Following the mixed US data last week, markets will continue to try to assess the US recession risks and whether the economy is already in recession. The PMI data on Friday suggested that the economy was not in recession, but the fact that weakness has been focussed in construction will maintain serious doubts, especially after the weak payroll data.
In this context, the PMI index for the manufacturing data on Tuesday will be watched very closely. A figure close to December’s level would cast further doubts on recession. The jobless claims data will also be watched very closely on Thursday after the big jump claims seen last week.
The Wall Street trends will be watched closely with a particular focus on the bond insurers. The bid activity last week and hopes for support measures for the bond insurers suggest that risk tolerances could improve slightly this week which would also provide support for carry trades, especially if volatility levels ease. Markets will still be very cautious and any improvement could easily prove to be very tempoary
Caution is required as any respite in fears over US recession would tend to support the dollar while an easing of risk aversion would weaken it. The net trend looks to be slightly dollar supportive after the performance on Friday.
Interest rate decisions within Europe will be a very important influence over the second half of the week with the Bank of England and ECB both set to announce their rate decisions on Thursday. Assuming the ECB holds rates steady, the statement and comments from Trichet will be watched very closely for hints on future policy.
There are very strong expectations that the Bank of England will cut interest rates this week. If so, the bank will release a statement and this will be watched closely for hints on policy over the next few months.
The Australian interest rate decision is due on Tuesday local time amid expectations of an increase. Again, the statement from the Reserve Bank as well as the decision will be very important for sentiment.
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