Week Ahead: US presents 'watershed' for markets

The excellent non-farm payroll figures on Friday, which showed 236,000 US jobs were created last month, could be a ‘watershed moment’ for markets, says Kathleen Brooks, research director at Forex.com.

The US economy has created a total of 800,000 jobs since November, helped by a surprisingly good performance from construction last month which edged the unemployment rate down to 7.7%. Of particular note was a 0.5% increase in the number of hours worked which could be a prelude to more hiring by employers.

According to Brooks, ‘this has reinforced a theme that has been threatening to break into the foreign exchange market: could the dollar become a growth currency?’ In other words, could the dollar stop being a safe haven that investors turn to when markets are rough to become a valued destination in its own right? This would have big implications for commodities and stock markets as well as currencies.

US consumers throw caution to the wind

On Wednesday we will get a further indication of how the US is responding to the tax increases at the start of the year with retail sales figures for February. Despite the recent bad weather, a rise in retail sales could be in the offing simply because gas prices jumped in January. This may feed through to a higher inflation with a PPI (producer prices index) reading on Thursday followed by the CPI (consumer prices index) on Friday. The end of the week also sees the monthly report from the University of Michigan’s consumer confidence index.

Debate over the underlying state of the US consumer and the broader economy is significant because sustained signs of strength could convince the Federal Reserve to withdraw its ‘quantitative easing’ (QE), money printing emergency support of the past four years. However, the ongoing threat of $85 billion spending cuts, equivalent to 0.5% of the US economy, as a result of ‘sequestration’ make this a difficult call for the central bank.
 
Economists at ING will keep their beady eyes on the Fed before the next meeting of its ‘open markets committee’ (FOMC) on 20 March for clues of its intentions, although they add, ‘with Fed chairman [Ben] Bernanke remaining dovish we doubt they will amend their QE efforts until much later in the year.’

Dr Jorg Kramer, chief economist at Commerzbank, says: ‘Positive sales growth reported by automobile manufacturers for February shows that consumers are not exercising restraint when it comes to expensive consumer durables. This is all the more remarkable as the upsurge in petrol prices has eaten into consumers’ purchasing power. But the US economy is currently creating 150,000 to 200,000 new jobs every month, causing labour income to rise more rapidly.’

UK weakness exposed

Government spending cuts are right at the top of the political agenda in the UK after the Office for Budget Responsibility rebuked the prime minister for claiming the country’s sluggish economic performance was the result of the financial crisis, not the government’s austerity measures.

OBR chairman Robert Chote (pictured above) said this was wrong and that the budget watchdog had consistently pointed out that ‘tax increases and spending cuts reduce economic growth in the short term’. This was strong stuff less than two weeks before the Budget and a month after the UK lost its AAA credit rating from Moody's.

Looking ahead to Tuesday when industrial production figures for January are released Chris Williamson, chief economist at Markit, the financial data analyst, said that its purchasing manager index (PMI) surveys had indicated the UK economy grew by just 0.1% in both January and February. ‘Weak official production data will fuel fears that the slide back into recession will not necessarily be avoided, especially after official data on the construction industry have already pointed to ongoing weakness in January,’ he said.

Europe softens austerity

The eurozone issues its industrial production figures on Wednesday ahead of the spring meeting of the European Council. Since the election of French socialist  president Hollande last year the debate in Europe has shifted against using more austerity to plug shortfalls in government revenues caused by the recession. Encouraged by the European Central Bank's willingness to intervene in the bond markets, most investors won't be disappointed if the European Union supports countries that soften their budget targets this year, says Commerzbank. The ECB cut its economic growth forecast for the eurozone this year to -0.5% last week.

FTSE Diary

A string of online gaming companies report this week.

888 Holdings (888.L), which launched a casino game on Facebook last week and hopes to gain a licence in Nevada, issues its full-year results on Wednesday.

Investors will look for news on what Playtech (PTEC.L) means to do with £424 million it got from the sale of its stake in William Hill Online when it reports final results on Thursday.

Bwin.party (BPTY.L) follows with its preliminary results on Friday. The consensus analyst forecast expects full-year earnings of €162.9 million. The company is said to be encouraged by its recent launch in Italy.

Meanwhile on Wednesday Prudential (PRU.L) will be the last of the major insurers to report its final results. It’s been a tale of two sectors of late, with some insurers, such as Legal & General and Standard Life, posting good figures and big dividend increases while Aviva and RSA have slashed their dividend payouts.

Tuesday:
Inchcape (INCH.L) full-year
Gem Diamonds (GEMD.L) full-year

Wednesday:
CVS (CVSG.L) half-year
Hikma Pharmaceuticals (HIK.L) full-year)
Thomas Cook (TCG.L) capital markets day, analyst briefing

Friday:
Rentokil Initial (RTO.L) full-year
J D Wetherspoon (JDW.L) half-year