Macro Outlook

Is the US Government Bond yield curve telling us something about the dollar? Since Janet Yellen gave the market a steer that the Fed could be planning to begin the rate tightening cycle in Q2 2015, the yields on short term US government debt have shot higher. However, the same could not be said at the long end, where the 30 year bond yield has fallen, leading to a flattening of the yield curve. Rising bond yields at the short end should help boost demand for the dollar as investors searching for higher yield, and the Dollar has been strengthening (especially against the Euro) in recent days. However a falling 10 year bond yield, and more specifically, 30 year bond yield is something to be increasingly concerned about. For one, it does not bode especially well for equities, whilst it can reflect falling inflation expectations , economic concerns and/or geopolitical concerns. Now, it could be a combination of one or more of these factors that has held the equity markets back recently, however the 30 year bond yield needs to be watched over the coming days and weeks. If these longer dated yields continue to fall away, the bond markets could be suggesting something to be worried about.


Must watch out for: US Non-farm Payrolls (March)

Impact: February’s payrolls data surprised the market, revealing that along with a series of upward revisions, the harsh winter in the US had not been as damaging to economic numbers as had first been thought. Employment data has since continued to improve, with the 4 week average on the Weekly Jobless Claims falling to the lowest since October, whilst consumer confidence has hit a 5 year high last month. The data improvements bode well for March payrolls. As ever, a strong number would the dollar higher and could this month induce all time highs on the S&P.


Foreign Exchange

The first real signs have emerged that the ECB could be starting to seriously talk down the Euro. Comments from ECB President Mario Draghi and Bundesbank chief Weidmann suggest that the ECB is increasingly considering “additional monetary measures”. The fact that the head of the Bundesbank is not explicitly ruling out ruling out quantitative easing or negative deposit rates is a big step. This should make Draghi’s press conference quite a spicy one as he has continually denied that the Eurozone is under threat of deflation and that “the Eurozone is not Japan”. The flash March inflation figure is not expected to help him though with forecasts suggesting a decline to 0.6%. The Euro has been under pressure since Fed chair Yellen’s hawkish comments and the apparent divergence with the monetary policy views coming out of the ECB.

WATCH FOR: A volatile week for forex. Monday’s Eurozone inflation data kicks off the week, whilst Tuesday is jam packed with Manufacturing PMIs that could drive sentiment for a few days. The Eurozone is once more the key focus on Thursday with the ECB rates and more specifically Draghi’s press conference which has caused much volatility in recent months. Non-farm Payrolls Friday rounds off a heavy week.


Indices

With a lack of drive from corporate announcements, the lull from trading out of earnings season has caught Wall Street in consolidation mode. Equities indices have therefore been struggling to make gains against the headwinds of geopolitical concerns over Russia and Crimea and stuttering economic data out of China. Any comments from political leaders such as President Obama, that suggest the need for tougher sanctions on Russia have had an impact on investor sentiment in recent weeks. However, this week attention can turn to global growth factors once more. Tuesday’s PMI data kicks off with China’s second look at the HSBC manufacturing PMI, however if the first one way anything to go by then the omens are not positive. The ISM data for the US is also of keen importance giving a gauge of how the US could perform in the coming weeks. However, the biggest impact on equity markets could prove to be Non-farm Payrolls. Consensus is expecting good things from the US employment data. As ever, a volatile Non-farms Friday awaits.

WATCH FOR: Sporadic concern over geopolitical events surrounding Russia which have tended to dominate investor sentiment in recent week. However, the Manufacturing PMIs are sure to dominate on Tuesday, and into Wednesday. The ECB takes center stage on Thursday with services PMIs also of keen interest. However the end of the week will be dominated by Non-farm Payrolls.


Commodities

Demand for gold as an “insurance trade” has dwindled since the announcement of less than onerous sanctions on Russia two weeks ago. The geopolitics have ebbed and flowed ever since, but with a general trend of easing tensions and gold has tracked this move. Also working against gold has been the relative improvement in the prospects of the dollar since Janet Yellen’s hawkish FOMC press conference. However, at some stage investors will stop discounting the calming of geopolitical tensions and we can then return to normal trading conditions for gold. Silver has the added complication of being a precious metal that is also an industrial metal. The calming of geopolitical tensions has hit silver, but also the deteriorating economic data from China, meaning that silver has been underperforming gold. However, there are early signs in the last couple of sessions of this underperformance turning round and is worth keeping an eye on.

WATCH FOR: Geopolitics has been he main driver of commodities, but the huge amount of data releases this week will take over the agenda. China manufacturing PMI will be a pull on the oil price in addition to impacting on gold and silver. Gold could also be supported if the ECB opts to ease monetary policy or Draghi gives a dovish steer on Thursday. Non-farm Payrolls will also impact on Friday with any release that is positive for the dollar, subsequently should be negative for commodities.

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