Friday February 1, 2013 - 18:05:11 GMT
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ECONOMIC DATA ANALYSIS - CENTRAL BANKERS TO TAKE CENTRE STAGE
ECONOMIC DATA ANALYSIS FRIDAY 1 FEBRUARY 2013
CENTRAL BANKERS TO TAKE CENTRE STAGE
• Positive risk sentiment continues as economic data turn higher
• ECB meets amid resurgent euro. Will Draghi talk the currency down?
• MPC to keep policy unchanged, but Mark Carney will be watched for a longer-term steer
The big action this week has been in the FX markets, with the euro continuing to defy gravity and the yen showing no signs of a floor. USD/YEN and EUR/USD have broken above 92 and 1.36, respectively, in moves which, if sustained, could
have important implications for global growth and rebalancing. The sharp moves in the FX market have been accompanied by rising bond yields, with the US 10-yr briefly breaking above 2%. With a benign US employment report providing a catalyst for a renewed leg high in equities, the question remains how long the risk rally can be sustained? Much will depend on where bond yields move and the tone of upcoming economic data.
Based on the data alone, there is grounds for cautious optimism. The monthly US indicators, notably house prices, durable goods orders, the PMIs and employment, all posted solid increases. These put the surprise 0.1% drop in Q4 GDP – which was heavily depressed by transient factors – into context. Meanwhile, the uptick in the January unemployment rate to 7.9% cemented expectations that the Fed will continue QE throughout this year.
Germany defies euro strength... Despite the challenges posed by a resurgent euro, Germany has started the year on a strong note. The surge in last week’s German ZEW, IFO and PMI surveys was followed this week by a surprise fall in the unemployment rate to match the two decade low of 6.8%. The resilience in the face of the downturn across the euro area is perhaps more telling for what it reveals about global demand than domestic conditions. In the UK, the data calendar was light this week, but nevertheless, provided grounds for (cautious) optimism. In particular, mortgage approvals and broad money data posted clear improvements, while the January PMI pointed to signs of a modest rebound in manufacturing activity.
Q4 earnings and the fiscal debate... The US data calendar steps down a gear this week. US factory orders, the nonmanufacturing ISM and external trade figures are unlikely to be big market movers. Instead, the focus will again be on Q4 earnings and the fiscal debate. The latter poses a clear and present danger, with the 1 March deadline for sequestration approaching fast.
Will Draghi attempt to talk down the euro? In the euro area, service sector PMIs, German industrial production and, most importantly, the ECB meeting are all due. The ECB is almost certain to keep policy unchanged, but the press conference will be watched for the its take on the euro’s recent strength and the impact of LTRO repayments. Any suggestion that the tightening in conditions is unwelcome could precipitate a big market reaction.
Prospects of UK QE fading... In the UK, the MPC also meets in the coming week. Given the improvement in risk sentiment, the pick-up in money growth and the fall in sterling, there is no pressing case for additional QE. That said, with some QE gilts up for redemption in March, the MPC could announce that these wil l be
reinvested to maintain the policy status quo.
Mark Carney to appear before TSC... The prospect of further UK stimulus before Mark Carney takes up his appointment on 1 July looks limited. The markets will have an opportunity to assess Mr Carney’s policy leanings when he addresses the Treasury Select Committee (on Thursday). Much has been made of his perceived support for aggressive policy action following his suggestion that for ‘some economies’ a nominal GDP anchor may be more appropriate that an inflation target. The TSC hearing will provide an opportunity to clarify his position. While he is extremely unlikely to pre-commit to any particular course of action, he could signal his support for broadening the MPC’s remit away from the adherence to a strict inflation target.
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