Weekly wrap: FOMC expected to reveal QE path on Wednesday; stimulus scares or return to calm? 17.06.2013
Source: Henderson Glocal Investors
Global equities ended a torrid week slightly lower (MSCI World $ -0.4%). Worries over quantitative easing (QE) measures in Japan and the US were largely responsible for market direction (Nikkei -1.5%; S&P 500 -1.0% in local currency terms). While concerns heightened about the scaling back of US bond-buying purchases, Japan was very much the centre of attention. On Monday the Nikkei soared almost 5% as first quarter economic growth was revised to a much stronger 4.1% annualised. But later, investors became disappointed when the Bank of Japan’s (BoJ’s) policy meeting ended without the announcement of any further monetary stimulus. There were hopes that pressure on rising Japanese government bond yields would be eased by extending the maturity of the central bank’s bond purchases to two years. Additionally, the German federal court’s vote on the European Central Bank’s bond-buying plan (OMT, outright monetary transactions) also weighed on investor sentiment as Germany’s support for the programme is key. All this uncertainty caused market volatility, as gauged by the CBOE Volatility Index (VIX), which jumped up significantly over the week. Japanese 10-year government bond yields rose while those of Germany, the US and UK fell (yields move in the opposite direction to prices). Emerging markets had a challenging week as QE uncertainty led to a sell-off in riskier assets. General weakness across commodities including copper and gold also weighed on the region.
US data releases included May retail sales, which pleased with growth of 0.6% from a month earlier, suggesting that US consumer spending remains resilient. The upgrade on the US outlook from ‘negative’ to ‘stable’ by the credit rating agency Standard & Poor’s provided further encouragement. Elsewhere, there was a slight improvement in UK jobs data; unemployment fell in the three months to April and there was a fall in claims for unemployment benefits. The unemployment rate was unchanged at 7.8%.
FOMC on QE path plus China’s manufacturing activity
In the US, look out for Wednesday’s Federal Open Market Committee (FOMC) policy meeting for the Federal Reserve’s (Fed’s) latest thinking on QE. Although inflation has been lower, the softer economic indicators of late will likely mean that the Fed is more likely to continue policy support for now. Analyst expectations are for no change in interest rates. The weak patch in manufacturing may extend into June; for evidence of this check out the release of the Empire manufacturing survey (Monday) and the Philadelphia Fed equivalent (Friday). On Tuesday the May consumer prices index (CPI) could show a modest rise in inflation owing to higher petrol and food prices, to reverse two months of consecutive declines. The positive momentum in housing is forecast to continue; housing starts (new build) and existing home sales for May are due out on Tuesday and Thursday, respectively.
In emerging markets, this morning the Reserve Bank of India kept its main interest rate at 7.25%, as analysts anticipated. We will see if there is an improvement in China’s manufacturing activity with the release of the Markit/HSBC ‘flash’ purchasing managers’ index (PMI) for the sector (May: 49.2); last month’s contraction was the first in seven months. Meanwhile, Brazil’s inflation data is out on Friday. In Europe, Tuesday brings the latest release of the June ZEW economic sentiment gauges for France, Germany and the euro area. On Thursday analysts expect continued contraction in manufacturing and services activity across most of the region (euro area composite PMI reading 47.7 previously in May). Finally, UK CPI inflation data for May is out on Tuesday (+2.4% year-on-year in April).