The biggest event for US markets this week was certainly Fed Chairwoman Janet Yellen’s testimony before the Senate Banking Committee on Tuesday. Indicating that if the US economy improved further, she stated that the central bank could change its language and abandon its “patient” stance (which means not to make a move for at least two subsequent meetings of the FOMC, but thereafter consider a rate hike at any time based on economic data). Yellen also made clear that the Fed would only begin tightening its monetary policy when it was “reasonably confident” that inflation would head towards its 2% target. Furthermore, she also mentioned that although the current unemployment rate of 5.7% in the US is only fractionally higher than what is deemed full employment (5.5%), a historically low participation rate and currently sluggish wage growth (+2.2%) indicate that there might still be some room for improvements.
With respect to economic indicators, inflation data released on Thursday showed that core-inflation (the change in consumer prices excluding food and energy) edged up 0.2% compared to the previous month (+1.6% versus the same period one year ago), which was more than expected by market participants. Further evidence for increasing economic activity was also delivered by stronger than expected durable goods orders that rose by 2.8%. However the good data was contravened by Friday’s downward revision of Q4 GDP data (down to +2.2% from +2.6% estimated last month) and by the latest signal of abating manufacturing activity with the Chicago PMI undershooting expectations at 45.8 points (after several other regional manufacturing surveys disappointed over the past couple of weeks). Additionally, labour data showed that more Americans than estimated filed for unemployment benefits in the past week (313,000).
Equity markets finished the week with mixed signs. While the S&P 500 slipped by 0.3% closing at 2,104.5 points after having risen in the wake of Yellen’s testimony, the Dow Jones Industrial Average ended the week flat at 18,132.7 and the Nasdaq stood even slightly higher at 4,963.5 (+0.2%). However, February turned out to be a strong month for equities as the S&P recorded its strongest monthly gain since 2011 (+5.5%). The US-Dollar strengthened sharply against the Euro driven by the aforementioned inflation data release and ended Friday’s session at 1.1196. 10-year Treasury yields trended lower during the week to end at 1.99%.
The upcoming week will deliver an interesting set of economic data that might bring some further clarity on how soon the FED will consider raising interest rates. The level of manufacturing activity in the US will be gauged by data from the ISM Purchasing Manager Index on Monday. Even more in the spotlight, however, will be the condition of the labour market: Payroll service provider ADP’s estimate of monthly change in employment on Wednesday, weekly unemployment claims on Thursday and finally the unemployment rate together with data on average hourly earnings on Friday should provide further evidence here..
Again, these data will be closely monitored by market participants as it may provide hints to the Fed’s future actions, and it will therefore also be the dominant driver for the US financial markets. Although we are of the opinion that due to the current low level of inflation and muted expectations of long-term price growth (the 10-year breakeven inflation stands at 1.72%), the Fed will not hike rates in June as some pundits expect. We do believe that volatility will increase in the short-term and investors will re-price the date of the first rate hike based on the most recent bits of new data. Therefore, as the negative trend in recent economic indicators could likely continue, short-term rates could drop in a knee-jerk reaction, potentially dragging up short-dated bonds and US equities, and muting the recent rise of the dollar.
On Wednesday, after the release in the previous days of Germany’s GDP YoY and employment data slightly above expectations and German Ifo Business Climate Index and Expectations slightly below consensus but still higher than previous data, Germany sold more than €3bn of five year bonds at a yield of -0.08%. Following recent ECB’s announcement of starting the QE program (€60bn monthly programme) in early March, also other Eurozone countries including Finland, France and Netherlands were able to sell their negative yield debt this week. This week it is worth noting that also Eurozone peripheral countries released data better than expected, among which Italian CPI (YoY and MoM) and Spanish Business Confidence Index. European CPI and Core CPI appeared stable and in line with expectations. However, even though these data suggested a possible economic recovery in the Eurozone, or at least the positive impression that the QE might be working, the euro (as other basket of currencies) fell to record lows against the dollar on Thursday due to the report from the U.S. Chamber of Commerce of larger than expected durable goods orders (rose 2.8% from last month) reinforced by St Louis Fed Chairman, James Bullard, saying that the stronger dollar was having just a marginal impact on US monetary policy and economy. This offset the 0.1% drop in US consumer prices and the EUR/USD fell from 1.1361 to 1.12057.
As concerns the United Kingdom, last week’s most important macro data included the breakdown of 2014 Q4 GDP growth figure. The 0.5% improvement on Q3 was mainly the result of net exports growth and of a 0.3% consumption increase, as consumer confidence level edged up by 0.9 to 3.9, according to EU data. This trend is likely to continue into 2015 with consumer spending being boosted by cheap oil, experts say. On the other hand, the investment component performance was disappointing; mostly because of cancelled investments in North Sea oil explorations due to the crude price fall of the last few months.
On Tuesday 24th, the FTSE 100 marked a new record of 6949, surpassing the previous closing high of 6930 thanks to cautious words of FED chairwoman Janet Yellen. In the following days, the UK’s main index remained close to such record levels, closing on Thursday at 6943. GBP further appreciated against the Euro, as a pound is now worth over 1.37 units of the single currency, compared to Monday’s 1.35 level.