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FUNDAMENTAL ANALYSIS

Six Key Issues for Investors

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6 Apr 2015

We identify six key issues facing investors:

- US economy

- Brinkmanship in Athens

- Cyclical recovery in Europe

- BOJ policy response

- RBA meeting

- Oil prices

US Economy

The March jobs data was a disappointment. The question is its significance. From a macro point of view, we would not place much emphasis on any one high frequency data point. From a technical point of view, it may encourage a continued consolidation/correction of the dollar's Q1 gains, not only against the major currencies but also against many emerging market currencies.

The US dollar's strength in Q1 was not matched be the economic performance. The weakness in Q1 already prompted the Federal Reserve to lower its growth projections, though Yellen has noted that even with the downgrade, it expects above trend growth for the year. The poor employment report is unlikely to change this assessment. The Fed's Labor Market Conditions Index has already picked up a moderation in the labor market in Q1, where the monthly average has increased by 4.4 compared with 6.5 in Q4 14. The weekly initial jobless claims and continuing claims show underlying strength. The JOLTS report is expected to confirm this. Sectors like construction and leisure/hospitality, which are the most sensitive to weather were exceptionally weak in March.

We are reluctant to read too much into the weakness in Q1 economic activity. Over the last five years, there has been a clear pattern of weakness in the first part of the year. Consider than growth in Q1 has averaged 0.6% (quarterly annualized pace) compared with almost 2.9% for all the other quarters. In three of the five years, growth in Q1 was the slowest for the year (2010, 2011, 2014) and in one year it was the second weakest (2013).

Fed officials have argued that the headwinds in Q1 will prove transitory. This seems to be the most likely scenario. That said, the implications of the jobs report, especially the 0.1% fall in the average work week, suggests the quarter ended on a weak note. This would seem to have already been largely discounted by the market which means that March data may have less impact on prices. There will be headline risk from the minutes from last month's FOMC meeting, but in terms of policy insight we would put more emphasis on the speeches by the Fed's leadership in the coming days. NY Fed President Dudley speaks twice in the week ahead, after both Yellen and Fischer have given several speeches since the FOMC meeting.

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