The first week of the year, as expected was somewhat mixed. Dollar and US treasury markets brushed aside decent manufacturing and service sector ISM surveys to instead focus on the minutes from the December FOMC meeting. The minutes went on to reveal the Fed were not as hawkish on the economy as markets had been lead to believe. As a result 10 Year Treasury Yields which started the week at 2.51% fell to as low as 2.34% before a solid print of 156k for the US Non Farm payroll data, accompanied with a 0.1% increase in hourly earnings and an unemployment rate meeting expectation of 4.7%. This seemed to change the perception of rate increase outlook as the US labour market appears to be in good shape, coupled with the spectre of global price rises, 10 Year Yields ended the week at 2.41% up from it’s Thursday low.
The Euro experienced a somewhat roller coaster week, initially weakening as the post Trump 2016 sentiment continued, before rallying from the low of 1.03411 to above 1.06 in the aftermath of the Fed minutes. However the rally was short lived, as the single currency ended the week down at 1.05319.
Cable shared a similar ride, rallying as economic data continued to suggest that the world after Brexit has not yet ended, and although Sterling rallied to a midweek high of 1.24247 it ended the week trading down at 1.22799.
Elsewhere, Crude Oil started the week with a surge in price as the OPEC production cut began to kick in. This then gave way as price fell from above $55.00 a barrel to just above $52.00. However US Oil Inventories cam in at a draw down of –7.05 million barrels compared to the draw of –2.15 million. This spurred oil onto a weekly close of $53.67 a barrel.
This rise in oil helped equities on their continued upward trajectory, with the Dow Jones ending the week just shy of the record figure of 20,000. In addition, the prospect of rising producer costs is currently still seen as a profit boosting factor for most companies.
For the week ahead, it seems the first market shaping data point will be the end of year inflation data for China. The China inflation rate has been steadily creeping upwards since the second half of 2016, and given the rise in oil prices since then, there is no reason to suspect this trend to falter just yet. A strong figure, year on year figure of at least over 2.0% could see European markets open on the front foot on Tuesday.
On Wednesday, Brexit is back in focus as a slew of production and manufacturing data points for the UK will be released in the morning. Given recent trends for good post Brexit data, it is unlikely we will see significant rallies unless figures come in substantially better than expected and accompanied by some type of political shift. With all the UK data points for Wednesday expected to come in positively, the better trading opportunity could present itself in the event of a miss on expectations.
Wednesday also sees the return of the US Crude Oil Stock Change. With the previous figure being a draw of 7.05 million barrels, oil bulls will be monitoring this for further evidence of a decrease in supply of the black stuff. But let’s not forget, with oil over $50.00 a barrel, production could soon start kicking up again at refineries that were previously priced out.
Thursday starts with German Full Year GDP 2016. Expected at 1.9%, anything matching or beating the previous figure of 1.7% will act as a shot in the arm for the Euro. Anything below the 2016 low of 1.5% and it could signal trouble ahead for the single currency.
After midday on Thursday, things will start to get busy when we get a dump of data from the US. All of these will help paint the picture of the US economy in 2017, but all eyes will initially be on the Initial Jobless Claims figure. Expected at 258k. Dollar bulls will need to see this come in below expectation to show steady uptake in the jobs market. This figure has averaged 257k over the last 12 months, so it may take a figure closer to the December high of 275K to put the dollar in bears in control. Thursday also ends with a few Fed member speeches from Evans, Lockhart and then Bullard. It will be interesting to see if they reshape the market view of 2017.
On Friday, it’s time to sign off with a bang, as we get US Retail Sales and Core PPI data. Month on Month retail sales are expected at 0.7%, 0.6% above previous. Fed Harker speaks at 14:15 on Friday before we get the Michigan Consumer Sentiment Preliminary report. The previous report came in at 98.2% as US consumers anticipated the Trump effect as a positive. So far there doesn’t seem to be any reason for this to change, however at nearly 100% already, perhaps the only way is down??
So given the above, my view for the week ahead is as follows
10 Year US Treasury Notes
Prices are rising, and with positive production and consumer sentiment figures, the US may need to consider rate increases perhaps sooner than anticipated.
Barring some shock news, equities will continue forward on the anticipation of decreased regulation and increased profits from rising consumer costs
The pound could rally on better than expected manufacturing data, but as has been the case for some time, with limited upside, as any political risk or dollar strength can quickly draw it down.
The Euro could see some strength in the early stages of the week as good data from China and Germany creates a positive sentiment for the Eurozone. However, the strength of the dollar may weigh on the single currency towards the end of the week, especially if Fed speakers put forward hawkish rhetoric.