U.S. GDP Disappoints Forecasts but market will await Friday’s NFP before declaring USD weakness.
China PMI slips in to contraction
Greek PM seeking ECB agreement as end of February deadline approaches.
Reserve Bank of Australia anticipated to ease on Tuesday.
The EUR/USD is rising as the european session is underway after an eventful end to January. The main factors continue to be: central bank intervention, growth forecasts and the escalating political uncertainty that affects Europe. The European Central Bank continues to be in the spotlight after launching a much expected quantitative easing program to boost the Euro zone economy was launched. The political situation in Greece is forcing the newly elected PM to rebuilt bridges he burnt a week ago during his victory celebration.
The US gross domestic product figures disappointed by missing the 2014 fourth quarter forecast. In the quarter the U.S. economy expanded at a rate of 2.6 percent, this is lower than the anticipated 3.0 percent. Growing doubts about the ECB’s QE effectiveness, Greek diplomatic skills and sustained U.S. growth started a week that will end with Friday’s U.S. non-farm payrolls report.
ECB Confirms Greek Banking Drama Dealine
ECB Governing Council member Erkki Lkanen said that Greek banks would be cut off from ECB lending if a deal isn`t reached before the end of February. The bailout agreement talks that Greek PM Alexis Tsipras wishes to renegotiate will not start until May but the ECB has made it clear the current deal has to be honoured to continue to provide liquidity to embattled Greek banks. There have been an estimated 11 billion euros ($12.5 billion) withdrawn in January as the election outcome become clearer.
Angela Merkel, Germany’s chancellor, has avoided contact with Tsipras preferring to communicate via statements to the press. The newly elected greek PM has not made many friends in Germany with his first actions after winning a landslide election. His choice of appointees as part of his cabinet as well as his comments on the bailout have put him in a collision course with the experienced German politician. The chancellor’s goal is to try and isolate Tsipras although the anti-austerity movement continues to gain allies the most prominent are Spanish political party Podemos which leads in the polls and Italian PM Matteo Renzi. Germany is questioning Tsipras pledge to cut Greek debt in half, and even more skeptical about the ability of the new government to raise exceptional funds from long time ailments such as corruption and tax evasion while backtracking on privatization.
Reserve Bank of Australia Expected to Ease
The RBA meeting in Tuesday will be a key event this week as the market is pricing in a 65% chance the central bank will lower the cash rate 25 basis points to 2.25% and there is a broad consensus the Australian central bank will at least signal rate cuts are coming. The RBA has held rates at 2.5% since August 2013 and will likely ease to boost the nation’s employment picture as it battles declining exports due to the China’s slower growth.
Central Banks to Watch This Week
Turkey’s central bank is considering an extraordinary meeting to cut interest rates. Policy makers will make a decision Tuesday, when the state statistics agency will unveil the January inflation rate. Depending on the “strength of disinflation we will decide whether to call a meeting or not,” Governor Erdem Basci told reporters on the sidelines of a conference. The rate of inflation is a concern and politicians are asking for a proactive action from the central bank even as the TRY continues to depreciate as it has lost 5% versus the USD in 2015.
The Bank of England is expected to hold rates during its Official Bank Rate announcement on Thursday. The last rate vote was revealed to be unanimous, to hold the benchmark rate at record low, by the minutes of the MPC. Caution over the global macroeconomic picture and the outcome the UK elections will probably have the BOE on the sidelines.
Reserve Bank of New Zealand Governor Graeme Wheeler will be speaking to an Employer’s Chamber of Commerce. A regular activity as part of his tenure guiding New Zealand’s central bank but with the current emphasis on surprise actions from policy makers in 2015 the market will be watching for Governor Wheeler’s words as he is bound to talk about the NZD.
Global Growth Fears Rise After U.S. GDP and Chinese PMI
The Chinese Manufacturing sector suffered a setback in January as the HSBC purchasing managers index (PMI) came in below 50. The January reading was 49.7 compared to 49.6 in December. A slight improvement but still below what would be considered an expansion of the sector. Given the U.S. miss of fourth quarter GDP growth on Friday the market will be on the lookout for indicators that validate the slowdown narrative. The weaker China PMI also puts pressure on the PBOC as previous mini-stimulus measures have had mixed results and it might be time for a deeper intervention.
Non-Farm Payrolls in Spotlight After U.S. GDP Miss
The GDP numbers out of the United States disappointed by missing the 2014 fourth quarter forecast. In the quarter the U.S. economy expanded at a rate of 2.6 percent, this is lower than the anticipated 3.0 percent. Taken out of context it looks like the U.S. economy is struggling and some the immediate reaction did not take into account the global financial markets. Growth forecasts have been cut around the world so it should not be a total surprise that after an impressive Q3 the U.S. would slow down. Corporate investment was low and with the price of oil at current levels will discourage Energy companies as some are already closing unprofitable wells and new projects are on pause.
Friday’s NFP will capture the attention of the market as the U.S. economy continues to be an oasis in the dessert of economic uncertainty. The U.S. Federal Reserve has indicated that future policy decisions are “data dependent”; and the focus will be on the entire NFP report – not just the headline numbers. Average hourly earnings disappointed last month and the market took it as a sign that the Fed would be delaying its interest hiking schedule. The central bank can afford to be patient and only the sustained growth of the U.S. economy can pressure it into quick starting a tightening cycle.
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