CPI, Unemployment and Retail Sales dominate the UK this week ... forward guidance 2.0 watchout!

Week commencing Monday 17th January 2014

This week in Brief

  • In the UK we have CPI, the unemployment rate and retail sales to look forward to. With the release of Mark Carney’s adjusted forward guidance model, the unemployment rate is now slightly less in focus.

  • In the US we have the FOMC minutes and CPI inflation, and with the Fed seeming hell-bent on continuing to taper it will be interesting to see if it has caused any deflationary pressure.

  • In Europe we have the ZEW for both German and the Eurozone as a whole in addition to a raft of PMI releases.

Market Themes & Current Events

Japan's economy grew less than expected at the end of last year, countering forecasts it would see higher spending ahead of a sales tax increase in April. Gross domestic product rose by 1 percent on an annualised basis in the three-month period to December, compared with market forecasts for a 2.8 percent expansion. This slight downside movement was in part due to weaker private consumption and capital spending, as well as lower export figures. This will without doubt put further pressure on the BOJ and the government to do more in coming months, especially if a planned sales tax hike in April proves more damaging to growth than expected. This will especially be felt by newly elected Prime Minister Shinzo Abe, who has unleashed an unprecedented monetary and fiscal expansionary policy to try and kick-start a country suffering from a decade of lacklustre growth. His policies, dubbed Abenomics, helped Japan's economy speed past many of its Group of seven counterparts in the first half of last year, but the latest data will raise doubts about Abe's strategy.

Moving from the world’s third largest economy, to its first where US manufacturing output unexpectedly fell in January, recording its biggest drop in more than 4 and a half years, as cold weather disrupted production in the latest indication the economy got off to a weak start this year. Although consumer sentiment was steady in early February, there are worries the persistent and widespread harsh weather could dampen the morale of households, whose budgets are already being stretched by soaring heating bills. Factory production fell 0.8 percent last month, the Federal Reserve said on Friday. It was the first drop since July and the biggest since May 2009, when the economy was still locked in recession. Output had increased 0.3 percent in December. In addition, a separate report showed the UoM (University of Michigan index of consumer sentiment) stood at 81.2 early this month, unchanged from January. The survey's barometer of current economic conditions fell to 94.0 from 96.8 in January. With more bad weather on the way, we could see this issue becoming increasingly more prevalent, and judging by some of the pictures we have seen on the news, not an US exclusive problem either.

Finally, hopes of a UK export recovery were buoyed after Germany and France fired the euro zone a third successive quarter of growth. France came in with growth of 0.3%, Germany beat expectations with 0.4%, the Netherlands showed a real spurt with 0.7% and Austria came in with growth at 0.3%. Even Italy, whose economy has not expanded since the spring of 2011, grew 0.1%. Portugal grew by 0.5%. Greece was the only member of the euro-zone today to report contraction, but even there, the economy is improving. The big number, the euro-zone’s growth as a whole, came in ahead of forecasts, growing 0.3%, ahead of expectations of 0.2%. This pick-up in Europe, the destination of around half of the UK’s exports, strengthened hopes that Britain’s recovery will become more balanced, as it has relied on household spending in the main so far.

GBP This Week

We have an important week for the UK with the release of the CPI inflation figure, labour market data and retail sales, therefore expect some decent volatility in all Sterling pairs. We start with CPI, which is due to be released on Tuesday morning. Much like the US figure, inflation is worth watching as it is acting keeping it under control is the BoE’s primary mandate, however with the figure so close to the banks 2% target we doubt that we will see any real volatility unless the figure posts a significant uptick.

Moving to Wednesday we expect the release of jobs data which has to potential to highlight whether the improvements seen over the past four months are set to continue. We start with the unemployment rate, which is currently standing at 7.1 percent and the lowest since early 2009. Seeing how this is a mere 0.1 percent away from reaching the previous 7.0 percent mark where to BoE would have considered Interest Rate movements, we would normally expect to see some significant swings in market. However, with the second phase of forward guidance announced by Mark Carney last week, this figure should be somewhat less critically linked with monetary policy, so expect a slightly duller market response than usual.

Finally, retail sales on Friday are expected to pull back from the highest rate of month on month growth since 2008 as we move out of the festive season. The market expectations are for a -0.9% pullback compared to December, yet given the strong print from the British Retail Consortium earlier this month, I am hoping for a somewhat better figure to be released.

USD This Week

In the US we are primarily focusing on the FOMC minutes and CPI inflation figures, which hopefully should help heal the wounds from last week’s disappointing data rounds. We start with the latest minutes taken from the January FOMC meeting, which resulted in a second taper in asset purchases. Given that this taper came off the back of some particularly shocking payroll numbers, this shows that there is substantial emphasis behind the Fed’s plan to end all asset purchases by the end of the year. It is worth noting that adverse weather conditions would have played a large part in these poor numbers, so it will be interesting to see if the next batch of labour releases are also poor. If they are it will be interesting to see what conditions the FOMC would need to see in order to consider halting the taper.

Finally, Thursday sees the release of the CPI inflation measure and it likely to be the highlight of the week. This should be interesting as price stability is one of the cornerstones of central banking, and as the Fed reduces its QE policies, this indicator becomes key to see whether the economy is moving towards a deflationary scenario.  Should the inflation rate threaten to move even lower, it could see the monetary policy adjusted to stave off such a threat. Estimates point towards the year on year CPI figure remaining at 1.5%, with the monthly figure falling to 0.1% from 0.3%.

EUR This Week

This week’s European economic calendar is likely to be dominated by the release of the German ZEW economic sentiment and a range of PMI figures, so expect a good week for Euro volatility!  We start the week with Tuesday’s German and Eurozone ZEW economic sentiment releases, which should provide a valuable insight into the outlook of analysts on the direction and health of both the country and single currency region. We expect the German number to remain relatively flat on the month, however we expect the European figure to continue its march upwards. It is worth noting that despite a flat German figure, it is still sitting at near pre-crisis highs so we doubt a flat reading will be anything but Euro-bullish at this stage. With this in mind, we expect the Eurozone figure to rise from 73.3 to 73.9 whereas the German figure is estimated to remain at 61.7.

Later on in the week we have a host of manufacturing and services PMI figures, with the French and German ones looking set to dominate. The French manufacturing PMI has been contracting since mid-2011 and this has been slow to show any signs of improvement, with 5 of the last 6 figures coming in worse than expected. Forecasts point towards a rise to 49.8 from 49.3 which unfortunately still remains far below the 50.0 level of expansion.

The German and Eurozone figure by contrast are well above the critical 50.0, so are seen as safer bets for this week’s releases. The German figure in particular is expected to rise significantly this month and given the importance of the sector to the Eurozone as a whole, such a rise would be incredibly bullish for the single currency. 


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