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Events in the Crimea are expected to keep driving volatility across financial markets in the coming week
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The mid‑week US FOMC meeting, chaired by Janet Yellen, is likely to announce continued “tapering” and possibly change its forward guidance methodology.
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The US and EU data calendars are much busier with CPI and industrial output updates.
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Australia’s February jobs rise of 47k was much stronger than expected but was offset by weak China releases.
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Australia’s data calendar is reasonably light in the coming week with only the RBA’s February Board Minute
Financial markets had a roller coaster week, thanks mainly to events in the Crimea. A referendum in that region over the weekend, and international reaction to it, could prolong the volatility for shares, currencies and bonds. The US FOMC meeting may add to market moves if they depart from current views about the tapering program.
On Thursday the RBNZ lifted the Overnight Cash Rate, which had stayed at 2.50% for 3 years, to 2.75%. The ASB Chief Economist, Nick Tuffley, analyses in an article inside, the RBNZ’s reasoning. He forecasts the OCR to rise further over 2014 and 2015. NZ QIV GDP data this week is expected to show annual growth above 3%.
Australia’s financial markets received some shocks on Thursday. The first was a startling 47k jump in February jobs, with some upward revisions, unpalatable for some, to a previously quite weak history. Bond yields and the AUD/USD jumped initially, then regained some composure as more details about the survey methodology emerged. In our view, the February spike in employment is a “statistical reversal” of previously reported weak numbers given the limitations of a survey‑based data measure. On a three‑month average basis, jobs growth is around 14K. Firm population growth means around that 18K jobs are required every month to keep the unemployment rate stable. So it is reasonable, in our view, that while the short term risk remains with a rising unemployment rate, market watchers should prepare themselves for a gradual improvement in the jobs market around mid‑year. Markets are now pricing in the next RBA rate move as a rise, in mid‑2015. In our view it is more likely to be in late 2014 given our expectations about rising inflation risks. We expect the RBA to lift the cash rate to 3.5% in late 2015.
Weaker than expected China data on industrial production and retail sales was the second shock on Thursday. It restored the faith of those with bearish views on China, Australia and commodity prices. Our view is that the January‑February data in China is unduly influenced by shifts in the timing of the Lunar New Year. Another issue relating to the direction of the Chinese Yuan, CNY could become more important for markets in coming months. The CNY, which is controlled by China’s central bank (the PBoC), has fallen recently against the USD when its usual trend of the past few years is to appreciate. A weaker CNY will help China’s exporters but lift the cost of imports and possibly, inflation.
The US data in the coming week covers industrial production, CPI, housing construction and, most importantly, the US FOMC meeting. It will be the first meeting with Janet Yellen in charge. The Fed is expected to continue its tapering of asset purchases. It is also likely to change its forward guidance on monetary policy. Namely, the general unemployment rate target may be replaced by a broader set of jobs market indicators. The Fed could also adopt an approach that discusses what they intend to achieve with an interest rate rise and whether further rate rises will be gradual.
Australia has a reasonably light data calendar in the coming week. The only major release is the RBA’s February Board Minutes. We expect the RBA to repeat its “neutral” monetary policy bias. There could be some further signs from the RBA that they believe the uptick in cyclical parts of the economy is gaining more traction. We believe that the next move in RBA cash is up in the December quarter.
CBA’s economic and financial forecasts are attached, along with the weekly and events calendar. Articles inside include an overview of the RBNZ rate rise and an overview of Queensland’s economic outlook by Senior Economist, John Peters.
Shane Workman – CBA Economics