The mishmash of poor data from the US and fears over what exactly the People’s Bank of China are up to with their exchange rate continue to be the main market stories this week. Despite that, outside of Chinese contracts, volatility remains low as we head towards the end of the week. Data will have to contribute to the markets however, as investors seem unhappy to switch positions easily ahead of next week’s central bank risk.
Next week sees meetings from the Bank of Canada, Bank of England and European Central Bank and 7 separate speeches from Fed members.
An example of the market’s ambivalence to data came in yesterday’s Italian retail sales announcement. Sales disappointed by falling 0.3% in December on the month and 2.6% compared to the same time last year. This came a day after the new Italian PM Matteo Renzi called for a “radical and immediate change” in the country. Renzi has also pledged to review unemployment benefits, cut the tax burden by over 10% within months and pay off public debts. You campaign in poetry and govern in prose though; how well he can enforce these measures will be the cross to which he may be eventually nailed. The balance of Italian deficit spending will be key here.
Yesterday’s UK retail sales expectation announcement from the CBI destroyed expectations, rising to 37 from 14 previously showing that any flood damage did not impact retailing in February. Strong growth was seen in motor sales and orders with retailers and will quash fears that January’s slight slip in demand heralded a new decline in British retail spending.
The past week or so has seen earnings growth start to recover in the UK at the same time that inflation has started to soften. Granted, we are low against historical standards but this will provide some comfort to the MPC that inflation pressures are not going to get too far out of control. Also it increases hopes that the consumer based recovery will continue under the power of wage increases and not a falling savings ratio.
Today sees the first revision to Q4′s UK GDP number of 0.7% with the market happy to see no change at 09.30 GMT. Upside surprises are possible once December’s retail sales rocket-ship number of a 2.6% increase are folded into the calculations.
We will also receive a better breakdown of growth at this iteration and while consumption will have contributed the lion’s share we will look to see what effect business investment has had. This confidence will be the lifeblood of the new recovery. Exports will also be interesting to watch to see if recent GBP strength has had a negative effect.
US housing numbers this afternoon will likely follow the same trend as all data from the US; lower, blamed almost exclusively on the weather and having little impact on markets. The US housing market was one of the real drivers of expansion in 2012 and 2013 but this year, alongside expected higher mortgage rates, a slowing is very much expected.
