Economic and market briefing
0The ECB meets a day early as a result of holidays at the end of the week. We don’t expect any new innovations from this meeting, with the central bank clearly in holding mode. On the data front, the Euroland March final services PMI and composite PMI are likely unchanged at 48.7. February German factory orders likely rose 1.5%mom after the 2.7%mom fall in January.
Against this backcloth, we can expect markets to rebuild ECB easing expectations as peripheral economies struggle.
On the UK front, the services PMI is expected to moderate from 53.8 to 53.5, and the prospect of weak growth and low yields suggests that the pound may weaken on a trade-weighted basis.
Of course low interest rates are not ubiquitous – for example the Polish central bank meet today and are expected to keep its policy rate unchanged at 4.5%. Recent comments from Central Bank Governor Belka suggest that, although the MPC maintains a tightening bias, there’s no rush to raise rates as growth decelerates.
As for the US, the consensus forecast is that the ADP employment rose 206,000 in March, in line with the 215,000 consensus forecast for private non-farm payrolls. The non-manufacturing ISM likely eased off February’s 12-month high of 57.3 to 56.5 but this would still be above the long-run average.
The US data will be seen through the prism of the Fed minutes released last night. These were the minutes of the Open Market Committee’s (FOMC’s) March meeting and have been viewed as generally hawkish. While there was plenty of language downplaying some of the strength in the recent data, the basic message was that the underlying situation appeared to have improved and that additional easing measures were unlikely absent renewed deterioration.
This seemed to be a more hawkish message than that delivered by Mr Bernanke in his speech last week. The minutes also noted that, while the 2014 policy guidance remained appropriate now, the date could be revised if there were significant changes in the economic outlook. The US dollar gained broadly after the release, and with the Fed’s guidance statement now in play, the minutes set the markets up for a more significant US dollar reaction if the employment report were to surprise on the upside on Friday
Markets have been more interested in policy support than the substance of progress and prospects and equities weakened in Asian trading in response to the Fed minutes. The Nikkei led Asian equities lower, dropping 1.4%, followed by a 1.3% fall in Taiwan’s Taiex, and a 1% drop in the Kospi. Markets in China and Hong Kong were closed for a public holiday (Ching Ming). Meanwhile, stepping back, global PMI New Orders in March are consistent with further expansion in global industrial production albeit at a more gradual pace with some near-term regional divergences. The ISM has stabilised at just under its long run average. Anecdotes from respondents are broadly positive. East Asia is clearly rebounding with improvements in Japan, Korea, and Taiwan. Data from China has been more mixed. As for the UK, the BRC Shop Price index increased 1.5%yoy in March, compared with a 1.2%yoy increase in February.
These are markets where investors should reasonably stay focused on quality – accepting that prices can whipsaw in response to news flow, and not always in an intuitively obvious way.
James Bevan is chief investment officer of CCLA, specialist fund manager for charities and the public sector. CCLA launched The Public Sector Deposit Fund in 2011 to meet the needs of local authorities and other public sector organisations. You can follow James on twitter @jamesbevan_ccla
