WEEKLY OUTLOOK 15-18 MAY 2017

A QUICK LOOK AT GLOBAL FINANCIAL MARKETS

EMERGING MARKETS

Amid recent talks between US China trade deal, fate of Chinese economy will be much more important for global financial markets. In China this week, industrial production and retail sales as two important growth indicators will be followed this week. Industrial production in April is expected to decelerate to 7.15 from 7.6% a month ago while retail sales is also expected to ease to 10.6% from 10.9% in March. Realization in line with market consensus may hurt optimism about growth in Chinese economy. Market reaction would be positive should realizations exceed previous month.

Indonesian economy has been suffering from weak foreign demand and low energy prices throughout 2016 and economic sentiment was weak at the very beginning of this year however Indonesia Central Bank maintained its growth forecast at 5.2%-5.4% as 1Q17 growth at 5.0% was higher than the Bank’s expectations. Hence, interest rate decision to be announced on Thursday at 5:00 p.m. local time will be quite important. Market consensus is no change in the policy rate at 4.75%. Rationale behind the consensus is the Central Bank’s tendency to protect the economy against global financial risks including capital outflows and inflationary pressures from higher food and utility prices. Additionally trade balance will be announced on Monday at 12:00 p.m. Market consensus is an deceleration in exports from 23.5% in March to 22.4% in April while imports are expected to rise to 21.6% from 18.2% within the same period.

 

In Turkey this week, CBRT expectation survey, unemployment rate and budget balance to be announced on Monday will be widely followed. Market will follow how market participants and business environment revised their inflation expectations following sharp increase in inflation in April. End year inflation expectation was 9.3% in April survey. Medium term inflation expectations will be more important for the conduct of monetary policy and April survey revealed that 12 and 24 forward looking inflation expectations lie at 8.27% and 7.87% respectively. Any pick up on those rates will be a warning for the CBRT for further tightening. Data will be announced at 14:30 (GMT+3). Turkstat will announce February labor market statistics at 10:00 (GMT+3) while budget balance will be announced at 11:00 a.m. There is no market consensus but unemployment rate hit 13% in January. Effects of employment campaign initiated by the government may start to be seen by February and an ease in unemployment rate may come in February.

 

MAJOR MARKETS

It will be somewhat a heavy week in terms of data releases in US. industrial production, Treasury International Capital (TIC) data and housing data will be quite important. Net TIC flows which will be announced on Monday at 16.00 (UTC-4) is quite crucial for the fate of US exchange rate and bond markets. Data shows the foreign inflows to US equity, Treasury bond and private corporate bond markets. Rise in global bond yields keep data important for markets. There is no consensus estimate for the data however net foreign outflows to US assets in February has been $13.5 bln while long term net inflows were $53.4 bln. Acceleration in inflows would put upward pressure over dollar and hence support depreciation in EM currencies. On the contrary we may see further pick up in US bond yields if we see outflow from US assets continue.

Housing starts as a critical indicator of economic strength which reflects the number of privately owned new houses on which construction has been started is an important ingredient in market players’ expectation of next Fed move. Data will be announced on Tuesday at 8:30 a.m. In April, market expects housing starts to increase to 1256 mln from 1215 mln 6.8% y/y contraction in March. Building permits as another key indicator of demand in the housing market measures the change in the number of new building permits issued by the government. It is also expected to rise to 1271 mln from 1260 mln. Market impact would be negative for EMs but positive for US should indicators point to further recovery in US housing market. This would support dollar index and lead to a selloff in bond market.

 

Industrial production will be announced at 9:15 again on Tuesday as another important data release of the week.  Market expects industrial production to post 0.4% m/m change in April whereas production grew 0.5% in March. Capacity utilization in the meantime is expected to slightly edge up to 76.3% in April from 76.1% registered in March. Rise in production growth would encourage market participants who expects Fed to continue rate hikes by June. Yet, we may see dollar index to edge down should realization comes in line with expectations.

ZEW Expectation survey, second estimate of GDP growth for 1Q17 and April inflation will be followed in Eurozone. GDP growth in Eurozone will be announced on Tuesday at 9:00 a.m. q/q expectation is 0.5%, same as previous reading. This stands for a y-o-y realization of 1.7%, slightly lower than 1.8% registered in the previous quarter. A lower realization would put further downward pressure over EUR/USD.

For ZEW index to announced on Tuesday at the same time with GDO, any realization better than April outcome of 26.3 would be considered good for economic recovery in EU as it points to a better standing in financial sector’s perception about peripheral Europe.

In UK, January inflation will be the main release of the week. April inflation to be announced this week on Tuesday at 8:30 is expected to be 0.4% m/m which will push y/y inflation to 2.6% from 2.3% a month ago. Core inflation in the meantime is expected to rise from 1.8% to 2.2%. Amid concerns over growth performance after Brexit, rising inflation may be considered positive as it will hint economic activity and demand conditions were not hurt yet. This would also support GBPUSD, ceteris paribus. Unemployment will be another release to be followed closely this week. It will be announced on Wednesday at 8:30 a.m. and is expected to remain flat at 4.7%. Any sign of pick up will be considered negative for British growth after Brexit. Though it may remain second tier, retail sales growth (exc. fuel) as an economic activity indicator will be announced on Thursday at 8:30 a.m. It is expected to accelerate to slightly decelerate to 2.5% in April from 2.4% a month ago. Better than previous realization in retail sales would also be considered positive for UK economy which is expected to get hurt by Brexit process.

 

Japan GDP and industrial production will be the main releases of the week.  The former will be announced on Thursday at 8:50 a.m. (UTC + 9). Preliminary estimate for 1Q17 suggests 1.7% GDP growth y/y whereas it was 1.2% in the previous quarter. A better than previous quarter will be considered positive for Yen. Additionally, market will follow industrial production in Japan to be announced on Wednesday at 1:30 p.m. (UTC + 9). There is no consensus but previous estimates were suggesting 4.7% growth y/y. A better than expected realization would support USD/Yen.

 

06 Jul 18 (Fri)

07:45 am


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