A quiet week for the Eurozone as the US employment results put into question tapering.

Week Commencing Monday 9th September 2013


This week in Brief



  • In the UK, the claimant count should continue to see significant reductions in those claiming benefits, albeit at a slightly slower pace than the previous month. Despite the reduction in pace, we believe this will still be a GBP positive event as it still represents the one of the highest reading since 2010.

  • We have a big week in the US with the usual unemployment claims report on Thursday as well as Retail Sales and the Preliminary UoM Consumer Sentiment report on Friday. We expect mixed signals from the world’s largest economy and continued uncertainty surrounding the Fed tapering story.

  • There is nothing of note due to be released from the Eurozone apart from IP, which should show that the zone as a whole has seen industrial production contract after last month’s bumper reading.

  • IMPORTANT - Geo-political tensions still remain surrounding the potential US intervention in Syria. With Barack Obama going to congress this week there is potential that missile strikes could take place by the end of the week. Expect commodity markets (especially oil and gold) to be hugely effected should this take place. On the currency side, expect some mild to moderate capital flight into US treasuries (boosting USD) should an attack take place.


Market Themes & Current Events


In the US, Labour Department statistics stated that the economy added 169,000 new jobs in August, fewer than expected by many analysts. However, the unemployment rate fell to 7.3%, down from 7.4% in July, the lowest level since December 2008. This release comes ahead of the September meeting of the US Federal Reserve, at which policymakers are widely expected to begin cutting the current quantitative easing program. The Federal Reserve is currently buying $85bn in assets every month as a way of supporting the economy, but senior figures (including the Federal Reserve Chairman Ben Bernanke) at the reserve bank have already indicated their intention to roll back the programme in the coming months. The result came as a disappointment to the market, as many analysts projected 180,000 jobs would be added. The Labour Department also revised down the number of jobs added in July, from 162,000 to just 104,000. This brings the average monthly job growth for 2013 to 160,000, which is just barely enough to keep up with population growth.


Moving to closer shores, German exports unexpectedly fell in July as the nation delivered less products within the beleaguered Eurozone bloc. Seasonally adjusted exports fell by 1.1% in July from June, whereas economists were expecting a 0.7% rise. Exports to Eurozone nations, which buy approximately 30% of Germany's exports, fell by 0.7% compared with the same month last year. This comes as a new wave of bearishness spreads across the Euro area, compounded last week with Spanish factories reporting yet another month of falling production. Figures for July showed that factories and utilities cut production at an annual rate of 1.4%. This makes grim reading, especially as it is the 23rd consecutive month of falling industrial production.


In more doom and gloom, the cost of borrowing over 10 years for the British government has risen above 3% for the first time since July 2011. This once again stems from the tapering question, as many in financial markets believe that efforts to boost the US and UK economies will be withdrawn sooner than thought. At the MPC press conference last month, Bank of England governor Mark Carney said the central bank would not consider raising interest rates until the unemployment rate fell below 7%, which he said could take up to three years. However with UK service sector growth at a six year high, many economists believe that as the economic recovery is accelerating, Carney may have to take action sooner. Despite the underlining good news, this creates uncertainty in the market and this is pushing UK 10 year Gilt yields much higher than their usual average.


Sterling Outlook


We have a relatively quiet week for Sterling ahead after last week’s fantastic PMI releases pointing towards a sustained UK economic recovery. We start with the claimant count change, which is expected to continue to improve, albeit more modestly than previous months, with a fall of -21.2k expected against last month’s 29.2k fall. Despite the slowing of pace, we still believe this will be Sterling positive, especially as it would still be the second highest monthly reduction since May 2010.


We then move to the unemployment rate, which is now one of the core indicators after Mark Carney set forward guidance to be linked with 7% unemployment last month. Unfortunately this indicator remains relatively static, and as such we expect no change from the current 7.8% which has been posted for the past 5 months. It is worth mentioning however that any change in this figure will be highly notable owing to its link with potential interest rates in the future, so expect some significant volatility should it break the 7.8% trend.


US Dollar Outlook


The US has the busiest schedule of our selected currencies this week, with a number of key economic releases due to be unveiled this week. We start with the weekly unemployment claims, with market expectation set for an increase to 332k from the 323k figure last week. Overall this data release has been on a clear downward path and as such supports the case for potential tapering of QE. That said, mixed signals have further convoluted market perceptions of whether asset purchases are likely to be tapered at the upcoming FOMC meeting. One thing is clear; the markets are likely to become ever more volatile as we approach the meeting, especially with the release of any key data that could affect the decision making process. With this in mind, we expect the unemployment claims figure to cause considerably more volatility that usual in the market.


We then move to Retail Sales, where the expectation is for a rise from 0.2% to 0.5%. As with most key US economic indicators, any significant deviation from this figure is likely to drive the markets into fairly volatile grounds.


Finally, we have the preliminary University of Michigan consumer sentiment figure is also due out of Friday, with markets expecting a rise from 82.1 to 82.6. Interestingly, 5 out of the past 6 releases have fallen short of market forecasts, which in our opinion suggest that forecasts are too optimistic with this indicator. With this in mind, I expect this figure to fall short yet again, with markets likely to tie such an event to potential weaken the probability of the Federal Reserve action to taper current QE levels.


Euro Outlook


 We have an exceptionally quiet week for the Eurozone with very few real releases of note from the 17 nation single currency bloc. We do have Industrial Production for the EZ as a whole, which is due out on Thursday. This figure is worth noting, owing to the importance of the manufacturing sector in some of the more dominant Eurozone economies. Market expectations however point towards a disappointing figure of -0.1% after last month’s 0.7% growth.

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