China slowdown intensifies Global fears...

Week Commencing Monday 14th March 2016

Overriding Market Themes

We start this week in China, where industrial production grew just 5.4 percent in January and February compared with the previous year, sparking fears that the world’s second largest economy is slowing down. The figure was down from December’s 5.9 percent growth rate, and just below the 5.6 percent forecasted by economists. In more damming news, retail sales clocked in at 10.2 percent in the two month period, considerably slower than the 11.1 rate seen in December. The government combines some economic data for January and February to minimize distortions tied to the Lunar New Year holiday, which falls during those two months. It was in early February this year. One area did stand out however, namely investment in factories, buildings and other fixed assets, which increased faster than expected at 10.2 percent compared to a 10 percent increase for the whole of 2015. The overall weak production data suggested that the first quarter growth could fall towards the bottom of the government’s 6.5 – 7.0 percent target growth range for 2016, which if this were to be realised, would account for the slowest pace of growth in over 25 years.

Over in the UK, the British deficit on trade in goods and services narrowed slightly but the UK suffered a record deficit with European Union countries in January, according to the ONS. The figure for goods and services fell to GBP 3.5 billion in January from a revised GBP 3.7 billion the previous month, while the deficit in goods alone shrank from GBP 10.5 billion in December 2015 to GBP 10.3 billion in January. The total trade deficit figure however remained above the average monthly shortfall of GBP 3.1 billion recording in 2015. Britain's trade with the European Union was in the spotlight, with some investors worried it will suffer if the country decides to leave the world's largest trading bloc at a referendum in June. The goods trade deficit with the European Union widened to a record high of GBP 8.09 billion in January from GBP 7.45 billion in January.

 

GBP This Week

Wednesday’s budget announcement is an important downside risk for Sterling, given the governments continued stance for aggressive fiscal tightening. Also, disappointing tax receipts will likely lead to the Chancellor overshooting his own 2015-16 fiscal year borrowing targets. Unless tax receipts improve, or there is some significant further tightening, it is highly likely that the chancellor will have to reassess his targets for 2019-20, which obviously would be viewed negatively by the markets. In terms of data, the Bank of England is widely expected to leave its interest rate and asset purchase policy unchanged on Thursday. The tone of the minutes will likely be somewhat dovish, especially with Gertjan Vlieghe speaking recently on what would scenario would lead him to recommend a cut in bank rate.

Labour market data on Wednesday is likely to show no change in the January unemployment rate, currently sitting at 5.1 percent. The claimant count however should continue to shrink by around 13.2k.

USD This Week

In terms of data, Thursday’s we expect retail sales to have declined 0.3 percent on the month while PPI should post a downward figure of 0.3 percent. Wednesday’s Empire manufacturing index is expected to improve modestly, to -12 in March, while headline CPI to show a decline of 0.2 percent on the month. Finally, we expect the University of Michigan consumer sentiment to have increased to 92.5 in March.

Given the mixed messages above, we expect the greenback to trade range-bound versus the majors, especially given the Feb will likely keep its policy rate unchanged at 0.5 percent. Given the global risks present, we think it will be difficult for the Fed to signal its commitment to continue raising rates in the short term.

EUR This Week

This week, focus will centre on the EU Summit in Brussels on Thursday, where migration is likely to be a key focus after the extraordinary summit held on 7 March. Although markets might now focus on the summit as a whole, ECB President Draghi will also speak at the Summit and may well drop some hints regarding general monetary policy. Data this week includes January euro area IP with the market expecting a print of 1.6 percent, as well as final February headline with expectations set at -0.2%. Finally, the core figure for euro area HICP inflation should come in at 0.7 percent.

 

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