Week commencing Monday 30th June 2014
This week in Short
In the UK we have the PMI’s, with all three expected to come in slightly down on the month. Despite this, they all remain solidly in growth territory so expect any effect on Sterling to be muted at best.
In the US we have a very busy week, with ISM Manufacturing, ADP Non-Farms, Yellen speaking at the IMF and Non-Farms all expected. These should be mixed releases; however the general consensus should be positive with the economy back on track to recovery.
In Europe we have CPI expected to come in 0.1% higher on the month, while expectations are high for Mario Draghi’s monthly ECB press conference.
Overriding Market Themes
We start this week’s report in Japan, where consumer prices rose at an annual rate of 3.4% in May, following a 3.2% jump in April, indicating the fastest pace of growth in 32 years, according to the Internal Affairs and Communication Ministry on Friday. In fact, the increase was the biggest since April 1982, when the index jumped 3.5%. Diving into the release, electricity rates rose by 11.4%, while petrol prices rose by 9.6%. Prices of household goods also rose by a staggering 9.7%. This all comes as the Bank of Japan estimated that the newly enacted sales tax hike to 8% from 5% on April 1 would add 1.7% to annual consumer inflation in April, and 2% from the following month. “Abeamonics“, the latest buzz word for Prime Minister Shinzo Abe’s unorthodox economic strategy, certainly is stirring things up in the world’s third largest economy!
Across the Pacific to the US, the economy in Q1 contracted at a much steeper pace than previous thought, however indications that growth has since rebounded strongly are rearing their heads. The Commerce Department said on Wednesday that Gross Domestic Product fell by 2.9% in the first quarter, amounting to the worst economic performance in 5 years, instead of the 1.0% pace it had reported the previous month. While the majority of the economic woes were put down to the unseasonably bad weather, other revisions have certainly taken their toll. Growth has now been revised down by a total of 3% since the governments first estimate was published in April, which had the economy expanding at a total pace of 0.1%. The latest revisions have logged a weaker pace in healthcare spending, causing a drop in the consumer spending estimate. Despite this, data such as employment, manufacturing and services all point to a sharp acceleration in growth early in the second quarter. It seems that bad news does not come in pairs for Obama therefore, who should enjoy a slight easing of criticism as he approaches his final few years in office.
Sticking in the US, Sales of new US homes surged to a 6 year high in May suggesting the housing market is beginning to recover from its recent slowdown. The National Association of Realtors said on Monday existing home sales increased 4.9 percent to an annual rate of 4.89 million units. The sturdy housing report added to signs that economic activity has regained momentum after sliding in the dismal first quarter. However, while housing is showing tentative signs of recovery, progress is likely to be slow. This is felt acutely by the glut of first time buyers, a necessary ingredient for a strong housing market, who continue to feel as if they hug the side-lines. Credit growth in the first time buyer segment remains weak, while prices continue to favour more affluent middle income families.
Back in Blighty, UK economic growth in the first quarter was helped by the fastest expansion in business investment in two years, according to a recent report published by the Office for National Statistics. The headline economic growth rate for the first quarter was unchanged at 0.8 percent in revised official data on Friday, but the numbers showed that business investment was growing almost twice as fast as previously thought. Business investment rose by 5.0% on the quarter, up from a previous estimate of 2.7% and its fastest rate of growth since the first quarter of 2012. Annual growth was revised up to 10.5%, also a two-year high. Despite this, annual GDP was revised down to 3.0% from 3.1% for the year, however this still remains at the strongest level since 2007.
GBP This Week
We have a very quiet week ahead for the UK as the Bank of England are not due to meet until next week. We do however had the usual, first week of the month PMI’s to get through, which should stoke up some market volatility given their importance as a gauge of economic health. The most important of the three is the services PMI, which although expected to see a slight pull back from last month’s release, should still remain at a high level of around 58.1 (down from 58.6 in May). The Manufacturing and Construction PMI are also expect to come off the boil, however as with the Services release they will remain comfortably in growth territory so should do little to weigh on Sterling’s recent gains.
USD This Week
To start off the US week we have both the Chicago PMI and manufacturing PMI, both of which should give us a glimpse into how the US economy is rebounding from its dismal start to 2014. Both of these indicators have returned to near the levels that were being posted at the end of last year, and it is this confidence and optimism that will mean that traders will be watching both of these releases closely. Any miss in estimates will be seen very negatively, and would weigh heavily on risk-on trading as we move into the week.
On Wednesday we expect to see the release of the ADP employment numbers, which are expected to come in at 206,000 this month. This should give Janet Yellen something to talk about as she speaks at the IMF in Washington, also on Wednesday. Also, given the hawkish comments from James Bullard last week, Yellen is likely to be asked to clarify the Federal Reserve’s position on rates and confirm whether a rate hike at the start of next year is likely. As always, central bankers have a way of influencing currency markets, and as such be prepared for a volatile Dollar on Wednesday afternoon.
Finally, traders will concentrate on Thursday’s non-farm payroll numbers, which are expected to post a decent figure of above 200,000 once again. We also expect to see revisions to the number of unemployment claims, potentially down marginally from 312k to 310k on the week. This figure will most likely fall short of impacting the current level of unemployment, with the rate set to remain at a reasonably decent 6.3%. Finally for Thursday (given that Friday is a US bank holiday), we expect ISM Non-Manufacturing to come in relatively flat at 56.2 from the 56.3 posted last month.
EUR This Week
We have a busy week ahead for Europe, with the all-important inflation numbers and PMI numbers all stealing the lime light. We also have the ECB meeting, which given last month’s rate cut could very well be the release of the week. We start the week however with Inflation, where CPI is expected to rise to 0.6% from 0.5% previously, however we doubt this will give the Euro much rest-bite given its marginal increase.
Given that the ECB announced a whole package of stimulus measures last month, and the distinct lack of any further monetary “wiggle room” for base rate, it will be interesting to see what Mario Draghi can do to continue boosting the European recovery. Clearly, markets are waiting for Draghi to release some form of quantitative easing, especially owing to its success in both the US, UK and Japanese economic recoveries. This is an extremely difficult step for Draghi to take however, especially due to the lack of a single Eurozone bond. Purchasing debt directly from member states would be considerably more difficult, and as this would likely drive down bond yields, could act as an incentive to reduce the pace of austerity and economic reforms. Draghi’s approach to these problems will excite markets, and I have no doubt that Thursday’s meeting will cause some significant Euro volatility.
Lastly, the PMI numbers on their own are unlikely to effect the Euro, as is German Retail Sales which came in at -0.6% early Monday morning. All in all, expect an abnormally volatile week for the single currency, especially against a bullish Pound.
Week commencing Monday 23rd June 2014
This week in Short
We have a quiet week ahead for the UK with the Financial Stability Report and Mark Carney’s speech the only events of note. Expect some interesting questions of interest rates to capture the limelight!
In the US we expect Q1 GDP to drop to -1.7 percent while consumer confidence is expected to marginally increase on the month. Despite the drop in GDP, we expect a reasonably stable week ahead for the Dollar.
In Europe we have the PMI’s for both Germany, France and the Eurozone as a whole. We could see French manufacturing finally push through the 50.0 level of expansion while Germany should continue to lead to pack in both services and manufacturing.
Overriding Market Themes
Starting with the US this week, the Federal Reserve slashed its growth forecast for the US economy from 2.9 percent to between 2.1 and 2.3 percent last week. They cited bad weather at the start of the year as being party to blame for the reduction in growth forecasts, with the bank stating that “Economic activity will expand at a moderate pace and labour conditions will continue to improve gradually”. Policymakers did however feel confident enough to continue to reduce the amount of monthly asset purchases from USD 45 bullion to USD 35 billion a month. In terms of interest rate expectations, in contract to the Bank of England and with the lower than expect economic growth on the horizon, the view is that long term interest rates are likely to rise slightly slower and not as far as previously thought.
Moving back to home soil, UK inflation has slumped to a 4 and a half year low, despite a house price surge in April. Consumer price inflation dropped to 1.5 percent in May from 1.8 percent in April, the lowest reading since October 2009. Diving into the figures, the ONS stated that inflation in May was subdued by the first year-on-year drop in food prices since 2006, as well as lower clothing prices and cheaper air and sea transport costs. Interestingly, food prices have dropped by 0.6 percent as the major UK supermarkets begin a price war to win back consumers. Meanwhile, house prices continue to rise, prompting considerable concern from the MPC and the Bank of England. London house prices rose 18.7 percent on the year, while excluding London and the south east of England, house prices were 6.3 percent higher.
Sticking with the UK, retail sales have fallen for the first time since January last month, despite World Cup fever. Specifically, a drop in food, petrol and household goods pushed the numbers south in May, offsetting strong growth in other areas of the economy such as internet sales, clothing and footwear and second hand goods. Sales at sport retailers were boosted on the back of the World Cup, however no doubt this trend is likely to reverse given England’s recent performance in Brazil! All is not doom and gloom however, on a quarterly basis, retail sales rose by 1.3 percent in the three months to May, making this the longest period of growth in 6 and a half years. On an annual basis, retail sales is up by 3.9 percent. Consumer confidence continues to rise amid the growing economy, rising house prices, falling unemployment and low inflationary pressures and interest rates. Despite these factors however, wage growth remains somewhat subdued and continues to put pressure on households as falls in real pay continue to effect the majority.
GBP This Week
We have a very quiet week ahead for the UK, with the only event of note in the form of the Financial Stability Report on Thursday, followed by Mark Carney’s speech. This report is released twice a year, and largely focuses on how the bank can promote stability in the financial system moving forward. One hot topic is likely to be house prices, in particular the over-extension of the banks in loan to value ratios. Also, we expect some questions on interest rate speculation, especially after his contentious comments last week where he indicated rates could be risen sooner than markets had anticipated.
USD This Week
We have a mixed week ahead for the US with the release of consumer confidence figures as well as the GDP figures headlining. We will focus the majority of our attention on Wednesday’s final GDP release for Q1. Initially, the advance figure was published at 0.1 percent, which was lowered to -0.6 percent for last month’s preliminary figure. We are now expecting to see a figure closer to -1.7 percent on Wednesday. Despite being quite a fall, the impact on markets should remain to be seen, as they will now probably focus on more recent economic indicators. Despite this, it will distort the expected annual rate of growth and should put the USD bears back into the ring.
On Tuesday the release of the latest consumer confidence survey is likely to shed some light on the health of the US retail space. Earlier this month we saw a reasonably decent print in the May retail sales, posting a growth rate of 0.2 percent following a marginal rise in consumer confidence from 82.3 to 83.0. This week we expect another marginal rise to 83.4, which should spell out a similar growth in sales as last month.
EUR This Week
We have a busy week ahead in the Eurozone, with the first part of the week dominated with the PMI surveys, followed by the German Ifo. Starting with the PMI’s, we will be keeping a close eye on the French manufacturing PMI, which seems to be shifting back towards the critical 50 mark donating expansion. Market analysts are expecting this release to print around 49.6, however should we see expansion this could be enough to reverse the Euro’s recent bad form.
On the German manufacturing side, things are looking considerably better, and any further growth in this PMI should be welcomed by markets. The Eurozone PMI should also be an interesting read, as it is by far the most comprehensive view on how the manufacturing and services sectors are performing in the zone as a whole. We would need to see some quite powerful moves in both these indicators to shift sentiment, however with Germany progressing well and France/Italy regaining some momentum, we could see something reasonably positive this week.
Finally, Tuesday’s German Ifo business climate survey is due to be released. This figure typically requires a strong divergence from expectations to cause any volatility in the market, so we would need to see a considerable push away from the 110.4 figure we saw last month to impact sentiment. This month, we expect a reasonably flat release in line with last months figure.