In the markets: What to watch this week

Equity prices, which represent claims on the proceeds of future growth, have risen sharply in the past five years, even though growth expectations have been revised down almost everywhere.

Three economic issues have been cause for concern over the past five years: Low inflation, low interest rates and low growth. 

This week will focus on all three as major economies including South Africa release inflation data, the European Central Bank (ECB) makes an interest rate decision and China releases GDP growth figures for the third quarter.

The Reserve Bank Governor Lesetja Kganyago said at the bank’s last press conference that the decline in consumer inflation to within the bank’s target range of 3% to 6% is expected to be temporary and that there is no room for complacency in monetary policy.

The Reserve Bank targets 3% to 6% because inflation below 3% decreases the demand for investment while an inflation rate above 6% hurts the consumer. 

SA has endured many severe shocks to the economy, such as labour issues, a commodity price plunge, load-shedding and the worst drought in 55 years.

However, there is a sense of optimism among economists that the business cycle is bottoming out and that relatively better growth and inflation are expected next year – if the rains indeed come.

A summer season with good rains is positive for South African farmers’ supply, which could hold down the Consumer Price Index (CPI).

Inflation data is also expected from USA, UK and euro area (EA).

ECB

The ECB is expected to tweak its asset purchase programme and announce an extension.

Low growth and low inflation could force the ECB to extend its quantitative easing programme beyond March 2017, but to do so it has to modify the scope of the programme to tackle the problem of scarcity of eligible bonds, especially German bonds.

China

The global growth engine delivers its GDP growth rate figures for the third quarter early on Wednesday morning. Positive signs of growth will put to bed concerns about the manufacturing-centric economy. 

Other economic announcements due this week:

Monday

• EA Inflation
• US Industrial Production

Tuesday

• GB Inflation
• US Inflation

Wednesday

• SA Inflation Rate and Retail Sales
• GB Unemployment Rate
• US Building Permits and Housing Starts 

Thursday

• GB Retail Sales
• US Existing Home Sales

Friday

• CN MNI Business Sentiment Indicator
• EA Consumer Confidence

Giacomo Bonavera is head of foreign exchange trading at Capilis Asset Managers. Click here to visit the firm’s website.