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 A raft of global business surveys, jobs data from the United States
and central bank meetings in Europe should offer a clearer view on
how well the global economy is faring at the start of 2014.
Most economists have been expecting a better 12 months after three
years of slowing global growth, but the recent turmoil in emerging
markets has given them pause for thought.
MSCI's global index <.MIWD00000PUS> posted its largest monthly
decline since May 2012 in January, sliding 4 percent.
Emerging markets <.MSCIEF> were down 6.6 percent for the month — their worst January since 2009 — after another turbulent day on
Friday, when the Russian rouble slid and bond yields rose sharply
across the board.
"Markets in the major economies will continue to be subject to
trends in emerging markets (this) week, both in terms of overall
currency and stock market sentiment," said Philip Shaw, chief
economist at Investec.
First up are purchasing managers' indexes (PMIs), which survey
thousands of businesses worldwide. While the PMIs from Europe and
the United States are expected to show more growth, particular
attention will be paid to those from China.
"There are … potential flashpoints in the form of various Chinese
PMI indices — signs of a slowdown in the pace of economic activity
in China would result in the risk-off lights starting to flash
again."
The other key data will be Friday's jobs report from the United
States.
The world's No.1 economy added the fewest workers in nearly three
years in December — just 74,000 non-farm jobs — although the
consensus of economists polled by Reuters points to a rebound in
January.
Still, there could be potential for another nasty surprise.
"As if forecasting the monthly change in nonfarm payrolls were not
hard enough, the outlook for January payrolls is clouded by poor
weather, difficult seasonal adjustment, annual benchmark revisions,
and methodology changes," said Scott Brown, chief economist at
Raymond James in St. Petersburg, Florida.
CENTRAL BANKS IN FOCUS
Fears about emerging economies intensified after Turkey, South
Africa and India failed to halt a wholesale capital flight by
raising their interest rates. The Federal Reserve's decision to
withdraw more of its monetary stimulus and weak Chinese data added
to the concerns.
With Turkey and South Africa's hikes in particular aimed at
countering steep currency depreciations, the pressure is on other
emerging central banks to follow suit.
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"One of the underlying issues is that the market believes that real
rates are just too low in emerging markets in an environment of
falling liquidity provision," said Ishitaa Sharma, global markets
analyst at Citi, in a note to clients.
"Given that the Fed is likely going to continue tapering according
to schedule, the market is likely going to continue to demand higher
real interest rates from at least the more vulnerable emerging
markets."
India's central bank governor, Raghuram Rajan, last week criticized
what he called a breakdown in global monetary coordination, saying
developed countries could not wash their hands of the turmoil their
actions caused in emerging markets.
European Central Bank President Mario Draghi will have a chance to
address the emerging market worries after the central bank's policy
decision on Thursday.
Euro zone inflation fell to 0.7 percent in January, putting the ECB
under further pressure to meet its target of keeping inflation below
but close to 2 percent.
"This outcome clearly raises the chances of ECB policy action," said
Nick Matthews, economist at Nomura, who raised the prospect of more
interest rate cuts to record lows.
"While we recognize that the probability of further easing has risen
significantly, on balance we believe that the ECB might want to
accumulate a bit more information before taking such a decision."
The Bank of England, also meeting on Thursday, is not expected to
announce any change to interest rates, although there is a small
chance it might make a statement to clarify its forward guidance.
More likely, though, it will wait until its quarterly inflation
report next week to reveal how it will conduct forward guidance from
here.
Looking further ahead, Bank of Japan policymakers meet next week to
set monetary policy. The sharp selloff in emerging markets plays
into the hands of those at the BoJ who fear the pick-up in exports
is lackluster and so may require extra monetary stimulus sooner
rather than later.
(Editing by Hugh Lawson)
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