Week Ahead: a ‘pleasant interlude’ and a mighty market mover

A fresh bailout remains out of Greece’s reach, while a recession is likely to be confirmed in the eurozone next week. But the talk is of a ‘pleasant interlude’, a brightening economic outlook dawning not only in the US but on European shores.

The fresh disappointment dealt by news that eurozone finance ministers would not accept a package of Greek austerity measures – and would therefore not yet sign off a €130 billion bailout – may have sapped market sentiment on Friday, but 2012’s upbeat tone appears to have been extended.

This, says a growing chorus of market watchers, is largely the doing of central banks. Last week the Bank of England fulfilled expectations with another £50 billion in quantitative easing (QE), while the European Central Bank displayed what French bank Société Générale economists described as ‘cautious optimism’ – that is risks remain, but they’re not necessarily so ‘substantial’.

Wealth manager and stockbroker Charles Stanley’s chief economist is in no doubt that while QE may do little for the real economy, it helps equity markets and cuts savings. ‘Come the autumn of 2013 will we know that zero, or near-zero, interest rates have been extended yet again, or will we be waking up to the start of monetary policy normalisation? If the latter, then investors will need to enjoy the next eighteen months to the full,’ wrote Jeremy Batstone-Carr in a strategy note.

The promise of more support from powerful central banks – with the US Federal Reserve in particular dangling the offer of ‘QE3’ – is keeping morale high in Western markets.

Winning spree

Hopes are also high that US economic data releases over the coming week, with figures on industrial production, retail sales and inflation, will continue a recent winning spree that has boosted markets around the world. ‘Economic data from the USA as well as some leading indicators should confirm expectations that the economic outlook on both sides of the Atlantic is likely to soon brighten,’ said Alexander Aldinger of Germany's Commerzbank.

Chris Williamson of data company Markit says: ‘Recent surveys have surprised on the upside, suggesting that the US could build on the inventory-led growth seen in the final quarter of 2011, with consumers and industry helping to drive trend-like economic growth in the first quarter.’

UK inflation drop

The UK’s central bank, the Bank of England, will also wield a ‘powerful market mover’ this week, as Michael Saunders of Citi describes it. That’s the quarterly inflation report, whose pages will be scrutinised for signs as to whether the Bank intends to extend its asset-buying programme beyond £325 billion.

The report, published on Wednesday, contains the Bank’s latest inflation and growth forecasts, which Markit’s Williamson says ‘look likely to be less gloomy than in November due to the better than expected data flow in recent weeks’.

A day before the publication of the Bank’s outlook report, the UK’s official inflation stats for January will be released. They are expected to show a sharp fall in inflation – which has been falling since a 5.2% peak on the consumer prices measure in September – due to last year’s VAT hike dropping out of the annual comparison.

CPI could fall to around 3.4% from December’s 4.2% reading. ‘Note though that on these figures, Sir Mervyn King will still need to write another open letter to the chancellor, although this could be his last one,’ adds Philip Shaw of Investec.

UK retail sales and unemployment data will also be published this week.