Markets Looking for Direction

CONFLICTING SIGNALS Markets have struggled to find direction the week amid a host of conflicting signals. On the one hand, Covid-19 cases and deaths have continued their uptrend across most of the Northern Hemisphere. That has meant that economic growth has slow ed in most economies and, in some cases, it has stalled or even started to slip. On a more positive note, recent economic data are showing that the hits from the most recent lockdowns are far smaller than last spring. Moreover, the vaccine roll-out is gathering pace in a number of countries. For example, the US said this w eek that 10 million of its citizens had already received at least one jab. Finally, US President Biden’s announcement of plans for another major fiscal stimulus is an additional support for growth expectations.

Against this background, while market sentiment has been less ‘risk on’ than in the first few trading days of January, the mood is also not overwhelmingly ‘risk off’. For instance, while many equity markets seem to end the w eek down, they have only lost a fraction of the sizeable gains of the previous w eek. In bond markets, the most notable move of the year so far has probably been the rise in longer-term US Treasury yields. Another new high for the year was touched at one point this w eek before comments from Fed Chair Powell and other senior Fed officials helped calm fears for now that a ‘tapering’ in Fed asset purchases may come as soon as this year. Meanwhile, in currency markets, the US dollar has appreciated against the Euro this week, while sterling has posted gains against the Euro and the US dollar.

UK PMI AND RETAIL SALES DATA IN FOCUS The UK posted a smaller than forecast fall in November GDP of 2.9%. It was driven by a slip in services activity while in contrast manufacturing and construction both rose. There were also upside revisions to previous months which means that the post spring lockdown rebound now looks stronger than previously estimated.

Potentially of most interest within next week’s busy UK calendar may be the January PMIs. Last month’s data saw rises in all measures. although services stayed below the 50 level that signals expansion. The services reading is likely to be down in January given the further tightening in restrictions but possibly by less than is generally expected. We forecast a fall to 48.5 from 49.4 in December. Last month’s manufacturing number seemed to have been boosted by preparations for post-Brexit disruptions and so w e also expect a modest fall this month to 56.0. Retail sales declined in November for the first time since May as the impact of the lockdown was felt. We think another drop of around -0.5% is likely to have occurred in December. That will leave sales close to flat for Q4, but that follows a rise of over 18% in Q3. The GfK consumer confidence measure is forecast to be -29 in January down from -26 in December but still above November’s -33 reading. Annual CPI inflation is forecast to have picked up to 0.6% in December from 0.3% in November. That would still it leave more than 1% below the inflation target. Finally, December public finances data w ill provide further evidence on the ongoing huge rise in the deficit and debt levels.

Both Bank of England Governor Bailey and Chief Economist Haldane are scheduled to speak next w eek, but it looks as though they w ill not be primarily focusing on the near-term outlook for monetary policy. This week’s comments from Bailey suggested that the BoE is still assessing the impact on the financial sector of a move to negative interest rates, causing markets to conclude that such a move is probably unlikely to happen in the next few months.

ECB IN WAIT-AND-SEE MODE Monetary policy is expected to be left unchanged at next w eek’s European Central Bank meeting. As the ECB made some significant easing moves at its December meeting, it would seem strange if further action w as considered appropriate right now . However, it w ill be interesting to see to w hat extent the ECB’s view on economic developments have changed in response to the recent rise in restrictions. ECB President Lagarde said this week that she felt the ECB’s December projections w ere ‘still plausible’, but by that she may have meant that the vaccine rollout will still lead to a strong rebound later this year. In the meantime, January Eurozone PMI data are likely to show falls with manufacturing down 54.5 from 55.2 and services to 45.5 from 46.4. More positively w e expect the German ZEW survey to post a second consecutive rise in its expectations reading to 60 in January from 55 in December reflecting growing confidence conditions w ill improve later this year. To discuss how the above may affect your money transfer requirements, please contact your Currency Dealer at Heritage Pay on +44 (0) 207 117 2934.

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