Buckle up, the Market is driving
Following a quiet week for data, Eurozone GDP and US Retail sales come into focus today. Market consensus is expecting a slight downtick in GDP for the single currency bloc as the growth rate slowed to 1.5%, following a four year high of 1.6% in the three months through to September. Industrial production YoY is also expected to drop from 1.1% to 0.9%.
Much of the economic data from the Eurozone has printed on the downside since the beginning of the year. Underperformance on the data front suggests that analysts’ models are overstating the economy’s vigour, which opens the door for a downside surprise on the GDP front. Looking back at previous patterns, a lower than expected reading could magnify bets on the expansion of European Central Bank (ECB) stimulus in March and consequently reverse the gains the Euro has achieved over the last week due to safe haven flows.
Janet Yellen was grilled again yesterday, by the Senate this time, where a lot focus was on what remaining tools the Fed had to use. The stand out comment was that, given the current market turndown, the Fed would consider negative interest rates if it were appropriate, but such a measure was unlikely to be enacted soon. When Congress had asked the question on Wednesday Yellen indicated that negative rates weren’t an option, so yesterday’s comments from Yellen might have been a defence of the Fed’s effectiveness whilst avoiding the suggestion that rates had been hiked too early. With the Eurozone, Japan, Switzerland and Sweden already using negative interest rates, the effectiveness is yet to be proven. There is also a strong argument that if everyone adopts negative rates there would be no interest rate differential, deterring investors, and causing the banks to struggle to make money, consequently hampering lending.
With Equity markets stealing the headlines recently it’s worth noting that 19 of the 21 major global stock markets are down in comparison to the same period last year. This has been driven partly by economic fundamentals, partly by sentiment as investors follow the market down desperate not to be caught out, and partly by vicious market forces. The biggest players have decided that the asset bubble, caused by low interest rates and floods of central bank cash, has burst and are now running for cover. Eventually the self-perpetuating cycle will prompt action from central banks and this could cause even more currency volatility than we have already seen.
From a data standpoint, US retail sales are due this afternoon where economists expect to see an improvement to 0.1% MoM. Much of the US retail data has disappointed relative to expectations since November 2015, while leading survey data from Markit Economics shows that the consumer goods sector to have outperformed since the beginning of the year, hinting at the possibility of better than expected results.
Data to watch: 9am Eurozone GDP. 10am Eurozone industrial Production MoM & YoY. 1.30pm US Retail Sales MoM. US Retail Sales ex Autos MoM.