With the US off on a Columbus Day holiday, the focus of today’s session will be on Europe. Saying that, the focus of the remaining quarter of 2014 is likely to be particularly European given the divergences that are starting to become more and more evident. Divergence is a great word and sums up the state of capitalism better than most. The splitting and separating of terms, paths, ideas, conclusions and ultimately performance are core to the belief of efficiency within markets. It is this divergence within and without Europe that sets up the euro as the currency to watch as the curtain falls on 2014.
Following the IMF’s rather depressing re-evaluation of global economic strength last week and the recent run of extremely disappointing European data, particularly that from Germany, the scene is set for a showdown between the European Central Bank, markets and politicians within Europe. Those of you who tuned into our ‘Bank of England Webinar’ last week will have heard me describe the three factions at action in European economic policy at the moment.
The first, led by ECB President Mario Draghi, is those who are looking for a more accommodative monetary policy from the European Central Bank to further support business and lending within the Eurozone. The second are those members of the European Central Bank who are against these unconventional measures, led by Bundesbank President Jens Weidmann. Thirdly are the Eurozone politicians who may be eventually called upon to change the rules of the Eurozone in order to allow the European Central Bank more room to manoeuvre. Decisions and battle lines will be moved depending on the data cycle this week with the German ZEW reading of economic strength on Tuesday and Wednesday’s inflation readings the stand out releases.
The disappointing Federal Reserve minutes last week that saw a real lack of hawkish noise from the Federal Open Markets Committee has kept the USD pinned back from its recent highs. Looking through this publication it is obvious to us that the Federal Reserve seems to be petrified of rattling markets on rate hikes. As we stated upon publication, the ‘dot chart’ of rate expectations published on the day of the meeting had rates higher at the end of 2015/16 than the previous iteration, yet the market, which had pulled in expectations of the first rate hike to as early as June of 2015, have now kicked them out into Q4. The disconnect between data and the language used by the Federal Reserve will in my opinion keep the USD very much in favour as we head towards the turn of the year.
Apart from a fall on Friday, prompted by the by-election win of UKIP candidate Douglas Carswell, GBP had a rather quiet week. This week however, the run of inflation, jobs ad wage data that forms the crux of the real wage argument are due. We are still calling for a rate hike in February of next year, despite the continuing strength of the economy; we anticipate that November will still be too soon for most MPC members. Some market predictions of rate increases have slipped as far out as Q3 2015; far too far in our eyes and a likely support for sterling on improved data sentiment.
Improved data from China has not been able to turn around global markets that seem likely to open this session. Faster export growth in September – a 15.3% increase on the year – driven by the new iPhone is all well and good in the short term but the domestic demand picture remains poor in our eyes and represents a real risk to Chinese growth. The protests in Hong Kong are now moving into their third week with market risk seeping back from their rather extreme levels.
