Trading Week Outlook: April 22, 2012

The busy week ahead could prove pivotal for the future direction of the stock market and the U.S. dollar as all eyes turn to the FOMC meeting and the U.S. Q1 2012 GDP estimate in search for clarity on the Fed’s monetary policy and on the state of the world’s largest economy.  

In preparation for the new trading week, here is the outlook for the Top 10 spotlight economic events that will move the markets around the globe. 

1. EUR- Euro-zone Manufacturing and Services PMI- Purchasing Managers Indexes, two leading indicators of economic conditions measuring activity in the manufacturing and services sectors, Mon., Apr. 23, 4:00 am, ET. 

Despite of the anticipated improvement, both indexes are forecast to stay below 50, in contraction territory for another month, with a manufacturing index reading of 48.2 from 47.7 and a services index reading of 49.4 from 49.2.

2. AUD- CPI- Consumer Price Index, the main measure of inflation preferred by the Reserve Bank of Australia, Mon., Apr. 23, 9:30 pm, ET.

Inflationary pressures in Australia are forecast to rise by 0.8% q/q in the first quarter of 2012, compared with the flat 0% reading in Q4 2011. Elevated inflation could keep the Australian dollar supported on reduced odds of another rate cut by the Reserve Bank of Australia.    

3. USD- U.S. Consumer Confidence, a measure of consumer confidence and outlook on the economy, and New Home Sales, an important gauge of housing market conditions, Tues., Apr. 24, 10:00 am, ET.

The outlook of U.S. consumers is forecast to inch lower to 70.0 in April from 70.2 in March, while the sales of new homes in the U.S. increase to 325K in March from 313K in the previous month.

4. GBP- U.K. GDP- Gross Domestic Product, the main measure of economic activity and growth, Wed., Apr. 25, 4:30 am, ET. 

After contracting by 0.3% q/q in Q4 2011, the preliminary estimate of the U.K. GDP is forecast to show the economy returning to growth by a small 0.1% q/q in the first quarter of 2012. However, some economists and one Bank of England policy maker have expressed concerns that the report could be worse than anticipated. The GBP has managed to attract more bids and has strengthened recently, but if the GDP report signals another quarter of contraction and a double dip, this could become a significant risk event that could put the brakes on the sterling’s rally.

5. USD- U.S. FOMC- Federal Open Markets Committee Interest Rate Announcement, Wed., Apr. 25, 12:30 pm, ET.

There is a clear division among the FOMC policy makers on when the Fed should start tightening monetary policy. Some policy makers have called for an exit and rate hikes as early as this year, while a couple of committee members felt that policy accommodation should continue until 2016. With some of the recent U.S. economic data beginning to show signs of weakness and forecasts predicting slower economic growth, it would not be surprising to see the Fed maintaining a dovish stance and expressing a cautious outlook on the economy and the labor market, but stopping short of announcing another round of quantitative easing at this meeting.

However, QE3 will not be completely out of the picture and will remain as a viable option, especially if the occasional soft spots in the U.S. economic data become a persistent trend of deteriorating economic conditions lasting for at least a couple of months. Although additional quantitative easing may not come until the second half of the year or simply not at all, the future fate of the U.S. dollar will continue to depend on QE3 expectations and the Fed's next move. 

6. NZD- Reserve Bank of New Zealand Interest Rate Announcement, Wed., Apr. 25, 5:00 pm, ET.

With the inflation gauge lower than expected, the global economy slowing and the EU debt crisis far from over, the Reserve Bank of New Zealand will not be in any hurry to start hiking rates and is expected to keep the benchmark interest rate at the current 2.50% level.

7. USD- U.S. Jobless Claims, an important gauge of labor market conditions measuring first-time claims for unemployment benefits, Thurs., Apr. 26, 8:30 am, ET.

Throughout the month of April, the jobless claims reports have disappointed twice by unexpectedly jumping higher and have caused concerns that the U.S. labor market may be softening. Although the weekly first-time claims for unemployment benefits are forecast to decline to 375K from 386K, the report should be closely watched for potential red flags that could signal weakness in the job market.  

8. JPY- Japan CPI- Consumer Price Index, the main measure of inflation preferred by the Bank of Japan, Thurs., Apr. 26, 7:30 pm, ET.

Scheduled for release only a few hours ahead of the Bank of Japan’s monetary policy announcement, the national Core CPI (excluding food and energy costs) is forecast to remain in deflation territory with a reading of -0.5% y/y in March, compared with -0.6% y/y in the previous month. The threat of deflation could continue to loom over the economy and could prompt the Japanese central bank into additional easing.  

9. JPY- Bank of Japan Interest Rate Announcement, Thurs., Apr. 26, around 11:00 pm, ET.   

Everyone expects that the Bank of Japan will announce additional expansion of its quantitative easing operations, but not everyone is betting on the bank lifting its inflation target to 2%. Such a move would make sense, especially because in February the combination of more QE with a 1% inflation target has proven to be an effective tool in the Bank of Japan’s campaign to weaken the yen.

Considering that a decision to make additional asset purchases may be already priced in, the Japanese central bank will need to deliver a “shock and awe” type of an announcement in order to trigger another leg of significant yen weakness. A failure to do so could see the yen quickly erasing some of its recent losses against the U.S. dollar and other currency majors.     

10. USD- U.S. GDP- Gross Domestic Product, the main measure of economic activity and growth in the world’s largest economy, Fri., Apr. 27, 8:30 am, ET.
  
Beware of the potential for the GDP report to join this month’s list of weaker economic data with the U.S. economy forecast to grow at a slower pace from 3.0% in the fourth quarter of 2011 to 2.6% in Q1 2012. Some less optimistic forecasts anticipate an even lower reading of 2.3%, while Moody’s monthly GDP gauge points as low as 1.8%. It would not be surprising to see the pressure mounting on the U.S. dollar on signs of U.S. economic slowdown and elevated QE3 odds.