By Andy Bruce
LONDON Feb 2 This week will go a long way to
determining whether the uncertainty hanging over the world
economy and markets fades after a rocky January or lasts further
into the year.
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 posted its largest
monthly decline since May 2012 in January, sliding 4 percent.
Emerging markets 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
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.
"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
criticised 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 recognise 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
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 lacklustre and so may require extra
monetary stimulus sooner rather than later.