Risk Manager David Long shares his expert insight into January’s economic data.
Welcome to the new year. Traditionally this time of year is scant of economic data, 2018 is no different. So far there has been little economic releases to focus on. Price action has been driven more by fiscal headlines than monetary ones. Think Trumpism’s. We did have employment data for the USA and Canada, the former underperforming and the latter beating expectations in a big way. There has also been chatter about NAFTA which hosed down any bullish Canadian sentiment for the time being.
Other recent news which has given price a brief spike has been the BOJ’s (Bank of Japan) tapering of JGB (Japanese Government Bonds) purchases, which saw a few days of Yen strength. The PBOC (Peoples Bank of China) also hit the wires with, what was later denied by an official from the PBOC, that they are considering reducing their purchase of US treasury bonds. This created turmoil for 2 days, especially in the US bond and the Greenback.
Looking ahead for the rest of this month, the market will be focused on Central Banks as always. This month we have the Bank of Canada due January 18th, the Bank of Japan Jan 23rd, and the European Central Bank on Jan 25th. On February 1st we will have the first statement of the year from the US Federal Reserve, via the FOMC. This will be quickly followed by the RBA on Feb 6th, the RBNZ on Feb 8 th and the UK’s BOE on Feb 8th.
The focus for 2018 will be the US and the EU with the majority of the other central banks unlikely to be moving rates. However, they will need to be careful not to be left too far behind the curve. The US has forward guidance that they will raise rates 3 to 4 times this year, the first being in March. With the US 10year bonds already trading circa 2.5%, it will not be long until the premium enjoyed by Australia (2.75%) and New Zealand (2.85%) will be eradicated. This is already having a big influence on the antipodean currencies as the yield differential makes investing or owning assets denominated in AUD or NZD less attractive. You may have noticed how volatile and correlated the Kiwi dollar is to US interest rate yields.
The ECB minutes this week discussed the backing away from forward guidance, which will leave the market guessing as to its next move. They have stated that QE will remain at these levels until September, and beyond that, the tapering of QE to zero, with rates to remain low for some time. Without the forward guidance however, expect higher volatility around the ECB announcements as traders try to guess what will be said. Then have to position themselves accordingly.
So with the US looking to keep raising rates, the EU to reduce stimulus, the BOJ also wanting out of QE, expect these three to dominate 2018. Rates up in US means weaker Greenback for 2018 and look for the flow to head to Europe, Japan and emerging markets such as Brazil, China and even Russia.
Last thing I wanted to point out is that recently I saw some analysis on US stocks. In particular, the S&P500. Since it started trading in 1957, the number of times the first week of January was up by 3% or more is 15. 2018 makes it 16. Of those 15 times however, each and every one of those years, the S&P has finished that year by an increase of 18% or more. Make of that what you will.
Wishing you all the best for 2018.