A US missile strike in Syria, a weaker than expected jobs report, and Fed planning to shrink its balance sheet, all did little to move markets significantly last week.
US stocks fluctuated between gains and losses throughout the week, Treasuries traded in a similar pattern, gold erased gains after jumping to a 5-month high, and the VIX was capped at 13.43.
Such a market behaviour indicates that investors are not finding current geopolitical risks significant enough to move them into the defensive. But given Russia’s response on Friday that the missile strikes on the Syrian air base could have extremely serious consequences, investors will keep an open eye the week ahead on how the situation evolves, and the shift from risk appetite to risk aversion may occur in seconds if tensions escalated.
The U.S. earnings season also kicks off next week with banks taking the lead as usual. The financial sector is expected to post a double-digit earnings growth in Q1, the highest growth among all sectors. Given that the rally paused in recent weeks due to concerns about the U.S. administration’s ability to deliver on tax reforms, it requires strong positive surprise to refuel buying momentum.
On the U.S. data front, retail sales and CPI figures will be watched closely after the dollar rose to 3-week highs on Friday on mixed employment report. Markets expect retail sales to remain unchanged in March, but excluding automobiles, gasoline, building materials and food services, sales are projected to rise 0.4%. Inflation is also expected to show a similar trend with CPI figure remaining unchanged in March, but increase 0.2% when excluding food and energy. Fed Chair Janet Yellen will speak on Monday and given the debate around reducing the Fed’s balance sheet, any comments on the normalization process will be closely scrutinized. The key question dollar traders require an answer to, is whether shirking the balance sheet will impact the path of interest rates hikes.
On the other side of the Atlantic, UK economic data releases will take center stage. Sterling ended the week 1.4% lower against the dollar as manufacturing and construction activity unexpectedly slowed last month, in additional signs that the economy lost momentum by the end of first quarter.
BoE’s Gertjan Vlieghe indicated last week that he is in no rush to demand an end to the loose monetary policy. Inflation, employment, and house prices data are all scheduled for release next week, and if the disappointment resumed, GBPUSD would be at a risk of further declines.