Data May Bring Volatility Back to Cautious Market

European markets are expected to open moderately higher on Tuesday as we continue to see the more cautious approach that has been prevalent so far at the start of the week.

While I expect investors to maintain the cautious, risk averse approach today, there is a lot of economic data being released which could bring some volatility back to the markets. U.K. inflation data is particularly notable given the Bank of England’s apparent desire to raise interest rates in the foreseeable future.

Inflationary pressures are lacking in the U.K., as they are throughout the world at the moment, and yet policy makers at the BoE are determined to begin the cycle of raising rates. The worry is that inflation could rise rapidly if they keep rates low for too long, despite the CPI reading currently only being at 0.1% and expected to fall to 0% in August.

Source – Market Pulse Economic Calendar

Of course, lower commodity prices are playing a large part here and the effects of these are likely to drop off soon, but the core reading doesn’t make for much better reading at 1.2% and this is seen falling to 1% today.

The central bank is clearly still banking on a tight labour market producing stronger wage growth and more spending which under normal circumstances would occur but it appears these are not normal conditions and both of these are still lacking.

German economic sentiment, as measured by ZEW, is expected to fall to 18.3 this month, from 25 last month and well off the levels seen earlier this year. Eurozone sentiment is also expected to decline to 42.1 but the decline is not as bad as in Germany. This is probably largely down to what’s happening one of Germany’s big export markets, China. Chinese imports have been sharply declining for much of the year which is seen as being partly due to falling domestic demand. If the country continues to experience a slowdown in growth, or is in fact already experiencing much low levels than is being reported as some fear, this could create further problems for some German exporters.

Source – Thomson Reuters Eikon German exports to China

While exports to China remain at very high levels, the trend over the last year or so doesn’t look so good for Germany.

There are also a number of notable data releases in the U.S. this afternoon, including retail sales for August. Consumer spending has been rather disappointing in the U.S. so far this year, especially as the decline in oil prices was expected to act as a boost due to people’s extra disposable income. This has not been the case, another sign of the unusual environment we find ourselves in, which has been one of the arguments against raising rates. If consumers aren’t spending, even with this additional incentive, then there must be greater issues than metrics like the unemployment rate would suggest.

The Bank of Japan left monetary policy unchanged this month despite increasing calls for additional stimulus as the country continues to experience low levels of growth and inflation. The central bank still appears confident that it can hit its inflation target of 2% by the middle of next year despite falling well short of the pace at the moment. With the next sales tax hike due the following April, BoJ Governor Haruhiko Kuroda isn’t leaving himself much margin for error. I still think we’ll see an increase in asset purchases in the coming months though as the current package just isn’t achieving its target, or even close to doing so.

For a look at all of today’s economic events, check out our economic calendar.

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