Market analysis: Investor sentiment awaits US data

Financial markets have moved higher this month with the US dollar under pressure, but the release of key US data and comments from the Federal Reserve chairwoman Janet Yellen tomorrow will set the tone for the markets.

The euro-dollar futures on the Dubai Gold & Commodities Exchange (DGCX) was 2.53 per cent higher early yesterday at 1.1157, while the exchange’s March crude contract moved to a three-month high at $38.50. The US dollar index, a measure of the value of the dollar against a basket of currencies, dropped to monthly lows at 96 amid a flurry of key economic data, which has improved risk moods across the board.

The monthly US non-farm payrolls report was mixed at best. On the bright side last month there were gains in payrolls, which increased by 242,000 compared with expectations of 195,000, and upwards revisions to January’s figure to 172,000. The gain was particularly encouraging considering the expanding labour force participation rate, which increased to 62.9 per cent from 62.7 per cent.

On the flip side, there was cause for concern with deteriorating wage growth – average hourly earnings growth during February dropped to 2.2 per cent from a previous reading of 2.5 per cent. A lower than expected figure does not bode well for future consumption prospects, as a slowing figure reflects a labour force with a smaller disposable income.

Despite anaemic wage growth, markets digested the news positively, causing the dollar to sell off amid improving risk appetite.

This week will be key, as the release of a host of price-related data in the US will test market sentiment once again.

Following weakening wage growth in the payrolls report, all eyes will be on the headline consumer price index figure due tomorrow. The figure, a key indicator for inflation, is expected at 0.9 per cent (down from a previous reading of 1.4 per cent), while the inflation figure less food and energy is expected to be unchanged at 2.2 per cent.

While we believe these figures will be largely in line with expectations, any further downsides will cause additional volatility in the lead-up to the Federal Open Market Committee rate decision, which also takes place tomorrow.

While we do not expect any change in the interest rate decision at 0.5 per cent, Ms Yellen’s comments will once again be closely scrutinised with regards to their views on future US rate hikes.

The dynamics changed greatly after the hike late last year, and we expect the Fed to continue with its dovish undertones in its upcoming statement. Although we do not expect to see major volatility, we will also keenly watch the University of Michigan’s confidence figure due out on Friday. A key indicator of consumer sentiment in the US, the figure is expected at 92.2 (versus a previous reading of 91.7).

And finally, we wrap the US data docket this month with the GDP figure for the fourth quarter, due out on March 25.

Expectations are for a reading of 1 per cent, and we previously noted that we could see further downsides to this reading as a result of a smaller-than-expected liquidation in inventories, which will perhaps seep into this month’s reading, dragging it lower.

Also of note will be the per­sonal consumption figure due out along with the GDP reading. The figure previously came in lower at 2 per cent, and we expect the figure to tie the entire month’s pricing data together by coming in lower than expected.

And across the pond, volatility poured back into the euro crosses after the European Central Bank meeting this past Thursday as the ECB president Mario Draghi unleashed a fresh round of stimulus measures for the euro zone, including a 10 basis point cut to the deposit rate to minus 0.4 per cent and a 5 basis point cut to the refinancing and marginal lending rates to 0 per cent and 0.25 per cent, respectively. It also ramped up quantitative purchases to €80 billion per month, up from €20bn. In the immediate aftermath of the announcement, the euro tanked to 1.0822 against the dollar on the DGCX before reversing more than 400 points to close Thursday at 1.1213 levels.

Gaurav Kashyap is the head of futures at AxiTrader ME.

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