What to watch in Europe and Japan this week

European equuty markets ended higher last week shrugging off some disappointing manufacturing and service sector survey readings. The highlight of the Eurozone calendar this week is today’s release of the February German IFO business confidence survey which is expected to register a small increase from the 110.6 reading in January, supporting the message that German growth is consolidating over Q1 14.

Eurozone inflation readings will be important too, with the flash reading of February HICP inflation released at the end of the week set to record another soft reading of 0.7% YoY, supporting the case for further policy easing from the European Central Bank soon.

While the EUR may benefit from a firm IFO reading any gains will be short lived. Soft inflation will help cap gains in the currency especially given the renewed warning this weekend by ECB President Draghi of more policy action if needed.

Elsewhere, data this week will reveal that the main measure of Japanese inflation appears to be peaking around 1%, with core inflation set to decline over coming months. After last week’s softer than expected Q4 GDP reading the pressure on the Bank of Japan for monetary action and in turn a weaker JPY will continue.

Meanwhile, Japan’s job data is expected to reveal that the unemployment rate held steady at 3.7% in January. USD/JPY will remain support around its 100 day moving average at 101.65.

US data this week

Despite a softer tone to US equity markets at the end of last week market tensions appear to be easing, with news over the weekend of the ousting of Ukraine’s President helping in this respect. Although US equities ended the week slightly lower the overall tone to risk appetite was firm.

The G20 meeting proved to be a non event in terms of immediate market impact although the aim to lift GDP by more than $2 trillion over the next five years appears to be ambitious to say the least. However, at least focus has shifted from austerity to growth in terms of G20 thinking.

Last week’s release of the February Markit US PMI manufacturing survey which revealed a stronger than expected reading helped to allay some concerns afflicting markets over the pace of US growth giving markets reason for optimism. Indeed, in general markets have attributed recent weakness in US economic data to adverse weather conditions rather than a shift in growth trajectory.

Unfortunately this week’s US data releases are unlikely to be particularly helpful in shaking off growth worries. Although February consumer confidence is likely to be unchanged at a relatively high reading (tomorrow) declines in new homes sales (Wednesday) and durable goods orders (Thursday) in January will not bode well while a revision lower to US Q4 GDP (Friday) will highlight a slower pace of growth momentum at the end of last year than previously recorded.

The US data is likely to be bond friendly helping to cap gains in Treasury yields as well as restraining the USD. Nonetheless, the message from a plethora of Fed speakers on tap this week will likely be one of continued willingness to maintain the current pace of tapering, with recent and current weakness in economic data being shaken off as bad weather related.

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