Weekly wrap: Tales of the unexpected – US data disappoints, Fed’s minutes gaffe

Source: Henderson Global Investors

Global equity markets rose last week despite a reversal of fortunes on Friday, triggered by weak US economic data. US retail sales fell 0.4% in March, while a Thomson Reuters/University of Michigan survey showed consumer sentiment at a nine-month low in April. Fresh debate about when the US would begin to unwind its US$85bn asset purchase programme kept bond investors on their toes, following Federal Reserve (Fed) minutes highlighting divisions within the committee, and an embarrassing administrative error whereby the minutes were sent to congressional employees and lobbyists before the official release. Yields on 10-year Treasuries briefly rose above 1.8% (prices fell). In commodities, gold sold off heavily after reports that Cyprus may sell some of its reserves to raise extra revenue. Investors speculated other eurozone countries might follow suit – even as European Union finance ministers gave Portugal and Ireland seven more years to pay back their bailout loans.

The Nikkei surged 5.1%, nearing a five-year high as investors rewarded Japan’s efforts to target 2% inflation. But the Shanghai Composite posted its third-straight weekly loss (-0.9%) undermined by a conflicting set of data. While China’s annual rate of consumer inflation fell to 2.1% in March, total social financing (a broad measure of liquidity) more than doubled month-on-month (mom) signalling potential risk in the financial system. Trade data showed imports soared 14.1% year-on-year (yoy) in March, with some analysts questioning data integrity. Mounting tensions on the Korean peninsula were a destabilising influence after reports that North Korea might conduct a weapons test to commemorate state founder Kim Il Sung’s birth.

Grimm story or fairytale ending? European inflation data eyed; Italy votes on new president

In the US, banks will figure strongly among the 74 S&P companies releasing earnings results this week. Also competing for investors’ attention will be macroeconomic releases on regional manufacturing data (April) from the New York and Philadelphia Federal Reserve banks, and data on consumer price index (CPI) inflation and housing starts (both March). Manufacturing surveys may weaken as fiscal austerity begins to impact the US economy, while falling gasoline prices should offset a pick-up in food prices, resulting in no material change for CPI month-on-month. However, housing starts may increase to c.930k as builders gear up for the spring selling season.

In Europe, inflation data will also be in focus (Tuesday) when the final estimate for euro area CPI (March) is released. Inflation deceleration is likely, which may raise expectations of an interest rate cut from the European Central Bank in the second quarter. The same day, investors will be eyeing the German ZEW survey (economic sentiment, April), for signs of hope – or despair. On Thursday, the Italian parliament will begin voting for president Giorgio Napolitano’s replacement. In the UK, yoy CPI figures (March, Tuesday) are unlikely to have improved from 2.8% last month. Labour data and the minutes from the recent meeting of the Bank of England’s rate-setting committee will both be published on Wednesday.