World Week Ahead: Economic reality check

Monday 29th February 2016

As recent better-than-expected US economic data have reminded investors, the Federal Reserve may have reasons to lift rates sooner than thought amid the international market turmoil.

Fresh data this week on the American jobs market will be a key focus. In addition, a host of manufacturing and services data from the US, China, Europe and Japan will also garner close scrutiny in the coming days.

Last Friday, a report showed that the US economy unexpectedly grew at a faster pace in the fourth quarter than initially estimated. Gross domestic product increased at a 1 percent annualised rate, following an initial estimate of 0.7 percent.

Separate reports showed consumer spending posted the biggest increase since May, while a measure of inflation accelerated the most since October 2014.

“Growth is rebounding, inflation is picking up and stocks have recovered about half the loss posted this year. Conditions are moving back toward supporting a rate hike,” Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania, told Reuters.

The US dollar strengthened on the prospect of another rate rise, while US Treasuries weakened, pushing yields on the two-year note seven basis points higher to 0.79 percent.

“The discrepancy between the Fed’s outlook and what the market is pricing in is looking even more unrealistic,” Lee Ferridge, the Boston-based head of macro strategy for North America at State Street Global Markets, told Bloomberg. “It’s going to be good for the [US] dollar, certainly against high-beta currencies.”

Last week, the Dow Jones Industrial Average added 1.5 percent, while the Standard & Poor’s 500 Index gained 1.6 percent, and the Nasdaq Composite Index advanced 1.9 percent.

Some investors are optimistic.

“We see a lot of people that are on alert, but there haven’t really been any signs of recession from either the economic data, the surveys or our individual conversations with companies,” hedge fund manager Dan Loeb said Friday in a conference call held by Third Point Reinsurance, according to Bloomberg.

“We’ve actually increased our net exposure over the course of the month as some of these selloffs have created silly prices for securities,” Loeb noted.

Other investors are more cautious.

“The market is still very sceptical,” Ernie Cecilia, chief investment officer at Bryn Mawr Trust, told Bloomberg. “There’s a hesitancy for large, long positions to be made. We’ve remained very defensive and very selective.”

The latest US labour data set for release include the ADP employment report on Wednesday, weekly jobless claims on Thursday, and the government's non-farm payrolls report on Friday.

The latter is expected to show US employers added 193,000 jobs in February, while the unemployment rate is forecast to hold at 4.9 percent, according to a Reuters poll.

Payrolls “could actually hamper any further gains in the market,” Peter Kenny, equity market strategist at Kenny & Co in Denver, told Reuters. “People will look at that as an indicator that the Fed is more than less likely to move on rates, sooner rather than later.”

Other reports due this week include Chicago PMI, pending home sales index, Dallas Fed manufacturing survey, and farm prices, due today; motor vehicle sales, PMI manufacturing index, ISM manufacturing index, and constructing spending, due Tuesday; productivity and costs, PMI services index, factory orders, and the ISM non-manufacturing index, due Thursday; and international trade, due Friday.

The Fed is set to publish its Beige Book on Wednesday.

In Europe, Friday’s 1.5 percent gain in the Stoxx 600 Index helped limit its monthly drop to 3.1 percent.

The latest data here will show up in the form of German retail sales, and euro-zone consumer price index estimate, due today; euro-zone unemployment, and euro-zone manufacturing PMI, due Tuesday; euro-zone producer price index, due Wednesday; euro-zone services PMI, and euro-zone retail sales, due Thursday; and euro-zone retail PMI, due Friday.

BusinessDesk.co.nz

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