Bernanke takes the hot seat after Yellen's mega-schmooze!

Week Commencing Monday 18th November 2013


This week in Brief



  • In the UK the week is dominated by the MPC minutes and voting, which although are not expected to show any decent will be scrutinized for any hints to a possible change to the 7% threshold on the unemployment rate.

  • In the US, Ben Bernanke goes into the hot seat while Wednesday sees 5 important economic releases hit the market in one go. Expect some significant volatility both during Bernanke’s testimony and Wednesday.

  • In Europe, we expect strong European Manufacturing PMI’s despite the GDP setback last week. German ZEW and IFO business climate should also see some moderate strengthening so expect some rest bite for the beleaguered single currency.


Market Themes & Current Events


UK retail sales volumes fell 0.7% in October according to the ONS, however sales volumes are still up 1.8% from a year earlier, indicating increased consumer confidence. The month-on-month fall was unexpected as many economists had forecast sales to stay unchanged. Despite the retail sector only represents about 5% of the UK economy, the decline is unwelcome news to what has been a very good quarter for growth in the economy. The report underscores the challenges facing households as prices continue to rise three times faster than wages. While the Bank of England raised its growth forecasts yesterday, Governor Mark Carney said interest rates would remain at a record-low 0.5 percent until officials were sure the recovery was secure. The pound fell against the dollar after the data were released and push just below the 1.60 mark mid-afternoon, down 0.4 percent on the day. The yield on the 10-year U.K. government bond declined two basis points to 2.78%.


Moving to the Eurozone, The economy over there grew by just 0.1% in the third quarter, down from 0.3% growth posted in the previous quarter. Within the figures, German GDP rose 0.3% from the second quarter, when it increased by 0.7%, while the French and Italian economies both shrank 0.1%. With the second and third-biggest economies contracting, Germany continues to drive growth in the 17-nation euro area, with help from its neighbours in northern Europe. Separate data showed Austrian GDP increased 0.2%, while the Netherlands exited recession with a 0.1% gain. With this mixed picture of the European recovery, you would be forgiven to think that the recovery is not gaining any momentum at all!


Over in the US, Janet Yellen, the odds on favourite to succeed Ben Bernanke as Fed chairman, has defended its stimulus efforts and vowed to continue them if confirmed. Many of the lawmakers questions focused on what the Fed has done to shore up the banking sector and central bank’s progress in crafting new regulations required under sweeping reforms passed by Congress three years ago. They also challenged Yellen to address ways to limit the dominance of the nation’s largest financial institutions, which have been cited as too big to fail. Currently Barack Obama is revelling in Yellen’s image, as many lawmakers have her high up on their list of potential candidates.  However, at least one Republican senator on the committee, David Vitter of Louisiana, said Thursday that he will oppose her confirmation. That said, a committee vote on Yellen’s nomination could come as early as next week, and the panel appears almost certain to send it to the full Senate for consideration.


Sterling Outlook


We have a relatively quiet week for Sterling ahead with the MPC official bank rate vote and the MPC asset purchases facility votes taking the limelight. Starting with the bank rate votes, with the BOE making no change to the benchmark interest rate, the markets are expecting the vote to have been unanimous. A split vote, however unlikely, would indicate some dissent from the decision not to adjust rates, which we would speculate could result in some major volatility across all Sterling pairs.


Moving to the asset purchases, with the breakdown of the MPC vote on QE being unanimous (9-0) since July we doubt that deserters would rear their heads now! Once again, a split vote would show a difference of opinion regarding QE, which could lead to some increased volatility.


Slightly less on our agenda is the Public Sector Net Borrowing figure, which has been posted two straight deficits this year, although both of these readings beat their estimates. The deficit is expected to widen to 10.1 billion pounds in October, compared to 9.4 billion the month before.


Finally, the CBI industrial order expectation release is expected mid-day on Thursday. This important manufacturing index crashed in September, posting a reading of -4 points, compared to 9 points the month before. The markets are expecting a turnaround in October, with an estimate of 0 points in the upcoming release.


US Dollar Outlook


We start the week with Ben Bernanke speaking in Washington, where he is likely to follow Federal Reserve Chairperson-Designate Janet Yellen tone. He will no doubt be questioned on the possibility of tapering, which should spark some considerable market volatility, depending on whether he pushes forward expectations of tapering or not.


Sticking to Wednesday we also await the release of US Retail sales, which should recover after sales declined unexpectedly in September, down 0.1% for the first time in six months. Despite this fall, sales in most businesses increased, suggesting consumers are continuing to spend at the same rate as before the government shutdown. Meanwhile, sales excluding autos edged up 0.4% as consumers continued to spend despite the approaching federal shutdown, which lowered spending only temporarily. The fast approaching holiday season may have speeded purchases. Retail sales are expected to grow by 0.1%.


Also on Wednesday we have the all-important FOMC Meeting Minutes, which after leaving policy unchanged last month, may offer insights into any changes in the FOMC’s assessment of the economy. Many economic data releases were interrupted between the September and October FOMC meetings as a result of the government shutdown, so the minutes may give some insight into whether the Committee looks for meaningful shutdown-related impacts in upcoming data.


We then move to Thursday and the highlight of the week, the October Philadelphia Fed Business Outlook Survey, which is likely to rise to 21.0 from 22.3. A strong new orders index last month (27.5, up from 21.2 in September) suggests good momentum for activity in November. As energy prices continue to decline, lower prices paid or prices received indexes could be a source of downside risk to our forecast if they drag down the top-line. We expect, however, that the general activity indexes and employment related indexes should suggest continued moderate expansion.


Euro Outlook


On Tuesday we have the German ZEW Economic Sentiment release, which is expected to see another rise to 54.6 from the 52.8 in October. This follows the general consensus that Germany’s attitude towards the EU recovery has greatly improved. Hopefully this indicates the gap between Germany’s strong economy and the EU will be narrowing in the quarters to come!


We then move to Thursday’s Eurozone Flash Manufacturing PMI’s, which are likely to rise further into expansionary territory. Notwithstanding their recent poor GDP performance last week, France and Italy might experience the sharpest PMI rebounds in the near-term. Our forecast is for the Eurozone composite PMI index to rise back to its September level of 52.2.


Finally we have the German Ifo business sentiment index, which dropped slightly for the first time in six months in October, reaching 107.4 following 107.7 on September. Analysts expected a pick-up in momentum this month, especially as the reading fell short of consensus forecast of 108.2 last time. However as Germany’s recovery is expected to continue despite temporary European setbacks, a rise to 107.9 is projected now.

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