Weekly look-ahead

By David Morrison  |  05/01/2018 15:55

Data-light

There’s relatively little in the way of important data releases due out next week. There’s really nothing until Wednesday when we have UK Manufacturing Production and US Crude Oil Inventories. Thursday sees the release of US Producer Prices and Unemployment Claims while the main event comes on Friday with US CPI and Retail Sales.

Stock market rally to continue?

But the dearth of data doesn’t necessarily mean that markets won’t be moving. Most importantly, investors have to consider if US stock indices can continue to post fresh record highs and if the US dollar will take out its multi-year low versus the euro hit back in September last year. As far as US equities are concerned, it seems that investors have little concern about current high valuations or the potential impact of tighter monetary policy. Instead they prefer to focus on continued earnings growth, Trump’s business-friendly administration and the overall feeling that ultimately central banks will quickly step in to prevent a significant market correction. For now, it appears there’s nothing out there which could possibly upset the current market exuberance. Yet every additional fresh record close-out brings the market closer to an inevitable downside correction. As Hyman Minsky pointed out: “Stability breeds instability.”

EURUSD tests resistance

As for the dollar, next week could prove crucial in terms of where it goes next. The EURUSD tried and failed to take out its September high (just under 1.2100) on four separate occasions this week. If this level of resistance holds, and if the Dollar Index continues to trade above 91.00, then we may begin to see a reversal in the greenback’s fortunes. If this were the case, then we should expect to see pull-backs in both gold and silver. However, if the dollar continues its decline next week, then dollar-denominated assets should all get a boost. Much will depend on US Treasury bond yields which were recovering (and therefore dollar-positive) on Friday afternoon after their post non-farm payroll sell-off.

Non-Farm Payrolls

We rounded off this week with the final Non-Farm Payroll report of 2017. Headline payrolls rose 148,000 which was well below the 190,000 increase expected. There was an upward revision of 24,000 to the prior month’s reading. But this was more than offset by a reduction of 33,000 jobs to October’s release.
The Unemployment Rate came in at 4.1% - unchanged from last month, and remains at its lowest level since December 2000. Meanwhile, Average Hourly Earnings rose 0.3% month-on-month as expected. This was up from November’s +0.2% gain and will be encouraging as far as the Federal Reserve is concerned who are still looking for inflation to pick up towards their 2% target.
Market-wise there was an initial knee-jerk sell-off in the US dollar and a corresponding rally in precious metals. Although these moves were completely unwound by the time the New York stock Exchange opened. There was relatively little reaction from US stock indices which continue to rally as we get further into 2018.

Euro zone inflation

Last Friday also saw the release of Euro zone inflation data. The latest Flash CPI estimate rose 1.4% year-on-year. This was in line with the consensus forecast but down on the prior month’s reading of +1.5%. Meanwhile Core CPI (excluding food and energy) was up 0.9% from the same time last year, unchanged from the previous month but below the consensus expectation of +1.0%. Overall, this should prove a disappointment for the European Central Bank (ECB) which, as with the US Federal Reserve, continues to fail to drive inflation up towards its preferred target. 

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