Weekly wrap: Guidance is golden? Will BoE commit to revealing future interest rate intentions? – 06.08.2013
Source: Henderson Global Investors
Wrap up – last week
Not too hot, not too cold; global economy warms up, while central banks remain dovish
Investors were kept on their toes as the corporate earnings season reached full flow, delivering a number of positive earnings surprises. Global equities rose over the week, helped by generally encouraging economic data, while central bank policy meetings also proved supportive. Stateside, the eagerly awaited non-farm payrolls report showed the US economy had added 162,000 jobs in July, below analysts’ expectations, although the unemployment rate, upon which US quantitative easing (QE) is contingent, dipped from 7.6% to 7.4%. US gross domestic product (GDP) grew at an annualised rate of 1.7% in the second quarter, driven by business investment and consumption, beating expectations for a figure closer to 1%. Helping to allay investors’ fears about the Fed ‘tapering’ QE, the central bank sounded a dovish note at its meeting on Wednesday, saying persistently low inflation could hamper economic growth. Over the week, US ten-year government bond yields rose (prices fell) while the dollar strengthened against most of its peers.
Manufacturing data was in focus as a number of key economies boasted improvements in their July purchasing managers’ indices (PMIs). In the US, the Institute for Supply Management (ISM)’s factory index surged to 55.4 (>50 signifies expansion), while the UK Markit/CIPS PMI climbed to its strongest level since March 2011. Also welcome was news that eurozone manufacturing had returned to growth, rising to a two-year high. China’s official manufacturing data also evidenced expansion, contradicting HSBC’s reading. It was a busy week for policy: China’s Politburo pledged to focus on achieving steady economic expansion in the second half of 2013, while the People’s Bank of China twice injected cash into the money markets to aid liquidity. As expected, both the European Central Bank (ECB) and Bank of England (BoE) kept their policy settings unchanged, ECB President Draghi reiterating that European interest rates would remain at current levels or lower “for an extended period”.
Shaping the markets – this week
Guidance is golden? Will BoE commit to revealing future interest rate intentions?
Monetary policy will remain a hot topic this week. While the BoE did not issue a statement alongside its rates decision last week, there is a possibility that it might introduce clearer forward guidance about future interest rates. Chancellor George Osborne has asked the bank’s new governor Mark Carney to broker agreement among the bank's policymakers on the issue, the outcome of which should be revealed on Wednesday, alongside the UK’s Quarterly Inflation report. Also in the spotlight, will be UK manufacturing production for June (Tuesday). Expectations are for a turnaround compared with May’s negative readings. In the euro area, investors will be awaiting the ECB’s monthly report (Thursday), which will set out their outlook for credit, inflation and the economy. June industrial production data from Germany (Wednesday) and France (Friday) is also due for release.
In contrast, it is a relatively quiet week for the US. Investors should look out for July’s ISM non-manufacturing index (Monday), June’s trade balance data (Tuesday) and weekly initial jobless claims data (Thursday). In Asia, monetary policy decisions are due in Korea and Japan (both Thursday), although expectations are for no change from either. Chinese data for July could dominate towards the end of the week, with export data due for release on Thursday, while consumer prices index (CPI) inflation, retail sales, and industrial production are scheduled for Friday. Chinese CPI inflation could move up to 2.8% year-on-year (yoy), spurred by rising food inflation, whereas industrial production is expected to show growth of around 9% (yoy).