As expected, the previous week was a tale of two halves, beginning with the continuation of the risk on theme or Trump rally that saw the S&P continue it’s mostly buoyant setting. Similarly for European equities, the Dax for the most part stayed between 11500 and 11600. This was aided by positive PMI data from China early in the week, and then further boosted by the surge in oil
We did start to see some easing in the Dollar strength against the Euro as German GDP came in at 1.9% and Italian production figures came in 1.2% above the expected 2%, signalling that there is still some fight left in the Eurozone ahead of the next ECB Policy meeting. This is against the backdrop of hawkish Fed rhetoric, so it could be that market players are seeing the Fed rhetoric as just that – especially as several of these speakers will be trying to catch the attention of Mr Trump.
The pound tumbled as speculation increased that a hard Brexit was on the way, undoing the impact of the positive data prints. Theresa May is scheduled to speak on the Brexit matter on the 17th – and all eyes will be watching.
Elsewhere, President Elect Donald Trump held a press conference that didn’t give too much away on economic policy, but none the less got people talking on the potential security concerns his presidency may pose. One thing is sure, the next 4 years promise to be politically very interesting.
For the week ahead, the big stuff starts on Tuesday the 17th with slew of UK data at 9:30 including the Retail Price Index, Producer Price Index and chiefly the Inflation Rate. With a consensus figure of 1.4%, it is almost a given that the figure will match or exceed this given that there has been ample time for the effects of Brexit and the devalued pound to kick in (remember Marmite-Gate??).
30 minutes later there will also be the ZEW Economic Sentiment Index for Germany. This will be focusing on January data, so will provide an assessment of sentiment in the fledgling new year. But if current trends continue, it is difficult seeing this figure coming in under the previous value of 13.8.
Tuesday also features three Fed speakers – Dudley, Brainard and Williams – but given the current climate, the surprise here would be if they were not hawkish in tone. Of more importance on Tuesday will of course be the speech on Brexit by Prime Minister Theresa May. It’s safe to assume that this will move the pound, and with her previous stance putting immigration ahead of the economic factors, this could get ugly for cable.
Wednesday we have the final inflation data for the Eurozone, expected at 1.1% for the year 2016, and then later that day we have inflation data for the US. This could make things interesting for fixed income and currency traders, as the expected year on year figure of 2.1% would be the highest since 2014, and could send bond prices falling. Let’s also keep an eye on Janet Yellen’s planned speech at 20:00 GMT.
Thursday really kicks off with the ECB interest rate decision, followed by press conference. Where it is likely that no changes will be made to the rate, traders will be listening attentively to the words of Mario Draghi, and looking for any signs that the bond purchase program needs to be tapered. Later in the day, initial Jobless claims for the US will become a key data point, with the figure expected to increase to 253k claimants compared to 247k previous. The Philadelphia Manufacturing Index will then provide a good barometer of manufacturing sentiment, which is still expected to be positive, but perhaps not as positive as previous with an expected figure of 16 vs 21.5 previous.
For the oil traders, Crude Oil Stock Change for the US would be the key data point today, with anticipation of another build growing following last weeks build of 4.097 million barrels.
Friday could have a risky start, with China GDP figures expected early morning. Expected at 6.7%, it’s likely they will come out at 6.7% – stable, and predictable, but some may argue engineered and not reflecting the real economy. Either way, it could be expected that as long as this figure is not below expectation, a risk on theme could develop in European equities come Friday morning.
UK retail sales figures will provide some flavour to the Brexit soup, but most likely cable would be exhausted by this point.
Friday ends with speeches from Fed Harker and Williams, where further hawkishness can be reasonably expected. Oil traders will also wan to keep an eye on the Baker Hughes Rig count, which increased last week to 522. As oil creeps up in price, more and more manufacturers will be able to restart production they were previously priced out of.
So given the above, my view for the week ahead is as follows
10 Year US Treasury Notes
Yes, I have been bearish on T Notes for some time, even though prices have risen mildly over the last few weeks. However the outlook still seems bearish. This week in particular with so many inflation data points and Fed speakers, we may see the shift in market players as they seek to unload treasuries ahead of any potential increase in interest rates.
…However, with a bullish lean. The current market climate has pushed many into equities, however as inflation continues to rise and yields continue to increase, other options may start to seem more attractive. Especially as earnings season starts to kick in.
Unless Theresa May shocks the world by declaring her love for all things immigration, it is likely she will deliver a speech in keeping with her previous ones. Hard on immigration, tight lipped on the Brexit negotiation. Any calls for unity and the like will of course be sprinkled over the message, but wont stop the pound from dipping below $1.20
The Eurozone is not as weak as many would want others to think, and the data supports this. Positive data from Germany and the Eurozone on the whole will not bring a change in rate on the 19th, but it will signal that very soon things will need to change. Even the slightest hint of the word taper or anything that could come even close, may see a rally in the Euro and sell of in the Bund.
The cost of oil could be reaching a near term equilibrium as producers adjust to the recent supply and price changes. Even an increase in the rig count may not be enough to cause oil prices to drop significantly.