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ECONOMIC DATA ANALYSIS - EU ELECTIONS TO ADD TO MARKET VOLATILITY
ANALYSIS FRIDAY 16 MAY 2014
ELECTIONS TO ADD TO MARKET VOLATILITY
• Bond market rallies on growing expectations of
further ECB easing
• FOMC minutes may dent optimism generated by
Yellen’s dovish comments
• Low UK inflation means BoE has room to wait before
Greed and fear
drive bonds... The past week
has seen a big rally in core bond markets, but a sell-off in others. US, UK,
German and French markets are all up sharply. US 10-year treasury yields have
fallen back to levels not seen since last October. In contrast, the performance
of euro area peripheral markets has been mixed, with Greek yields in particular
up around 60bp on the week. Initially moves were seemingly driven by a search
for yield, on expectations of ECB easing injecting more liquidity into markets.
By Thursday, however, greed appeared to have given way to fear, as investors were
first spooked by weaker than expected euro area Q1 GDP, then by growing
concerns about the coming week’s EU parliament elections.
US on the sideline... US domestic news seemed a side issue in the
rally. Admittedly, some of this week’s activity data was mixed, with April industrial
production down on the month and retail sales also disappointing. However, big
April rises in both producer and consumer price inflation should have eased
concerns about disinflation (inflation is now only a little below the Fed ’s
target). Moreover, forward-looking surveys continued to point to a sizeable
rebound in economic growth in Q2. The only new economic releases of note in the
coming week are existing home sales (Thursday) and new home sales (Friday). Fed
Chair Yellen’s recent comments about the faltering housing recovery mean these
will get attention. We expect rises in both, partly reflecting a bounce back
fromwinter stagnation. The minutes of the April FOMC meeting (Wednesday) will
be read closely. These should show little change in the Fed ’s views on the
state of the economy. However, given market perceptions that Yellen’s recent
comments have been very ’dovish’, a more balanced view on the outlook for
interest rates could spook markets. The minutes could also contain some detail
on how the Fed plans to manage any future rise in interest rates.
Pressure to mount
on ECB? ... What, if
anything, the ECB plans to do at its next policy meeting is the key near-term
question. The various options will continue to be hotly debated before the June
5th meeting. The most eagerly awaited data ahead of
this will be the preliminary estimate for May euro area inflation (June 2nd).
In the meantime, the coming week will see May ‘flash’ PMIs for the euro area
(Thursday) and the German Ifo (Friday). We expect modest declines in both, but
they should still be consistent with Q2 GDP growth being similar to Q1.European
parliamentary elections (Thursday) will also be watched closely. These could
see strong support for anti-EU parties, fuelling concerns about the future of
Europe. In reality, however, these parties are likely to have little impact on
A busy week in the
UK ... Next week’s plethora of UK data is
likely to conform to the pattern outlined by BoE Governor Mark Carney at the press
conference to launch the latest Quarterly
Inflation Report. Activity measures, including April
retail sales (Wednesday) and the second estimate of Q1 GDP (Thursday) should be
consistent with above-trend economic growth. However, CPI data
(Tuesday) is expected to show inflation below the
MPC’s target for the 3rd successive month. Against this background, the release
of the minutes of the MPC’s May policy meeting will be of particular interest.
Carney’s comments suggest the consensus on the Committee is that there is sufficient
‘slack’ in the economy for it to grow at an above-trend rate for some time. The
minutes may reveal any dissenters to this view.
And finally...The Chinese ‘flash’ PMI for May will provide a
further indication of the extent of the slowdown in the manufacturing sector.
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