Eurozone inflation reading headlines data heavy session

Eurozone inflation reading headlines data heavy session

By Craig Erlam on May 6, 2014 08:11:06 GMT

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  • BoJ remains unchanged and releases unusually short statement;
  • FOMC seen trimming purchases by another $10 billion this evening;
  • Eurozone inflation reading headlines data heavy European session;
  • Royal Dutch Shell and GlaxoSmithKline to report Q1 earnings.

European futures are pointing to a slightly weaker open this morning, with the FTSE seen down 1 point, the CAC down 16 points and the DAX down 17 points. This comes following a mixed session in Asia overnight where the major indices are all treading water after a fairly quiet session that included one of the most uneventful policy decisions from the Bank of Japan you’re ever likely to see.

Not only did the central bank leave monetary policy unchanged, which was in line with expectations, the statement that was released alongside the decision consisted of only two sentences. One of these confirmed that the monetary base will continue to increase by an annual pace of 60-70 trillion yen, which is unchanged on the previous month, while the other confirmed that the vote was unanimous.

I guess when no policy makers are interested in expanding the monetary base any further, no more needs to be said. Although, that doesn’t help investors to forecast when the next increase will come, which many believe at this stage that it will. It would appear that the BoJ is not interested in increasing its purchases until there is conclusive evidence that the consumption tax hike is weighing on both growth and inflation expectations. There is no way of knowing this for another four or five months as the data for April and May is going to be distorted by the increase in spending in March in anticipation of the hike. Realistically, the BoJ can’t act now until it has four or five months of data to average out, which suggests the earliest we’ll see an increase in purchases is September. That is of course unless the economy completely falls apart before then. The economic projections, released after the close of the Asian session could provide further insight into the BoJs thinking, although if the statement is anything to go by, I wouldn’t get my hopes up.

The week has got off to a great start despite economic data falling short of expectations on most occasions and the US imposing additional sanctions on Russia for its part in the crisis in eastern Ukraine. Either of these would have weighed heavily on sentiment and left markets in the red a few weeks ago, but that is not the case at the moment. Investors are instead being buoyed by the daily reports of mergers and acquisitions, particularly in healthcare stocks, and first quarter earnings, which haven’t been as bad as first feared despite the poor weather in the first couple of months.

I think it’s interesting that we have two major events this week, the FOMC meeting today and the US jobs report on Friday, and traders do not appear bothered by this in the slightest. Ordinarily we’d see a little caution in the days leading up to these events but looking at the markets this is clearly not the case. This is especially surprising given the geopolitical risk that is not going away any time soon.

When it comes to the FOMC decision, one thing this may tell us is that traders are fully prepared for what’s to come. With no press conference after, I would be very surprised if the Fed announced anything that would shock the markets. With the economy still seeing moderate growth, I would be extremely surprised if the FOMC decided to speed up or slow the rate of tapering at the meeting today or significantly change their view on future rate hikes.

There’s plenty of data being released today that could create some volatility in the markets including German retail sales and unemployment, Spanish retail sales and GDP and unemployment data for Italy. The most important release this morning though will be the eurozone CPI inflation reading, especially if yesterday’s reaction to the German inflation number is anything to go by. Despite rising to 1.3% in April from 1% a month earlier, the number fell slightly short of expectations of 1.4% and the euro plummeted.

If this is the kind of reaction we can expect to the German inflation number, the eurozone reading could potentially be much bigger. Clearly, disinflation is being seen in the stronger economies and not just the periphery, where deflation is an intentional consequence of the austerity and reforms. If we see a similar miss on the eurozone reading tomorrow, it could prompt another round of euro selling as the pressure increases on the ECB to act before it’s too late.

Earnings have been a key driver in the markets over the last couple of weeks and I expect the same to be true in the coming days, despite the significant increase in economic data and the FOMC meeting. With so much focus on the healthcare sector at the moment, particular attention may be paid to earnings from GlaxoSmithKline when they report before at midday, while earnings from oil giant Royal Dutch Shell could also give the FTSE early direction with them reporting just before the open.

About Craig Erlam

Craig Erlam is Market Analyst at Alpari UK. He joined Alpari (UK) at the beginning of 2012 after four years in the financial services industry, including working at Goldman Sachs. Craig writes market commentary that regularly appears on websites including The Financial Times, Reuters, BBC, The Telegraph and FOX Business. He also provides insight and analysis for clients which he posts daily on Twitter, Google+ and the Alpari (UK) website. You can also find Craig on YouTube where he gives short market updates, including charting analysis.

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