FX markets have taken rising bond yields and the prospect of tighter Fed policy in their stride; it was the equity markets that reacted violently to a re-pricing of US monetary policy. With this in mind the week ahead contains some key releases on US inflation and retail sales that could deliver more volatility for financial markets.
Coming off the back of rising bond yields, the surprising rise in US wages in the nonfarm payroll report was the cue for a big selloff in stock markets. Markets appeared concerned that average earnings growth of 2.9% suddenly heralded the end of cheap money, a more hawkish Fed and higher rates. An overreaction perhaps, and one that was undoubtedly compounded by some technical moves in the Vix and short volatility trades, but nevertheless markets are having to adjust to normalisation by the Fed.
So US CPI inflation due on Wednesday will be central to both FX and indices this week. The last report indicates that price pressures are building. Core inflation accelerated to 1.8% in December on an annual basis, after a surprisingly strong 0.3% increase month-on-month.
If the January data shows signs of further price growth, we could justifiably see further selling on Wall Street. Inflation expectations have risen and if the hard data supports, yields could rise further and there may be hurt on Wall Street.
Also due this week is the monthly CPI print in the UK. After the Bank of England last week, this will help steer market expectations around a possible rate hike. While inflation is seen holding at or just below 3%, there is a risk that an expected decline this year in the headline CPI rate could fail to materialise if oil prices and higher business input costs feed through to consumers.
Early Wednesday morning sees the release of New Zealand’s inflation expectations data. Despite the global move to tighten by central banks, the Reserve Bank has stressed that rates could just as easily go down as up. Indeed last week it held interest rates at the record low and forecast they would remain there until the middle of next year. If inflation does creep, it could catch the RBNZ out.
US retail sales come out alongside the CPI report on Wednesday and will provide another good indicator of the US economy’s health. There was robust selling in November and December, so a cool-off in January may be expected.
Again, the UK follows the US with retail sales for Britain due on Friday. Having seen a lot of trouble in the retail stocks following a fairly mixed performance over November and December, this figure will not only be important in FX for cable etc, but could produce a read across for a number of UK blue chips such as Next, Marks & Spencer, Tesco and others.
As ever Brexit looms large over the pound as talks remain ongoing after some fresh rounds of discussions over the last week. There is increasingly a sense that time is running out and the two sides need to come to an understanding on future relationship is sooner rather than later. Latest warnings suggest that if firm arrangements are not in place soon businesses will have to start enacting worst-case scenario plans. Meanwhile, the disagreements on the UK side continue to put Theresa May under pressure.
It is hoped that a transition deal will be agreed in time for EU leaders to give it the green light at a Brussels summit later in March.
Source: ETX Capital