. With Draghi having recently implemented a whole raft of measures aimed at minimising the risk of deflation, it will be interesting to get some more details regarding those steps and what impact he expects them to make. However, the market focus will likely centre around the chance of a fully blown asset purchase scheme which ECB members have hinted as being a possibility down the line. Thus be sure to keep a look out for any discussion around this topic for potential volatility in the markets.

Later in the week, the eurozone CPI reading will shed more light on where the ECB’s core economic indicator stands. Of course, the implementation of several measures at the ECB means that even if we did get a further fall in inflation this time around, a kneejerk move from the ECB is highly unlikely. However, any shock fall could spark heightened expectations in the markets that asset purchases could be on their way or at least discussed and this means the markets will be following it very closely. That being said, the markets are looking for another figure of 0.5% to match last months release.

Asia & Oceania

Another week of note in Asia, where Japanese monetary policy and Chinese growth come to the fore. It is the release of Chinese GDP which will certainly grab the attention of the markets overnight on Wednesday. The slowdown throughout H1 within China has been discussed in depth with many worrying that the mix of debt and overcapacity meant we were going to see the powers that be leave the economy to cool off somewhat. However, the signs are pointing towards a recovery and move back to the strong growth we have become accustomed to. The most important indicator for the Chinese has always been GDP growth which is a sense of pride in an international realm, along with a signal to their domestic population that the ruling party is doing what is best for the country. For this reason, Wednesday’s reading is going to be crucial in determining exactly how much the recent slowdown has hurt their country and whether markets are satisfied that this will be temporary. Market expectations are for a flat figure of 7.4%, which is significantly down from the 7.7% seen at the back end of last year. However, should we see any movement either way it will be an opportune moment for the markets to gauge in what direction the economy is moving.

On Tuesday, the BoJ monetary policy stance looks set to come back into focus on Thursday with their latest monetary policy decision. Recently, market calls for further QE have been largely ignored despite a weakening in many of the fundamentals off the back of April’s sales tax hike. It is worth bearing in mind that the Japanese sales tax of 8% still pales in comparison to some of the other major economies, with the UK VAT currently at 20%. For this reason, I do not see this move as being particularly restrictive for the economy and whilst the negative effect is not ideal, it is likely to be short term. However, it is more likely that the BoJ will be thinking about their currency and inflation levels as a reason to raise asset purchases further. With much of the geo-political conflict we have seen around the world, the Japanese yen has been a safe haven asset despite the ongoing printing of the yen from the BoJ. Thus the deterioration in the price has cooled somewhat despite the call from many within the markets for a rate of 120, compared to the current level of 101. That being said, I do not I do not expect any change from the BoJ at this meeting as they seek further data regarding where the economy is heading off the back of the sales tax hike. I do not see the 2% inflation target as being attainable should the monetary policy remain the same given an end to the yen’s decline along with weakened consumer spending. However, it is most likely that the BoJ will look to move on this sentiment later rather than sooner in my opinion.