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  • Weekly macroeconomic and market update 02 March 2015

Weekly macroeconomic and market update

Here we give you a review of the major macroeconomic and market events for the week ending 27 February. This week we cover Federal Reserve Chair Janet Yellen’s recent testimony to the Senate banking committee, the latest updates surrounding Greece, and what to look out for during the week ahead.

Janet Yellen on the prospect of an interest rate hike

In her testimony before the Senate banking committee, Federal Reserve Chair Janet Yellen readied the markets for interest rate hikes – suggesting that once the ‘patient’ language was removed from the official release, we would be close to a point where the rate hike could happen at any time. Yellen also underlined the continued strength of the labour market – data which obviously came out after the previous Federal Reserve rate-setting meeting.

This makes it more likely that we could see the word ‘patient’ dropped as early as the March meeting, as well as marking a shift from forward-guidance towards data-dependence when it comes to the timing of rises in interest rates. A change in language at the March meeting would also be consistent with the many commentators who forecast a first increase between June and September.

However, our house view remains that these predictions are rather optimistic. With elements of the US labour market continuing to show weakness (particularly earnings growth), and global concerns over deflation pushing other Central banks to print money, we think a summer rate hike is far from a guarantee.

Economic data out of the US

In the US there was some disappointment as the fourth quarter GDP was revised down to 2.2% from the first estimate of 2.6%, but this had relatively little impact as forward-looking measures gave more reason to be positive. Durable goods orders rebounded considerably more than expected, up 2.8% month-on-month from the sharp falls seen previously.

House price increases also surpassed expectations, with the S&P Case-Shiller Home Price Index growing 4.46% year-on-year. The main counter to these positive developments was the Consumer Confidence index, which slipped more than was expected to 96.4 from 103.8 the month before.

The pressure is off for Greece – for now

We hope that there will be no mention of Greece in next week’s update, as Eurozone finance ministers accepted the country’s proposed reforms in order to extend the bailout – despite reservations from the IMF and ECB. At the end of last week the lower house of the German government approved the extension, although on Friday Greece also saw the first large scale anti-government riots since the Syriza party took control.

The immediate pressure is now off, although the situation is far from resolved. Most sides see this arrangement as less than ideal, and Greece still needs to deliver on agreed reforms by the end of April to secure its next payment of €7.3 billion.

Last week’s other events

  • Headline inflation in the US fell further than we expected, down 0.7% month-on-month from -0.6% expected and -0.3% the month before. Stripping out food and energy to get core inflation, the numbers appear a lot more robust, holding steady at 1.6% year on year.
  • Eurozone M3 money supply increased ahead of expectations, up 4.1% year-on-year ahead of an expected jump to 3.7% from 3.6% previously.
  • German economic measures fell short of expectations on Monday. The headline IFO Business Climate survey was barely moved at 106.8 compared to 106.7 the month before, despite expectations for an increase to 107.7.
  • Turkey cut its interest rates, reducing the overnight rate by 50 bps to 10.75% and the official repo rate 25 bps to 7.5%. There has been significant political pressure to cut the rate as the Turkish government heads towards election, which has brought into question the independence of the Central bank.
  • China also cut its interest rates, reducing the one-year lending rate 25 bps to 5.35%. This follows a similar cut and a reduction in the reserve requirement ratio last month, as the Central bank tried to manage its economic slowdown. More changes to both of these rates are forecast for later this year.
  • China’s manufacturing data indicated a modest return to growth, with the HSBC Purchasing Managers Index showing an initial reading of 50.1 from 49.7 in January (readings above 50 generally indicate expansion). However, export orders were sharply lower than last month.

The markets

Generally more muted week for markets, with much of the macro news already comfortably priced in. US equities finally broke a run of positive weeks, although most other major equity markets were up.

Graph 02-03-2015

Overall, February was a good month for the equity bulls with major markets achieving mid-to-high single digit returns in local currency terms. The Topix was the best overall performer up 7.7%, while broader equity markets as measured by the MSCI all-country world index returned 5.7% (but FTSE All-Share and Emerging Markets were laggards, returning 3.7% and 3.5% respectively). With the notable exception of high yield bonds, which benefited from the risk-on trade, fixed income suffered through the month – the Barclays Global Aggregate Corporate Bond index fell -0.56%, whilst easing in gilts led to a fall of 4.4% in the Barclays Sterling Gilt index.

Equities – European and Japanese equity markets went from strength to strength last week, up 1.24% and 1.55% respectively. Other markets were more subdued – the UK only managed +0.53% whilst the Asia Pacific and Emerging Markets grew 0.68% and 0.78% respectively. The US bucked the trend, slipping -0.27%.

Bonds – UK bonds softened modestly – they were 3 bps wider at 1.79% for the week, and a long way from the 1.33% of a month ago. Conversely, US treasuries contracted 13 bps to 2.00% through the week, as Chairwoman Yellen’s testimony was seen as more dovish than expected.

Currencies – Sterling was stronger during the week, up 0.22% against the dollar, 0.74% against the yen and 1.95% against the euro.

Commodities – Oil was firmer over the week and finished at US$62.17, whereas copper and gold both made slight increases to US$2.71 and US$1,231/ounce respectively.

The week ahead

We begin the week with US manufacturing figures, which are expected to stay in expansionary territory. Monday will also provide flash inflation readings for the Eurozone, which we are expecting to show a headline fall of -0.4%. Tuesday will see the release of German retail figures, as well as construction PMI numbers here in the UK.

On Wednesday we receive broader retail sales figures for the Eurozone, which we expect to have slowed to 1.8% year-on-year (from 2.8% in January). In the UK we get service PMI numbers too, before policy meetings at the Bank of England and the ECB take place on Thursday.

We finish the week with the first estimate of the Eurozone’s fourth-quarter GDP figure, which we expect to be 0.3% quarter-on-quarter to give full year-on-year growth of 0.9%. Friday is also non-farm payroll day, with an estimated 240,000 jobs added in February (only slightly down from 257,000 the month before). Unemployment is also expected to have reduced to 5.6% from 5.7%.

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