Week Commencing Monday 3rd January 2017
UK: GDP on the up despite Brexit, have we really had our cake and eaten it!
The UK economy grew slightly faster than previously forecasts in the first three months following the European Union membership referendum, figures released by the ONS stated on Friday.
According to the statistics agency, the UK’s Gross Domestic Product grew by 0.6 percent on a quarterly basis in the three months to the end of September, slightly ahead of the 0.5 percent forecast.
Meanwhile, the year on year reading showed the UK economy expanded 2.2 percent in the third quarter, down from the 2.3 percent reading recorded in the corresponding period in the previous year, which had remained unchanged in last month's report. These figures fly somewhat in the face of “doom-mongers”, however it is widely believed that 2017 will be a tougher year for the UK economy.
Consumer fundamentals are forecast to drop markedly over the period and business uncertainly surrounding the Brexit negotiations should impact both investment and hiring. One thing is certain however, 2017 will be an interesting year for the economy and the country.
EUROZONE: Manufacturing blasts to new highs for 2017!
Eurozone manufacturing sectors appear to be in good shape moving into 2017, with HIS Markit’s final 2016 numbers registering the combined economies at 54.9.
Equity markets jumped on the news, which signalled the best result for the beleaguered zone since April 2011.
Germany´s DAX 30 index rose 0.8 percent in midmorning trading, while the CAC 40 in Paris added 0.2 percent. Manufacturing in the Netherlands and Austria were also at 68-month highs, with France close behind at a 67-month high. In another encouraging sign for France, which has been suffering from high unemployment, job creation was at its fastest rate since June 2011.
This may well be unwelcome news to UK importers, whom were enjoying a slight rest bite from the collapse in Sterling versus the Euro. Should the good news continue, we expect the Euro to continue to find more solid ground moving deeper into 2017.
EUR/USD remained in its range over the Christmas/new Year period, with 1.0351 providing the key level of Euro support. Moving deeper into the week, should this level be breached we expect rates to continue to travel towards parity. CPI and the FOMC are key to this, and a bullish FOMC could see this level breached sooner rather than later.
GBP/USD temporarily dropped below 1.22 before reconsolidating above during the festive period. Should the recovery continue, we expect to see some Sterling resistance at the 1.2509 psychological and pivot levels, while 1.20 provides a solid downside barrier. Brexit and Geo-politics remain key drivers and are the events to watch.
GBP/EUR continues to seek director, trading as low at 1.1580 and as high at 1.1980. We expect this mixed trading to continue as markets grapple with solid UK data versus obvious Brexit risks.
Economic Calander for the Week
In the UK all eyes will be on the PMI releases this week, with Manufacturing kicking off the pack. We expect manufacturing to increase in the month, with the potential for the release to push through 55. Construction PMI on Wednesday is also expected to increase, albeit marginally from 52.8 to 53.0.
Finally, the all important Services PMI should drop slightly from 55.2 to 54.7. All in all, a mixed bag for the UK is expected this week.
We have a busy week for the US with ISM Manufacturing PMI kick starting things off. We expect manufacturing to increase slightly on the month from 53.2 to 53.6.
Moving to Wednesday, markets will be watching for the FOMC minutes which should provide some insight into the rate decision last month. Hawkish sentiment will be greeted well by Dollar markets, and should continue to support the Greenback.
Thursday’s Nonfarms should show a slight decline in hiring from 216k to 170k, and the unemployment rate could rise from 4.6 percent to 4.7 percent on the back.
We have a light week for the Euro with CPI the only release of note. We expect European inflation to post at 1 percent versus last months 0.6 percent print. This should provide the Euro with some ammunition, given the usual policy response to rising inflation.
Outside the economic calendar, traders will remain focused on European Geo-politics, with the French and German elections and polling key drivers.
Week Commencing Monday 19th December 2016
US: Fed funds up 25 basis points despite Trump win!
The US Federal Reserve on Wednesday raised interest rates for the first time in a year, and only the second time since the 2008 financial crisis.
The bank announced a 25 basis point increase in the benchmark rate from 0.50 percent to 0.75 percent. The news immediately edged the US Dollar higher, with all majors losing ground against the Greenback.
Yellen also set out a faster pace of rate increases next year than was previously expected, with the FOMC stating it expects rates to increase by a further 0.75 percent over the course of next year. The unanimous decision to raise rates, the first time in months that the 10 members of FOMC had all agreed on policy, came at the end of the committee’s first rate-setting meeting since the election of Donald Trump as the next US president.
Trump and Yellen are not friends, and the President-elect has stated he is not seeking to extend her term when it comes to an end in 2018.
GREECE: Pre-Christmas bonus payment sends Eurogroup mad!
International lenders said on Wednesday that they were considering suspending an agreed short-term debt relief offer to the country after Prime Minister Alexis Tsipras unexpectedly announced the payment.
Lawmakers then subsequently approved the measures late on Thursday, adding an additional EUR 617 million burden to the public finances. In a joint statement, representatives from the European Central Bank, the European Commission and the European rescue fund said they would now decide whether to uphold a Eurogroup decision granting Greece short-term debt relief earlier this month.
EUR/USD continues to track to the downside on the back of the FOMC interest rate decision last week, with a new low established at 1.0365. Initial bias remains to the downside this week, with heavy EUR support expected around parity. We do not expect a breach this week, especially with the Christmas break approaching, however further losses are to be expected.
GBP/USD continued to drop on the back of the FOMC rate increase, with bias remaining to the downside as with EUR/USD. Sterling appears to have support however, so declines should be more muted than versus the Euro. We expect Sterling to resist at 1.2301.
GBP/EUR remains mixed, with bias slightly in favour of Sterling as we approach the end of the year. 1.20 remains a key level, although with the previous breach in mind, we expect only minor resistance at this level. Expect continued moves to the upside as we draw towards the holiday season.
Economic Calander for the Week
We expect the current account and Final Q3 GDP to be the highlight of the Sterling week on Friday, with reasonably strong results expected. We expect the account to remain in the red, however to reduce the amount from -28.7 billion to -28.3 billion.
The GDP amount is unlikely to change and be confirmed in at a strong 0.5 percent for the third quarter. Finally, we expect Wednesday’s PSNB figure to show an increase in public sector borrowing from 4.3 billion to 11.5 billion.
We have a busy week for the US ahead, with unemployment claims, Final GDP and Core Durable Goods all coming out on Thursday. We expect Core Durable Goods to expand to 0.2 percent on the month as retailers gear up for the festive period. GDP should edge further to 3.3 percent annualized from the 3.2 percent previously estimated.
Finally, we expect unemployment claims to edge higher to 255k from 254k last month. All in all, a positive week for the Dollar.
We have little in the way of European news outside the usual geo-political space. We expect German Ifo Business Climate to edge up on the month, potentially to hit 111.0 versus last month’s 110.4 print.
Week Commencing Monday 12th December 2016
ECB: Bond buying reduced, but extended!
The European Central Bank has said it will extend its bond-buying program until at least December 2017, but it will reduce its purchases by a whopping EUR 20 billion a month.
The initial program was valued at EUR 80 billion per month but had been scheduled to be scaled back by the end of March. In a shock announcement, the bank surprised markets by saying it would only purchase EUR 60 billion per month from April.
The bank did not decide to adjust any other monetary policy instruments and left its benchmark rate of zero unchanged. During the press conference, the bank raised its inflation forecast for next year up to 1.3 percent, which remains well below the 2 percent target but still shows some traction.
Economic growth should continue to push higher, potentially hitting as high as 1.7 percent for 2017.
UK: Far-right fail to make gains in Presidential Election.
UK industrial production fell unexpectedly in October, pointing to a weak start for economic growth in the fourth quarter.
Figures published by the ONS on Wednesday showed that Industrial Production, which accounts for approximately 15 percent of total UK output, fell by 1.3 percent in October compared with September, and was 1.1 percent lower than in October 2015.
The UK economy grew by 0.5 percent in the third quarter and recent surveys have pointed to a similar level of growth in the fourth quarter. The disappointing data has cast some doubt on these forecasts, with many now saying that the economy is starting to feel the chill post-Brexit.
The fall in industrial production was partly caused by one-off factors, in particular the temporary shutdown for maintenance of the Buzzard oilfield in the North Sea. Manufacturing output, which makes up about 70 per cent of industrial production, grew in August and September but fell 0.9 per cent in October.
EUR/USD surged last week to a high of 1.0872 however failed to sustain the break above the 1.0850 level of resistance. Rates have since returned to the 1.0550 region and with bias continuing to the downside (coupled with a heavy US data week), we expect further losses this week.
GBP/USD saw the Sterling bull trend continue, with the rate peaking at 1.2774 last week. Initial bias this week is neutral, especially on the back of last weeks disappointing IP figure. We expect the pair to trade the range, with a potential downside level of support at 1.2307 while 1.28 remains within view.
GBP/EUR continues to head towards the 1.20 mark, with Sterling definitely taking the front foot. The 1.2043 level of EUR resistance remains intact, however should we see some strong geo-political movements around Brexit and we could see markets move very quickly.
Economic Calander for the Week
We have a busy week for the UK, with CPI kick starting everything off on Tuesday. We expect to see inflation continue to rise on the back of a weaker Sterling, potentially pushing as far as 1.1 percent in November.
Wednesday we await the Claimant Count and Average Earnings, all of which should come in in line with expectations (5.0K and 2.3 percent respectively). Thursday is the big one with both Retail Sales and the Bank of England expected to move markets. We expect retail sales to disappoint, dropping to 0.2 percent from last months strong 1.9 percent.
The bank should keep monetary policy stable and with no changes, markets will await the press conference and Q&A.
We have a very busy week for the US, with Retail Sales kicking off the game on Wednesday. We expect retail sales to decline slightly on the month, from 0.8 percent to 0.4 percent. PPI for November should increase from 0.0 percent to 0.1 percent, which Crude Oil Inventories should drop slightly after last months large -2.389M decline.
The FOMC meeting on Wednesday is the highlight, with the potential for the benchmark FedFunds rate to be increased from 0.5 percent to 0.75 percent. This will create a large currency shock without doubt, so this represents the largest risk to market stability this week.
Finally, we expect Core CPI to increase marginally to 0.2 percent while the Philly Fed should also increase from 7.6 to 9.0.
We have a extremely quiet week for the Euro with CPI on Friday the only release of note. We expect inflation to remain reasonably stable for November at 0.6 percent. As discussed, the Euro is more likely to react to external factors this week, including the FOMC meeting in the US and the Bank of England in the UK.
Week Commencing Monday 5th December 2016
ITALY: Renzi gone and a new era of political turmoil!
Italian Prime Minister Matteo Renzi has announced his resignation, citing full responsibility for the defeat of his package of constitutional reforms in Sunday's referendum.
With 90 percent of the votes counted as of Monday morning, the “No” camp have consolidated a lead of a massive 10 points, making a No vote a certainty. The euro fell to 20 month lows against the Greenback, with markets concerned that instability in the Euro one's third-largest economy could reignite a dormant financial crisis and deal a critical blow to Italy's fragile banking sector.
The main worry of markets however is the fact that Renzi’s resignation could lead to fresh elections, with the right wing Five Star movement poised to make significant gains. The group advocates a departure from the single currency, and by extension the European Union. It is difficult to see how this referendum result will play out ion financial markets, however the bias is certainly shifting to a Euro negative scenario.
We expect the government to act swiftly to quell fears of a fresh election, however should popular support wain we could see elections as early as Q1 next year.
AUSTRIA: Far-right fail to make gains in Presidential Election.
In contrasting news, Austria’s voters have resoundingly rejected the anti-immigration and Eurosceptic Norbert Hofer’s bid to become the European Union’s first far-right president.
Greens backed independent Alexander Van der Bellen swept 53.3 percent of the vote from his rival, offering Hofer his second electoral defeat for the presidency. In keeping with other nationalist parties across Europe, Hofer promised to tackle establishment politics and called for an end to the migration crisis by effectively removing the country from the Schengen area, the European boarderless zone.
The result is providing little restbite to markets however in the wake of Italy’s shock referendum result, however it is certainly a Euro positive event.
UK: Government appeal underway, which way will it go?
11 of the UK’s top constitutional judges will take their seats on the supreme court bench on Monday to decide whether parliament or the government has the authority to trigger Brexit.
The four day court hearing will decide whether the UK parliament requires a vote on the governments negotiating position with respect to its EU exit. Markets generally believe that if parliament is given the opportunity to vote on the terms of a Brexit, the emphasis will shift away from the current “hard” stance to a softer style of Brexit.
Sterling assets are set to rocket it the court finds in favour of the Parliamentary vote, and with risks building in Europe, things look set to get even choppier.
EUR/USD continues to weaken after the Italian referendum result, with a low of 1.0518 signalling a decisive break of resistance. We expect the rate to now stabilise, especially as political risks are now realised for the short term. Expect the pair to trade within its current range, with a downside maximum of 1.0461.
GBP/USD continues to perform versus the Dollar on the back of European woes and the upcoming Supreme Court hearing. With a break of the 1.26 level, we now open up the potential of a 1.30 breach. Assuming a market positive response to the court result (aka Parliament getting the vote), we expect a positive bias moving forward.
GBP/EUR has reacted powerfully to the Italian result with a breach of the 1.20 level on Monday morning. We expect this positive bias to continue as Europe reacts to the news, and assuming the Supreme Court upholds its initial decision surrounding Brexit.
Economic Calander for the Week
We have the all-important Services PMI release on Monday, with a marginal decline of 0.5 expected by markets. This leaves the print at 54.0 which remains a relatively decent print, so we expect Sterling to continue to perform robustly. We then move to Wednesday’s Manufacturing Production print, which we expect to show a 0.2 percent increase in general production. As before, markets tend to concentrate on the geo-politics at the moment, so expect all the emphasis to remain on the Supreme Court this week.
We have a quiet week for the US ahead, with ISM Non-Manufacturing kicking things off. We expect the print to increase from 54.8 to 55.4, showing continued robustness in the world’s largest economy. We then move to Crude Oil Inventories on Wednesday, which the expectation of a drop in numbers by -0.88 million barrels. All in all, a mute week for the Greenback with most emphasis focused across the pond.
All eyes are on this week’s ECB meeting and Mario Draghi’s comments. We do not expect any monetary policy changes, however his comments on both Brexit and the Italian Referendum will likely be key market movers.
Week Commencing Monday 28th November 2016
UK: GDP estimate holds despite Brexit fears!
The Office for National Statistics has said UK gross domestic product grew by 0.5 percent from July to September, confirming the initial estimate in October.
This means year on year, growth should be confirmed in at 2.3 percent which is roughly in line with economist’s expectation and a solid number.
Diving into the figures, only the services sector recorded a quarter-on-quarter increase, while agriculture, forestry and fishing, construction, and production all showed declines during the period. Production output decreased by 0.5 percent in the third quarter, compared with the previous three months, revised down 0.1 percentage point from a previously published estimate. Despite a 1 percent drop in Q2, exports were up 0.7 percent in the third quarter, while imports fell 1.5 percent despite a 1.3 percent jump in Q2. Separately, retail sales have picked up with volumes growing at the fastest pace for over a year in the 12 months to November, according to the CBI’s quarterly Distributive Trades Survey.
CUBA: Castro's death throws country into mourning.
Cubans will begin massing on Havana's Revolution Square from Monday for a week-long commemoration of Fidel Castro, the communist guerrilla leader who led a revolution in 1959 and ruled the Caribbean island for half a century.
His death comes amid improving relations between the Communist state and the US, after nearly 60 years of isolation. There are hopes that a softening of the US led sanctions will lead to a huge influx of inward investment into the country, however it remains unclear whether Castro’s death will have a positive or negative effect on this dream.
A truly controversial figure, Castro is a love or hate character! I wonder how much trouble Boris Johnson can cause at the funeral!
ITALY: Renzi in a spot of bother as polls continue to turn.
Investors reeling from democratic shocks in Britain and the US are worried about Italy’s future in the Euro, with the impending referendum scheduled for the 4th December.
A defeat for Renzi, who proposed the vote and initially pledged to resign if the result did not go his way, could lead to early elections and a rise in support for the populist Five Star Movement. If they were to seize power in a post-referendum election, the potential market reaction would be severe.
The fears are already being reflected in current European assets, with the euro’s more than 3 percent slide this month to the lowest level since March 2015. This risk is also signaled by Italy’s 10-year bond yield climbing above 2 percent for the first time in more than a year.
EUR/USD's decline continued last week and reached as low as 1.0518. Initial bias stays on the downside this week. This is compounded by a relatively bullish Dollar and a lack of decent Eurozone economic data releases this week. A decisive break of 1.0461 should signal a further decline to parity.
GBP/USD remains within its current trading range last week, with the pair touching 1.25 on Friday. We are neutral on the pair this week, especially in the context of renewed Brexit pressures and more “stable” Trump rhetoric. We expect the pair to trade between 1.2673 to the upside and bounce off resistance at 1.2301.
GBP/EUR continues to see upside movement, with the pair trading above 1.17 for part of last week. Italian referendum fears coupled with French political risk appear to be outweighing Brexit concerns at the moment, and as such we remains bullish on this pair. We expect to see the pair continue to track a positive bias throughout the week, however hitting heavy resistance at the 1.1825 level.
Economic Calander for the Week
We have the start of the PMI releases at the end of the week for the UK, with Manufacturing kicking off. We expect a slight increase in the index, pushing up from last months 54.3 to a new post-Brexit high of 54.5. We then shift our focus to Construction PMI, which should see a small decline on the month from 52.6 to 52.2.
We have a busy week for the US, with US GDP and Nonfarm Payrolls headlining. We expect GDP to edge up by 0.1 percent to 3.0 percent annualised on Tuesday, Moving to Wednesday, we expect ADP Nonfarm Employment Change to edge up to 165k for November, while pending home sales is likely to disappoint at 0.4 percent.
Thursday’s ISM Manufacturing PMI should see marginal gains on the month to 52.2, while Friday’s NonFarms and Unemployment Rate should remain relatively stable at 175k and 4.9 percent respectively.
We have a quiet week for the Eurozone, with CPI the only release of note on Wednesday. We expect CPI to edge up to 0.6 percent on the month, mirroring the large gains seen in the UK numbers. On both Monday and Wednesday we have ECB President Mario Draghi speaking, with markets paying particular attention to Brexit, Trump and European geo-politics.
Week Commencing Monday 21st November 2016
UK: Inflation surprises but rises on the way!
UK inflation slipped unexpectedly last month as Bank of England Governor Carney warned higher prices are on the way.
Despite the surprise release, cost pressures at factories already appear to be ballooning thanks to sterling post-Brexit slump. Annual CPI weakened to 0.9 percent during the month of October from its previous high of 1.0 percent in September.
Within the Inflation Report, Mark Carney highlighted the cost of materials and oil for factories, which have posted the biggest monthly jump since records started in 1996, leaping by 4.6 percent in October.
This has led to prices for goods leaving factories rising by 2.1 percent on the year, the biggest increase since April 2012. The Bank of England now forecasts that inflation will rise to about 2.7 percent around this time next year. Interestingly, inflation expectations around the world have also surged in the past week, driven in part by U.S. President-elect Donald Trump's plans to increase government spending. It’s just one thing after another these days!
EUROPE: Like it or not, populism is not just an Anglo-Saxon thing!
German Chancellor Angela Merkel announced that she will run for a fourth term, despite horrendous poll ratings for her ruling Christian Democratic party.
Already chancellor for 11 years, she faces a daunting task given the shifting tides in the Transatlantic relationship, coupled with European troubles at home. In order to succeed on the international stage in a fourth term, Merkel must first heal divisions over her refugee policy, effectively allowing over one million migrants enter Germany, that has alienated the Bavarian wing of her nation-wide conservative alliance.
European problems do not end there, the rise of Marine Le Pen's far-right National Front will leave the next French president ruling over a deeply divided country.
More immediately, Italian Prime Minister Matteo Renzi risks losing a referendum on constitutional reform next month on which he has staked his political future. These are tumultuous times for Europe and the big question on everyone’s mind is, will the bloc survive?
UK: Hammond to deliver first post-Brexit budget.
The UK’s first budget plan since the Brexit vote will not include a big new spending push, owing to a high level of public debt.
The most significant part of the statement should be the “new fiscal framework”, effectively ditching George Osborne’s policy of austerity for something more relaxed. This could be viewed in two ways, potentially as a positive as the government can be more reactive with the fiscal levers in a post-Brexit world.
However with ballooning debt, there is little room for further borrowing, and borrowing will further strain the country’s uncertain credit rating. Phillip Hammond has a tight rope to walk, let’s see if he can make the distance!
Continued declines in EUR/USD have pushed the pair into a new range, with key levels of support now placed at the 1.0460 level. As momentum continues to the downside, coupled with the lack of Eurozone data this week, we expect further losses. It is unlikely to break through the support mentioned above, however geo-political events continue to dominate the pair.
GBP/USD lost its momentum last week and has finally pushed through the 1.2370 level of support. Despite its current bearish stance, significant Sterling support now gathers at the 1.1946 low, and given the light data week for Sterling it is unlikely we will see a break. Should we see a decent UK GDP print, and/or softening of Brexit stance, expect to see Sterling’s fortunes reverse.
GBP/EUR remains reasonably high given the current geo-political environment. Given the recent poll ratings for both the Italian referendum, French Presidential Elections we expect further pressure on the Euro. Although we expect the pair to trade the range this week, Sterling should have a small advantage.
Economic Calander for the Week
We have a relatively light week for the UK with GDP to only economic data release of note. Friday’s GDP figures should confirm Q3 GDP at 0.5 percent for the quarter, which on an annual basis puts UK GDP at 2.3 percent.
This is a decent print and remains far above the European average, so expect a strong Sterling on the back of it. Another key event is the mid-term budget on Wednesday, which should cause some volatility, especially should the chancellor give up on debt reduction targets.
We have a busy week of US data with Existing Home Sales kicking off the show on Tuesday. We expect to see around 5.43 million units sold in October, which is a solid number and in line with last month’s 5.47 million print.
The FOMC headlines Wednesday with the release of their minutes, and as usual any hint of policy shift will impact market sentiment. Core durable goods should show a marginal increase to 0.2 percent for October while New Home Sales should come in at 593 thousand.
Finally Thursday is Thanksgiving day, so expect light Dollar markets towards the end of the week.
We have little in the way of European data this week, with most eyes focusing on Mario Draghi’s speech at the European Parliament on Monday, Questions about how a Trump presidency will affect the Eurozone are expected to dominate the day, and any outlandish statements will likely be capitalised on by markets.
Week Commencing Monday 14th November 2016
UK: Construction sector enters recession
The UK’s construction industry has had its weakest performance in four years following the first three months after June's vote to leave the European Union, official figures from the ONS have shown.
Construction volumes fell by 1.1 percent in the third quarter as large falls in repairs were only partly offset by small rises in infrastructure and public building work.
The figures confirmed that British builders are experiencing a recession with a second successive quarter of decline after shrinking by 0.1 percent in the April-June period.
The actual release was better than market expectation, with analysts widely expecting a 1.4 percent decline. Britain's construction industry makes up about 6 percent of the economy.
TTIP: Dead in the water?
European policy makers appear to have conceded that the Transatlantic Trade and Investment Partnership (TTIP) is dead in the water.
Earlier this week, congressional leaders in both the Republican and Democratic parties said they would not bring the trade deal forward during a lame-duck session of Congress, before the formal transition of power on 20 January.
Originally, the 28-nation bloc hoped to seal TTIP with the Obama administration by the end of the year. But in the course of three years of negotiations, resistance has been mounting on both sides of the Atlantic, preventing a breakthrough in recent months.
Following his anti-globalisation stance, Trump has promised to get tough with China and withdraw from the unsigned 12-nation Trans-Pacific Partnership (TPP) as well as renegotiate or scrap the North American Free Trade Agreement (NAFTA) with Mexico and Canada. Interesting time ahead!
EUR/USD surged initially to 1.1298 last week but reversed and dived through 1.0850 support as markets count the perceived cost of a cancelled TTIP. Initial bias remains on the downside this week, especially as we see continued risk off trading surrounding Trumps electoral victory, with a potential low of 1.0517 in mind.
GBP/USD's choppy rebound from 1.1946 extended higher last week and touched a high of 1.2650, before returning to the mid point of 1.2450. Initial bias stays on the upside this week for further rises, given continued Trump rhetoric and GBP remaining a partial safe haven currency.
GBP/EUR also rose on the back of the Trump victory, pushing 1.1650 and retaining its bullish stance. With this in mind, and given we are unlikely to receive any Brexit related news in the coming week, we expect this bias to continue and the pair to trace higher.
Economic Calander for the Week
We have a busy week ahead for the UK with both the CPI and Inflation Report due on Tuesday, Employment on Wednesday and Retail Sales on Thursday. We expect inflation indexes to continue to rise as prices adjust to a weaker Sterling, which Mark Carney could provide some reignite Brexit talk during the Inflation report.
We expect the Claimant Count to increase slightly in October by a marginal 2.0k, while average earnings plus bonuses should come in at 2.4 percent. Retail sales is the big one, with the market expect a 0.5 percent gain in the lead up to Christmas versus last month’s flat reading. All in all, this could be a positive week or Sterling.
We have a big week for US markets with Retail Sales, Inflation, the Philly Fed and Yellen all potential market movers. We expect retail sales to come in a little lower than the previous, despite the festive season, at 0.4 percent and 0.5 percent respectively for core and non-core. PPI inflation should come in flat at 0.3 percent, while Core CPI should edge up by 0.1 percent.
Unfortunately we expect the Philly Fed to edge down to 8.0 given downside pressure to manufacturing confidence. Finally the market will look forward to any comments Janet Yellen might have regarding the President-Elect.
We have a quite week ahead for Europe with Mario Draghi and inflation the only economic releases of note. Currently a meeting of EU Foreign Ministers are scrambling to come up with a strategy in the Post-Trump world, and any hint of TTIP defeat will likely be market negative.
Inflation is the only economic release of note, and with expectations set at 0.5 percent, we expect little FX moves on the back of its release.
Week Commencing Monday 31st October 2016
UK: GDP continues to defy Brexit blues
UK gross domestic product beat estimates, with the economy growing by 0.5 percent during the third quarter of the year.
This beat analysts expectations of the 0.3 percent print and was considerably better than the -0.1 percent the Treasury had projected. Diving into the figures, the services sector, which makes up nearly 80 percent of the UK economy, was responsible for all of the third-quarter growth, expanding 0.8 percent.
The three other major sectors within the economy (industrial production, construction and agriculture) all contracted. The strength of services continues the pattern since the financial crisis, with output 12.1 percent higher than its pre-crisis peak. In contrast, manufacturing is still 5.6 per cent smaller than at the start of 2008 and construction 1.3 per cent lower. It is important to note to that despite the great print, this number is subject to change.
The current figure was based on only 44 percent of the data required for the final estimate, and the number could be quite different later this year when the final figure is confirmed.
CETA: Finally Ceta is off the ground, lessons for Brexit anyone?
The EU and Canada signed a free trade deal on Sunday that was almost scuppered by a regional Belgium town, exposing the difficulties of securing agreement from the 18 member bloc.
The Canadian Prime Minister and top EU officials signed the comprehensive economic and trade agreement, known as Ceta, paving the way for most import duties to be removed early next year.
The treaty does still need to be approved by at least 38 national and regional parliaments, including the UK parliament, in order to take effect. Liam Fox, the international trade secretary has warned that the UK parliament could still veto the deal and has also warned that problems in agreeing Ceta showed the difficulty the UK could face in negotiating a trade agreement with the EU.
Unlike Brexit, both the EU and Canada approached the negotiations with goodwill, something which is unlikely in the Brexit negotiations.
BoE: Don't leave me now Carney!
Markets are becoming increasingly hopeful that Mark Carney, Governor of the Bank of England, is ready to confirm that he will extend his term at the Bank of England beyond 2018.
Sources close to the Governor have said he is likely to make a statement on his future this week to put an end to damaging speculation. It is thought that pressure exerted on the bank chief from prominent “Brexiteers” is partly to blame for the speculation, with some MP’s openly calling for his resignation.
This Thursday’s Bank of England news conference will therefore be watches closely and any indication that he is ready to throw in the towel will certainly send Sterling lower. Interesting time ahead!
EUR/USD has recovered from its 1.0850 lows however the outlook remains unchanged, especially in the geopolitical context. With this in mind, we expect bais to remain to the downside with a floor of 1.0775 likely to represent the low of the week. Ceta news should support early trading, however the FOMC coupled with US employment data should prompt USD strength towards the mid to end of the week.
GBP/USD remains range bound subject to Brexit news, with the rate hovering between 1.21 and 1.23 last week. Any news of Carney’s quitting the Bank of England will certainly cause Sterling markets to panic, with a new range in the teen’s likely. Bias remains to the downside, however if we see a decent set of PMI prints we could see the trend reverse and the rate edge back up into the 1.23’s.
With GBP/EUR approaching the 1.10 barrier we expect a range bound week, with upside potential on the back of some decent UK PMI prints. There is significant support at 1.13 and this would be hard for a bullish Sterling to break, therefore expect the pair to trade within this range.
Economic Calander for the Week
We have a busy week for the UK with the all important PMI’s set to be released this week. Starting with Manufacturing, we expect a slight downside shift in the level from 55.4 to 54.5, indicating the sector remains in growth albeit growing slower. Construction is also expected to grow with the indicator coming in at 51.8 versus last months 52.3 print. Services is the big one, with a 52.4 print expected this month versus last months 52.6. Finally we are awaiting the Bank of England’s interest rate decision and minutes on Thursday, which should give markets a decent insight into the bank’s current Brexit sentiment.
It is a big week for the US with ISM Manufacturing kicking off the news on Tuesday. We expect a slight upside revision in the index, with a print of 51.7 expected against last months 51.5. The FOMC statement is expected on Wednesday and we expect it to be more hawkish than ever, which should give the Dollar bulls a further reason to buy. ISM Non-Manufacturing on Thursday is likely to be the only disappointment, with a downside print of 56.0 versus last months 57.1. Finally, Nonfarms should show an improvement in the number of payrolls and unemployment could drop from 5.0 percent to 4.9 percent on Friday.
We have a quiet week for the Eurozone with Monday’s CPI figures the only economic release of note. We expect CPI to be confirmed in at a healthy 0.5 percent on the month, with Core CPI coming in around 0.8 percent. Eurozone GDP is also due on Monday and should be confirmed in at 0.3 percent for the quarter.
Week Commencing Monday 17th October 2016
CHINA: GDP remains robust despite debt bubble
The Chinese economy expanded at an annual rate of 6.7 percent in the third quarter, in line with the government’s full-year target.
This, coupled with GDP growth of 6.7 percent in the first and second quarters of 2016, seems to be allaying fears of a sharper slowdown in the country on the back of continuing turmoil on currency and stock markets.
Two critical sectors, both retail sales and investment, have powered the Chinese economy this year, rising 10.7 and 8.2 per cent respectively in September. Industrial production growth however slowed to 6.1 percent in September, an indicator which easily remains the largest contributor to Chinese GDP.
Many analysts believe this year’s stronger than expected growth has been down to a dangerous expansion in credit, especially for real estate developments. Debt, obviously, has to be paid back and with debt now running at 170 percent of GDP, many are question how much further the economy can grow.
UK: British banks get ready to jump ship
A report from the British Bankers Association has suggested that Britain’s biggest banks are preparing to relocate out of the UK in the first few months of 2017 amid growing fears over Brexit.
It seems the City believes that the government’s stated intention to take control of the freedom of movement into the UK is a deal breaker to any chance of retaining the present terms of trade for banks.
A hard Brexit would involve the UK leaving both the single market, a central pillar of which is freedom of movement, and the customs union, which could potentially reintroduce tariff and non-tariff restrictions on British imports and exports.
Within the report it is claimed that US banking giant Goldman Sachs is among those drawing up plans to transfer around 2,000 of its employees to a rival European city, should the UK lose its passporting rights.
EU: CETA on the brink as small Belgium region looks to block
The possible collapse of a free-trade agreement between the European Union and Canada is the latest sign of how complicated things could get between the UK and EU over Brexit negotiations.
Currently a small region of Belgium, known as Wallonia, is holding back the deal stating it is a bad deal for Europe’s farmers and gives too much power to global corporate interests.
Wallonia is one of five regions in Federal Belgium, which requires a unanimous agreement within its government to give the deal its blessing. The political impasse led to extraordinary scenes on Friday of Paul Magnette, Wallonia’s minister president, negotiating directly with Canada’s trade minister Chrystia Freeland, while EU leaders waited to learn the outcome.
This deal has been long in the making, and to hit a hurdle this big just before it is signed is a big disappointment. Outlook for Brexit negotiations just got a little dimmer!
EUR/USD pushed to the downside last week as traders reassess USD shorts on the back of renewed hawkishness from the Fed. 1.08 now appears to be in reach and should we see a decent US GDP print, we could see the rate drop as low as 1.0715. With little in the way of European data this week, we expect upside momentum to be muted at best.
GBP/USD continues grinding lower on the release of strong data which has increased the chances of the Federal Reserve increasing interest rates. UK GDP will be the main mover of Sterling markets, with a decent print likely to reinforce the 1.21 – 1.23 range we are in. With a decent GDP print and perhaps a resolution on CETA, expect Sterling to perform well.
GBP/EUR remains range bound last week as markets continue to wait for further Brexit news. This weeks GDP s will likely cause movement, as would any resolution in the CETA discussions. With 1.10 gathering support, we expect markets to remain range bound with Sterling pushing to the upside. As always, headlines concerning Brexit and which way the government is swinging on the bard-versus-soft Brexit scale are the main focus.
Economic Calander for the Week
We have an important week for the UK as continued Brexit speculations continues to dominate the news wires. Mark Carney is set to speak on Tuesday before the House of Lords Economic Affairs Select Committee, which will certainly contain some Brexit material. Thursday sees the release of the all-important GDP figures for the UK, with a 0.3 percent third quarter expected, quashing fears of a Brexit fuelled technical recession.
We have a busy week for the US we Consumer Confidence kick starting the week, followed by Wednesday’s New Home Sales and Crude Oil Inventories. Core Durable Goods and Pending Home Sales on Thursday will also be a decent watch however all eyes remain on US GDP, which is widely expect to come in at 2.5 percent annualised.
We have a quiet week for the Eurozone with Mario Draghi’s speech about stability, equity and monetary policy at the DIW Economic Institute in Berlin on Tuesday the highlight. CETA trade negotiations will therefore likely dominate, especially as it is being viewed as a barometer on future UK/EU trade negotiations.
Week Commencing Monday 17th October 2016
US: FOMC back on the bull surge!
Minutes from last month’s FOMC meeting have shown that the decision to hold interest rates was closer than expected.
The Federal Open Market Committee left the benchmark lending rate unchanged in a range of 0.25 percent to 0.5 percent for the sixth straight meeting last month, even as a majority of the 17 participants still forecast at least one hike this year.
Uncertainties over the economic outlook and the desire by the committee to assure that job growth remains strong are likely to delay another rate increase until December. Continued concerns over global growth, especially Brexit, have spooked a number of committee members and led to calls for a more cautious hiking path.
Despite these concerns the US economy continues to push ahead on the back of solid consumer spending and decent payroll figures. Payrolls rose by 156,000 last month, bringing the monthly average to 178,000 this year compared with 229,000 last year.
UK: E&Y forecasts a weaker near term as inflation hits growth.
The Ernest and Young Item Club has said that the UK economy faces “prolonged period” of weaker growth as consumer spending slows and business investment fizzles out.
This is despite the Office for National Statistics revised up its reading for the UK economy in the runup to the Brexit vote, with GDP growing 0.7 percent in the second quarter, up from a previous estimate of 0.6 percent for the period.
While the UK’s main economic indications have held up since Britain voted to exit the EU, sterling has lost around 18 percent of its value against the US dollar since 23 June.
The EY Item Club report said a weak pound would cause exports to rise by 4.5 percent in 2017 and 5.6 percent 2018. It said net exports are expected to add 0.8 percent to GDP next year, accounting for nearly all of the expected growth in the UK economy.
EUR/USD continued to track down last week as Brexit woes and a bullish FOMC weighed on the single currency. As we have little in the way of US data this week, all eyes will be on Mario Draghi on Thursday, and with trends to the downside we expect 1.09 – 1.0850 on the cards.
GBP/USD held just above the 1.20 level last week as the aftermath of the flash crash continued to be felt. With inflation the only release of note from the UK this week we expect to see a continuation of the current bearish trend, with Sterling support at 1.20 growing. As per usual, expect any Brexit speeches by politicians or policy makers to drive the market lower.
GBP/EUR should have an interesting week as markets look forward to both Mario Draghi and UK inflation this week. Sterling remains on the back foot despite its large losses last week, with 1.10 a significant barrier. If breached we could see the rate drop to as low as 1.08 this week, especially if we see some shock announcements surrounding Brexit from politicians and/or policymakers.
Economic Calander for the Week
We have a relatively quiet week for the UK with inflation figures for September the only releases of note. We expect the headline rate on inflation to pick up from 0.6 percent to 0.8 percent in the month as a weaker Sterling pushes up import prices.
Core numbers should also show a uptick from 1.3 percent to 1.4 percent.On the non-data front, traders are watching politicians as usual with focus currently on Phillip Hammonds softening Brexit stance.
We have a very light week in the US with no market moving data expected. Stanley Fischer’s speech on Monday may be a highlight if he backs a more hawkish rate stance than his peers within the FOMC, while the Beige Book and Initial Jobless Claims on Wednesday and Thursday respectively could also be worth a watch.
All eyes will be on Mario Draghi’s policy statement on Thursday and while we do not expect any shift in interest rate direction, his comments always play havoc on the markets. We expect any comments surrounding Brexit or the ongoing funding difficulties in Italy to push down the Euro.
Outside the ECB we look forward to European inflation figures on Monday, which should come in flat on the month at 0.8 percent.