Economic events of this week

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Monday: The Producer Prices Index will be released in Spain, currently still at a 1.2% annual deflation. Tuesday: May Consumer Confidence Indices will be released in France and Italy. In the U.S., analysts except April’s Durable Goods Orders to decrease by a monthly 0.7%, following a 2.6% increase recorded last month. Also due in the U.S. are the Markit Purchasing Mangers’ Indices for the Composite and Services sectors and May’s Consumer Confidence Index. Wednesday: Germany will see the release of May’s Unemployment print, which analysts expect to remain at 6.7%. The Eurozone’s aggregate Consumer Confidence print will also be released. Indications on the real estate market will be provided with the publishing of the MBA Mortgage Applications. Thursday: The final estimate regarding the first quarter’s Gross Domestic Product print will be released in Spain. The U.S. will see the second estimate for the same figure released and the weekly Initial Jobless Claims. Friday: April’s Jobless Rate will be released in Japan, where analysts expected it to remain unchanged at 3.6%. The Nationwide Consumer Price Index will also be released – prices could become more volatile as the effect of Abenomics picks up. Preliminary indications of Spain’s May CPI will also be released, analysts expect a mere 0.3% annual increase. Italy will see the publishing of a preliminary May CPI print. In the U.S., April’s Personal Income and Spending data will be released, in addition to the Chicago Business Barometer and the University of Michigan’s Consumer Confidence Index. Start Trading HERE!

Temporary maneuvers in a terminal situation

The minutes did note a joint session being held between the Federal Open Market Committee and the Board of Governors where the “eventual normalization of the stance and conduct of monetary policy” was discussed. However, those were said to have been undertaken as part of prudent planning, while stressing that it “did not imply that normalization would necessarily begin sometime soon”. Moreover, the mere idea of "starting to consider the options for normalization at this meeting" was described as prudent, while suggesting the first steps in normalizing policy have yet to become appropriate. At the bottom line, the minutes stressed the fact that no decisions regarding policy normalization were taken, while meeting-participants noted that "it would be helpful to continue to review these issues at upcoming meetings". In conclusion, the Fed managed to assure markets it was attending to the question of when it will increase interest rates, it is simply too early to disperse any information regarding when that will actually happen. It managed to avoid a bullet in the sense that unlike previous comments on the matter, this time no turbulence was witnessed in interest, and subsequently all other, markets, with the release of the minutes. However, the mathematical fact outlined above regarding the imminent end of tapering still holds. The Fed can try using temporary maneuvers in what is essentially a terminal situation, but it will have no alternative rather than changing its strategy at some point. Start Trading HERE!

Tapering, unguided

The Federal Reserve got itself into a cumbersome situation in recent months as it tried to establish an alternative monetary policy to that outlined in Ben Bernanke’s term. The release of the Federal Reserve’s April minutes last week presented a good opportunity to skim over its rough edges. The Fed has an incentive to continue tapering its asset purchase program. At 4.3 trillion dollars, the Fed’s Balance Sheet is more than five times larger than it were a decade ago. On the other hand, at currently 45 billion dollars a month, reducing asset purchases by 10 billion dollars can only continue for a limited amount of time – four Fed decisions to be exact. The Fed knows that once QE is off the table, it will need to address its future monetary policy. Providing any indication now as to what that might be has an increasingly larger effect on the markets. With the above a given, it is clear why April’s minutes, released on Thursday, had the incentive to convey a message of continued tapering. The usual review of the Fed’s take on the U.S. economy was provided at the minutes. Namely, it was mentioned that most of the meeting’s participants expected to see inflation returning to 2% within the next few years. Downside risks to growth were also said to have been found at the housing sector. A number of participants even expressed concerns that a persistent slowdown in housing could pose a risk to economic growth. Promises as to the day after QE3 ends were, however, avoided.

Economic events of this week

Monday: The Rightmove National Asking Price indicator will be published in the U.K, after surging by 2.6% last month. March’s Machine Orders data will be published in Japan, after those presented a 10.8% annual growth, in the latest figure. Tuesday: The All Industry Activity Index is due in Japan. Analysts expect last month’s 1.1% decrease reverting to a 1.6% increase. April’s Consumer Price Index is due to be released in the U.K. Analysts expect it to continue indicating a below, but close to 2% annual inflation. The Producer Price Index will also be released in the U.K., but analysts see that presenting milder figures. Wednesday: The day will see the BoJ issue a monetary policy statement, followed by Governor Kuroda holding a press conference. Retail Sales data will be released in the U.K. This will be followed by the Eurozone’s Consumer Confidence Index. In the U.S., the Fed will release minutes from April’s meeting. Thursday: The Markit Manufacturing Purchasing Managers’ Index will be published in Japan. China will see the GSBC Manufacturing Purchasing Managers’ Index published. The day will also see PMIs published throughout the Eurozone, namely France, Germany and the Eurozone Aggregate. The U.K will see a preliminary estimation of the first quarter’s GDP being published. In the U.S., the weekly Initial Jobless Claims will be published, after dropping below the critical level of 300K (see above). Further in the U.S., May’s Markit Purchasing Managers’ Index will be published, analysts expect it to increase even higher, from a previous print of 55.4. Also due are Existing Home Sales and the Leading Index. Friday: The day will kick off with the publishing of Germany’s final estimation of the first quarters’ GDP. This will be followed with the IFO Business Survey. In the U.S., April’s New Home Sales figure will be published. Start Trading HERE!

Weekly Market Review: Euro continues to weaken against the Dollar

The volatile trading between the Euro and the U.S. dollar, due to speculation of monetary measures enacted by the ECB, morphed into rather muted trading early last week. It started with the Euro being left battered and bruised from Draghi’s dispersion of dovish remarks, and trading at 1.375 Dollar to the Euro, a level unseen since the beginning of April. The weakening of the Euro was re-ignited on Tuesday, as an article on the Wall Street Journal stated that the German Bundesbank would be willing to back the European Central Bank in "an array of stimulus measures". The idea that the Bundesbank, often considered hawkish-oriented in its advocated monetary policy, could support more dovish policy, helped further weaken the Euro - sending it to trade 50 pips lower versus the Dollar, at a level of 1.371. Wednesday saw the publishing of numerous April European Consumer Price Indices. However, many of those were final estimations of previously announced preliminary figures. Knowing this, investors needed something rather extraordinary in order to shake the markets. Another dosage of the usual muted inflation wouldn’t suffice to send the Euro trading lower versus the Dollar. Evidently, “the usual” was somewhat of understatement to what followed. It started the Germany CPI’s final estimation confirming the preliminary figure at a muted but tolerable 1.1% annual increase, continued with the French CPI presenting 0.7% annual inflation at slightly below analyst expectations of 0.9%, and even saw Spain confirming a positive 0.4% annual inflation print. With nothing out of the ordinary to shake things up, the Euro gained 10 pips against the dollar.

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Up to a certain point

Market participants saw the Euro slide further versus major currencies on Thursday, fueled by European Central Bank Vice President Vitor Constancio promising the bank would act "swiftly" if needed to battle the low level of inflation prevailing in the Euro Zone. The rest of the day saw the U.S. Initial Jobless Claims published to indicate that only 297K claims have been submitted during the previous week. Aside from breaking the 300K Initial Claims limit, this is also the first time since May 2007 that such a small number of claims were submitted. Interestingly, the effect on the markets was limited, mostly due to the Fed's efforts to make the labor market less cardinal in determining future policy measures. The soon-to-follow release of April’s U.S. Industrial Production decrease by 0.6% Month over Month, versus analyst expectations for a 0.7% increase had a stronger impact on markets sending EUR/USD trading as high as 1.373. Like most rollercoaster rides, this one ended with the EUR/USD at the 1.371 level in which it started. In conclusion, we see that the ECB's promises of more Dovish measures continued translating to a weaker Euro. However, this only held up to a certain point. With the ECB’s June 5th announcement, showdown is nearing, and no central bank possesses the privilege to fold. Start Trading NOW!!