Fair is foul, and foul is fair

Wrap up - last week

• Global equity markets finished lower last week, as investors continued to fret about when the US Federal Reserve (Fed) might begin tapering its asset purchase programme. US economic data produced volatility as weaker releases renewed hopes for stimulus continuing and vice versa. ISM manufacturing data and ADP’s private sector payrolls were poorer than expected, although new orders for non-defense capital goods (seen as a measure of business confidence) increased 1.2%. Markets were on tenterhooks until Friday’s employment report: 175,000 non-farm jobs were created in May, above analysts’ forecasts, but the unemployment rate, to which stimulus is tied, ticked up to 7.6% in May triggering a relief rally. The S&P 500 Index ended the week up 0.8% in dollar terms.
• ‘Good news’ was bad for Europe; euro area purchasing managers (PMI) manufacturing indices improved, triggering a sell-off. The subdued tone continued after no policy changes from the European Central Bank (ECB) nor the Bank of England. Upbeat data on UK construction and manufacturing boosted Britain’s recovery prospects, but the FTSE finished lower. The Japanese market also underperformed; Prime Minister Abe’s growth strategy speech disappointed investors braced for fiercer economic reforms. Reports on Friday that Japan’s Government Pension Investment Fund intends to raise its weighting in foreign and domestic stocks came too late to provide much relief. In currencies, the dollar briefly fell to ¥95, before recovering following Friday’s US jobs data. Government bond markets were unsettled by the changing views on future central bank policy, with German and UK 10-year government bond yields rising (prices falling), while Japanese 10-year government yields fell.

Shaping the markets – this week

All quiet on the Western front? Fewer data releases this week, but volatility could persist

• Last week’s bumpy ride could continue, with investors digesting the news over the weekend that Chinese exports had posted their lowest growth rate in almost a year (+1.0% versus expectations for 7.4%) in May. Additionally, imports unexpectedly fell, while growth in bank lending was below forecasts. Looking ahead, the Bank of Japan’s monetary policy decision is due on Tuesday; analysts think it unlikely the bank will increase its already quite aggressive monetary stimulus programme.
• It is a relatively quiet week for data in the West: US retail sales (May) will be announced on Thursday. While headline sales could be lifted by auto purchases and falling gasoline prices, lacklustre core sales are expected to be impacted by a weaker trend in sales at restaurants and healthcare stores. Friday brings industrial production figures (May), where analysts anticipate that manufacturing output will expand 0.2% following last month’s drop. Euro area industrial production data (April) is revealed on Wednesday and inflation figures (May) on Thursday. Analysts expect a 0.2% month-on-month (mom) fall in the former, while the latter could pick up to 1.4% year-on-year in May. Investor focus could turn, instead, to Germany, where its top court votes on the legality of the ECB’s outright monetary transactions programme. In the UK manufacturing production (Tuesday) is expected to drop 0.3% mom (April), while the International Labour Organisation’s unemployment rate, announced on Wednesday, is expected to remain at 7.8% for April.