Eurozone wide growth and inflation still patchy
Last week was interesting in several ways. The data releases in many economies made the direction of monetary policy easy to predict.
A rate hike is already priced in for the U.S. following Friday’s positive employment where even the previous months (already strong) reading was revised up.
However, the mention of talk about interest rate an interest rate hike in the Eurozone was completely unexpected.
Germany is the only member of the Eurozone that would benefit from higher rates and already talk of a two speed Eurozone has emerged.
Polish Prime Minister Beata Szydle, at last week's European Council Meeting, was fiercely critical of the re-election of Donald Tusk (former Polish P.M) as Council President and as a protest she refused to sign the joint communique at the end of the meeting.
The EU is searching for unity among its 27 members in the light of the departure of the U.K. but this is proving difficult to find. It is no surprise that Poland is one of the U.K.’s fiercest allies in the EU given the traditional ties between the two nations that are now being disregarded by the majority of the Bloc.
From Athens to Madrid and Dublin to Tallinn talk about an interest rate hike must bring shivers of concern. There can be no greater illustration of a two speed Europe than this. Germany would be the prime beneficiary of this and there have been mumblings from both Merkel and Scheuble about how a stronger euro (brought about by higher interest rates) would benefit the German economy.
The Dutch election will take place this week and they suddenly find themselves in a spat with Turkey over the desire of two Turkish ministers to enter the country. Both were turned away; the Finance Minister due to make a speech to Turkish expats in Rotterdam and the Social Affairs Minister simply trying to test the waters of Dutch determination. The Rally due to be addressed was banned and there appears to have been an overreaction on both sides as Turkish President Erdogan labelled the Dutch “Nazi Remnants” and vowed to ensure The Netherlands “paid the price”.
This is a storm in a teacup between two NATO members but it could have ramifications for the Dutch election which takes place on Wednesday.
Interest Rate Decisions to Dominate Market Sentiment
Following last week’s data releases the attention of the market will switch to monetary policy decisions with Central Bank meetings taking place in the UK, U.S., Japan and Switzerland.
The U.S. rate hike is now guaranteed following Yellen’s comments that provided the jobs and inflation data were “on trend” the FOMC would see conditions as favouring a rise in rates.
The MPC in the UK has been completely as one voting 9-0 for rates to stay on hold for some time. However, there have been concerns voiced over the wait and see policy over inflation and there could be a couple of dissenters this week who feel that the BoE is in danger of “falling behind the curve”. The reaction of the pound to an announcement regarding the triggering of Article 50 may also have some bearing on the MPC.
Japan and Switzerland will both leave rates unchanged. Each as ultra-easy monetary policy and that is unlikely to change in the foreseeable future.
Overall Market sentiment hard to read
2017 has been a difficult year so far for traders with no real trends developing, other than underlying dollar strength. As we approach the end of the first quarter, the diversity of growth in the major economies continues to be a major factor. The rise in the value of the euro over the past two days is a perfect illustration. A hike in rates in the U.S. is a certainty, yet vague rumours regarding a conversation which may or may not have taken place at the ECB triggers a correction for the single currency.
Give the data already released in 2017, there are grounds for some encouragement regarding the Eurozone economy but it is highly unlikely that conditions (across the whole region) will be strong enough to sustain a rate hike until Q3 at the earliest.
The pound one day looks likely got test the psychologically important 1.20 level vs. the dollar and the next looks like taking out upside resistance. Brexit is affecting the market in ways that no one could have imagined.
The only certain thing pervading thinking is that sufficient uncertainty remains to keep traders interested.