BREXIT to overshadow key UK and US data this week...

Week Commencing Monday 2nd May 2016

Overriding Market Themes

We start this week in the UK, where both the manufacturing and construction sectors managed to drag down UK growth during the first three months of the year. The economy grew by 0.4 percent between January and March, following growth of 0.6 percent in the final quarter of 2015. In contrast to the other indicators, the ONS said that the UK’s dominant services sector grew by 0.6 percent in the first quarter. While the disappointing figure was in line with expectations, analysts said recent surveys of the services sector (which accounts for roughly 75% of UK output), pointed to a weak start to the second quarter, suggesting that growth could slow even more sharply ahead of the EU referendum on June 23. However a number of prominent economists have started to question the extent to which the forthcoming referendum could be blamed for slowing GDP growth. This is especially compounded by the soft survey data we have been seeing since the beginning of the year, before the referendum date had been set. One thing is for sure, currency markets are being affected by the referendum however! Last week’s intervention by US president Barack Obama, who spoke out in favour of Britain remaining in the EU, has helped to lift sterling. Sterling climbed to a three month high on Tuesday as a result, while traders have brought forward their expectations of an US interest rate hike by almost two years over the past few weeks to mid-2018 as stock markets have recovered and global sentiment calmed. How far can Sterling go? Ask the politicians!

Across the channel, the Eurozone has finally growth through its pre-crisis 2008 level! Growth in the euro single currency area gathered pace in the first threemonths of the year, bringing economic output back level before the 2008 financial crisis. The Eurozone’s gross domestic product grew at an annualized pace of 2.2% in the first quarter, data published by the European Union’sstatistics unit showed. The solid first quarter, at a time when financial markets werevolatile and European exports to China and other large economiesweakened, was a welcome sign of resilience, and contrasts with a slowdown in the US. Despite the welcome news, many Eurozone countries remain stuck in near economic collapse! Both Germany and now France have pulled themselves firmly out of their pre-crisis levels (having posted nearly 6% and 3.5% gains respectively), however Spain and especially Italy have not been so lucky. Italian GDP continues to sit nearly 10% below pre-crisis levels and with little chance of an immediate recovery. What is even more worrying is that this lack of growth comes during a period of extremely easy money, with central banks using every trick in the book to support regional economies.


GBP This Week

This week’s London mayoral and regional elections on Thursday are likely to ensure that the referendum debate remains a key driver of FX markets for the immediate future. On the data front, manufacturing PMI on Tuesday is likely to pick up slightly to 51.2, which should be in line with recent bullish CBI rhetoric. In contrast however, we expect the services PMI on Thursday to drop to 53.5 in April from 53.7 in March. This would be consistent with the general view that the UK economy will slow into the second quarter of 2016 as the EU referendum draws nearer (with some analysts even suggesting flat growth in the second quarter). With this in mind, we expect the composite PMI on Thursday to print 53.3 in April, -0.3 points down from March.

USD This Week

We have a busy week state side! We start with non-farm payrolls, which we forecast to see growth of 250k. Within this, we look for private payroll growth of 240k and net government hiring of 10k. For nonmanufacturing ISM on Wednesday, we expect the index to jump to 55.0 in April, from 54.5 in March. Business activity rebounded last month; however, the employment index remains soft at 50.3. In line with our outlook for robust April jobs gains, we expect a higher reading on the employment element to lead the headline index up about half a point this month.

On the speeches side of things, we have several FOMC members speaking this week, with Williams on Tuesday likely to be the most important. Lockhart is also due to speak on Tuesday, and will speak on economic outlook and monetary policy. If either of them provide any insight into the balance of views at the April meeting, expect FX markets to extrapolate and move accordingly.

EUR This Week

This week we have already heard from European Central Bank President Draghi, and expect to hear from Executive Board Member Coeure on Tuesday, and Vice President Constâncio on Thursday. On the data front, consensus is forecasting that the April euro area manufacturing on Monday, services, and composite PMIs on Wednesday will be finalized at 51.5, 53.2 and 53.0, respectively, in line with their estimated readings.



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