This week is going to be a busy one for earnings and economic news. There are 82 European and 143 US companies reporting this week. So far this earnings season, results continue to be reasonable in terms of profits, but with disappointing revenue growth.
As far as economic data are concerned, monetary policy will be in focus. After Japan left policy unchanged last week, the Federal Reserve Open Markets Committee (FOMC) and Bank of England’s Monetary Policy Committee (MPC) are expected to do the same this week. US data have been weak recently, and this underlying trend has largely flushed out expectations that the FOMC will taper its asset purchases over the course of 2013 (the term “tapering”, meaning slowing, was introduced in the minutes of the last Fed meeting). We continue to believe the Fed will maintain the rate of asset purchases ($85bn per month) throughout this year as the impact of lower government spending starts to weigh on the US economy.
On this front, US GDP was a touch disappointing at a headline level on Friday (2.5% rather than the forecast of 3%), but the strength of the consumer spending component was reassuring. It suggested that, in the early months of 2013 at least, consumers were enjoying higher disposable incomes a result of lower fuel, food and mortgage costs. By contrast the impact of the 2% payroll tax hike which became effective at the end of 2012, and more broadly the impact of sequestration (mammoth US government spending cuts) had so far been weathered by the economy. The impact of sequestration will be more intensely felt in the second and third quarters of 2013.
The Bank of England has probably seen just enough economic resilience (UK GDP beat expectations) to preclude a further bout of quantitative easing. The dovish camp currently contains three members so a further two converts would be required to bring about a change in policy.
In the eurozone, however, a thin majority of forecasters are now expecting the ECB to lower the headline “refi” rate (the eurozone equivalent of the UK’s base interest rate) by 25 basis points. Whilst recognising that it wouldn’t achieve much in practical terms, we expect a cut on Thursday as a precursor to an unconventional monetary response at the June meeting. With a marked downturn in German economic data we believe the pressure on the ECB to act has been ramping up significantly over the coming weeks. This afternoon showed the German rate of inflation falling to 1.2%, its lowest level since September 2010
There are a lot of data from the US this week covering confidence and house prices, but the main focus will obviously be the non-farm payroll numbers on Friday. The market is looking for just 150k news jobs, below the 200k trend of the last two years, but we suspect most commentators will be looking for revisions to last month’s disappointing 88k report.
Head of Portfolio Strategy