One step beyond: ECB and BoE surprise with forward guidance
Equity markets seesawed to gains last week as political disturbances played off against central bank surprises, ahead of Friday’s US Employment Report. US economic news was under intense scrutiny, given the backdrop of the US Federal Reserve (Fed) potentially ‘tapering’ (reducing) its asset purchases this year. Data releases prior to the Independence Day holiday were mixed – although the Institute for Supply Management’s manufacturing survey edged back into expansion territory, the employment component of the index fell. ADP’s payrolls report showed that private sector job creation had accelerated, but the services sector slowed (all June). However, Friday’s strong report on non-farm jobs creation (+195k in June) led analysts to speculate that the Fed might begin to raise interest rates as early as 2014. The yields on US ten-year Treasury bonds climbed to their highest level (lowest price) in nearly two years as a result.
European equities managed positive gains, despite fears for US tapering and rising tensions in Portugal and Greece. Portuguese prime minister Coelho struggled to keep his government together, while it appeared Greece might fail to meet its targets for receiving its next tranche of bailout monies. Most of the market’s gains were driven by surprise statements from the European Central Bank (ECB) and Bank of England (BoE). Both broke with tradition by giving increased ‘forward guidance’ (intentions about future interest rates). ECB President Draghi ruled out a rates increase for an "extended period", while new BoE governor Carney said that the markets’ expectations for UK rate rises in 2015 "were unwarranted". The euro and sterling weakened against the dollar, which climbed to its highest level in three years against a basket of currencies. In commodities, the price of Brent oil rose to a three-month high given fears for potential supply disruption in Egypt after President Mursi was ousted from power by the military.
Shaping the markets – this week
Taper tantrums to continue?
As economic data from the US is fairly light this week, last week’s strong US payrolls report could continue to cause ‘tapering’ volatility. Wednesday sees the release of the Federal Open Market Committee’s policy meeting minutes from June. Investors will be sifting through them for clues as to what level of economic gauges might trigger tapering, its potential pace, and when the first interest rate rise might occur. In Asia, key releases are due from China covering inflation (Tuesday) and international trade (Wednesday) for June. Analysts expect consumer prices index inflation of 2.5% year-on-year (yoy), driven by a surge in food prices, while export growth could climb to 3.9% yoy. In Japan, the policy board of the Bank of Japan is to meet on 10-11 July. Although no policy changes are expected, the central bank will be conducting a quarterly review of the outlook for the economy. Monetary policy decisions in Thailand, Indonesia, Malaysia, Korea, Brazil and Russia will also be revealed as the week progresses.
In Europe, the signs of austerity fatigue in Europe’s periphery could influence finance ministers’ minds at the Eurogroup/Ecofin meeting later today (Monday), when it is due to decide whether to unlock a further €8.1bn in aid for Greece. Discussions could also encompass banking union and budgetary considerations. Industrial production data (May) in Germany, Italy, and France will be in focus as the week progresses with the euro area numbers released on Friday – expectations are for a slight decline (-0.2% month-on-month, mom). In the UK, manufacturing production on Tuesday is expected to rise by 0.4% mom in May (-1.6% yoy).