Sunday 25 September 2016

Daily Market Update: Downward pressure on the dollar eases

Simon Barry

Published 21/03/2016 | 10:16

The Federal Reserve Building. Photo: Reuters/Jim Young/Files
The Federal Reserve Building. Photo: Reuters/Jim Young/Files

Friday represented a quiet end to what was an eventful and important week on the economic calendar.

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It was a week that was dominated of course by the more dovish‐than‐expected Fed policy update with the Fed’s risk‐friendly soundings continuing to provide support for the US equity market rally into Friday’s close. The S&P chalked up gains of 0.4% in the final session of the week, taking its cumulative rally from its early February low to over 13% ‐ in the process taking the index back into positive territory for the year to date (a milestone passed by the Dow the previous day).

On the currency markets, downward pressure on the dollar relative to the euro and sterling has eased as focus has switched back to a degree on euro zone‐ and UK‐centric issues. The greenback is about 0.3% higher than on Friday morning vs. the euro (opening at $1.1250) and is about 0.5% firmer against the pound (opening at $1.4390). An interview late last week from ECB Chief Economist Peter Praet indicated that euro zone interest rates could be cut further “if new negative shocks should worsen the outlook or if financing conditions should not adjust in the direction and to the extent that is necessary to boost the economy and inflation”.

These are interesting comments as markets had come away from the recent ECB press conference with the view that the ECB was de‐emphasising the interest rate tool as a means to provide more stimulus if needed. But Praet’s comments clarify that further use of interest rate policy does in fact remain on the table. As he put it: “This recomposition of the tool‐box does not mean that we have thrown away any of our tools”. More broadly,such comments serve to again highlight the divergent paths for monetary policy in the euro zone and the US – an important plank of our moderately bearish view on Eur/USD.

Meanwhile, Brexit risks are back in focus in the UK. The Confederation of British Industry has this morning issued a report outlining its view that a vote to leave the EU could cost the UK economy £100bn and 950,000 jobs by 2020, elaborating that in its view “the savings from reduced EU budget contributions and regulation are greatly outweighed by the negative impact on trade and investment”. UK political risks are also to the fore following the resignation over the weekend of cabinet minister Iain Duncan Smith who opposed cuts to disability benefits in last week’s budget. While IDS has denied speculation that his move was linked to his position on EU (he favours leaving), his resignation serves to highlight the extent of division in the Tory party at present.

Looking to the week ahead, the flash Eurozone PMIs are published tomorrow for March. Expectations are for a slight pickup in the manufacturing PMI, from 51.2 to 51.4, but the services and composite PMI are expected to remain at 53.3 and 53.0 respectively (both about a point below their respective Q4 2015 averages). Other important business survey indicators released tomorrow will be the IFO and ZEW in Germany. The headline IFO indicator (the business climate index), is expected to edge up from 105.7 to 106.0. An increase in the expectations component (the more important part) from 98.8 to 99.5 and a downtick in the current assessment component from 112.9 to 112.7 are expected.

The ZEW (which surveys investors rather than real economy agents) is expected to show an advance in both measures, expectations are for the current situation component to increase from 52.3 to 53.0 and the expectations element is expected to increase from 1.0 to 5.4. On the consumer side, the provisional European Commission consumer confidence index is announced and expectations are for it to edge up from ‐8.8 to ‐8.3 in March, still about 2.5 points lower than the Q4 2015 average.

In the UK, CPI will see some attention tomorrow, especially the core measure as the Bank of England continue to monitor underlying inflation (MPC members have emphasised that cumulative acceleration in this is one of the things they will need to see before rate hike discussions get back on firmer footing). Core (ex. energy, food, alcohol, & tobacco) inflation is expected to remain at 1.2% y/y in February. Expectations are for headline inflation to edge up from 0.3% to 0.4% y/y. February public sector (ex. banking groups) finance data will also be announced and is expected to release at a £5.9bn deficit (compared to £7.5bn for the same period in 2015). Retail sales are published on Thursday with headline sales growth is expected to print at 3.9% y/y in February following an exceptional 5.2% in January.

Turning to the US, existing home sales are published tomorrow, and expectations are for 5.31m sales in February following 5.47m in January (the second highest reading since 2007). On Wednesday, new home sales are announced and expectations are for an increase from 494k to 510k, which would be in line with recent trends. Capital goods orders (ex. aircraft & parts) is expected to decline 0.5% m/m in February, partially in payback for an extremely strong 3.4% in January. Investors will continue to monitor the ramifications of low oil prices and a worsened outlook for world trade on business capital investment. The initial jobless claims also on Thursday will be watched as a timely indicator for the US economy in general and the labour market in particular: expectations are for 268k, broadly consistent with the encouraging levels we have seen since mid‐February.

Some important ECB governing council members speak this week, namely Vice President Constancio this morning, Nouy tomorrow and Wednesday, and Weidmann and Lautenschlaeger on Wednesday. In the UK, Bank of England Deputy Governor Andrew Bailey speaks today and Wednesday, while MPC member Kristin Forbes speaks today and Tuesday.

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