February is giving every impression of being a similar month to January, as volatility remains in risk assets. Developed equity markets in Europe and the US finished the week lower between 2 and 4pct. Asian markets likewise fell, with the exception of the Shanghai composite which had a small rally into the Chinese New Year break, The Vix index rose modestly over the week and remains above the 20 level, but well below the levels seen last August. Equity funds continue to see outflows; over $35bn since the start of the year.
It was another mixed week for economic data, particularly for the US economy. At the end of the week, despite the weaker than expected payroll report, the unemployment rate fell to 4.9% in January. One piece of economic data caused a sharp fall in the US dollar, this led to a brief bounce in commodity related markets on Thursday. Treasury yields fell this week on the back of the mixed economic data, 2 year yields are back to 0.7%, and ten year back to 1.85%. Yields did jump slightly after the unemployment rate announcement.
Federal Reserve members seem intent on continuing to comment on the current state of the economy, and its impact on interest rate expectations. In an attempt to provide forward guidance, they often seem to confuse the issue more. This week Fed member Loretta Mester reiterated that she believed the path for rates remained higher, but at a slow pace. New York member Bill Dudley believes that monetary conditions have tightened already in January that would indicate he is less in favor of further moves. The Governor of the Bank of England got in on the act this week, after a pretty dovish inflation report. Interest rates now appear to be anchored in the UK close to zero for the rest of the year.
Looking the week ahead, company earnings will continue to be focused on. In Europe 20% of the Stoxx 600 companies have reported earnings, and according to Merrill Lynch just over half have surprised positively, however just less than half have beaten on revenues. Expectations for the quarter are a small negative to earnings from the previous quarter. Over 60% of S&P 500 companies have now reported. The blended earnings decline for Q4 is at present -3.8%, in line with expectations at the start of the year (factset).
It’s another reasonably busy week for macro data, the focus for the US will be Janet Yellen’s testimony to the House committee on Wednesday and Thursday. On Friday a selection of consumer related data, including the Michigan Consumer Sentiment index, as well as retail sales for January and business inventories.
At the end of the week we get the fourth quarter GDP estimates for the euro area. Expectations are for the regions economy to have grown by 0.3% quarter on quarter and by 1.6% year on year.
As for the UK it’s a quieter week, the main event will be on Wednesday as we get the manufacturing and industrial production data for December.