Weekly wrap: After the disappointment of US nonfarm payrolls all eyes are on the Fed and the outlook for QE
Source: Henderson Global Investors
Thursday’s radical stimulus measures announced by the Bank of Japan took most investors by surprise. With a new governor at the helm, the central bank pledged to pull Japan’s economy out of deflation, through monetary easing measures that are aimed at achieving a 2% inflation target. The yen slid against the US dollar and the euro while Japanese equities rallied sharply.
The second shock wave arrived on Friday in the form of disappointing US nonfarm payroll numbers, which dropped to the lowest level since June 2012. The news that the US economy added only 88,000 jobs in March followed a number of other weak data earlier in the week, including poor services and manufacturing numbers, throwing into question the strength of the US economic recovery. On the bright side, factory orders were at their highest in five months, and nonfarm payrolls for January and February were revised up significantly.
While global equity markets came under pressure following the US data on Friday, with the exception of Japan that continued to rally, Asian markets also had to contend with geopolitical tensions around North Korea, and bird flu cases reported in China. In Europe, the European Central Bank left the door open for a rate cut. Portugal was in the news over the weekend as their constitutional court rejected austerity measures needed to meet mandatory deficit targets and the UK narrowly missed losing its AAA status with rating agency Standard and Poor’s.
Fed minutes and speeches sharply in focus after the unpalatable nonfarm data
Given the dent to investor confidence regarding the strength of economic recovery in the US, markets will be keenly watching the chairman, Ben Bernanke, and other Federal Reserve officials speak this week. Together with the release of the minutes of the March Federal Open Market Committee meeting minutes (Wednesday), observers will be looking for clues on the outlook for additional asset purchases and the continuation of quantitative easing.
The week after the release of payrolls tends to be fairly data-light in the US; data to watch include advance retail sales and consumer confidence (Friday) where expectations are around no meaningful changes. Q1 earnings season also gets underway with Alcoa’s report.
In Europe, an informal EcoFin/Eurogroup meeting of finance ministers begins on Thursday. On the agenda are the Cyprus bailout, and the review of Portuguese and Irish programmes. The euro area industrial production number for February (Friday) is expected to remain weak while the UK RICS housing survey for March (Tuesday) is likely to point to a decline in the sector because of the unusually cold weather.
China will release its latest consumer price index inflation reading (Tuesday) and trade data (Wednesday). The former is likely to have declined in March to 2.5% year-on-year, from 3.2% previously. Export growth should normalise following the strong performance seen in February (as a result of unusually high levels of exports to Europe and the US), while imports will likely reflect a gradual recovery in domestic demand.