David Cameron claims victory at the EU Budget Meeting, but has he won the war?
Week commencing Monday 11th February 2013
Overriding Market Themes
European leaders have agreed the first ever real time budget cut for the EU budget during lengthy talks in Brussels. David Cameron led the group of likeminded politicians, which including representatives from Scandinavia and other northern European countries, and the victory here could well be hailed as one of the most important during his premiership. Even the Germans, led by the all-powerful Angela Merkel welcomed the deal, which represents a 3.3% reduction from the previous seven year budget. Of course, in every struggle there is a loser, and this time it is the French President Francois Hollande, who had been arguing against big spending cuts in the budget, and protecting the all-important common agricultural policy, however even he in the end said it was a “good compromise”. However, in true bureaucratic euro style, agreement here is only the first step in a long political process, and indeed the deal will need to be voted on by the European Parliament, the very institution whose finances are getting squeezed. The four biggest political groups in the parliament have already said they "cannot accept it as it stands because it is not in the interests of Europe's citizens." The battle may therefore be won David, but the war is still very much on!
UK Construction output has been revised up in the fourth quarter of 2012, indicating that the sector grew more than initially thought. Output according the Office of National Statistics rose by 0.9% against its previous estimate of just 0.3%. Unfortunately, this is unlikely to have any significant impact on the GDP figures for the last three months of the year, which indicated that the economy shrank by 0.3%, but at least it is a revision up hey! The latest figures marked the first time the construction sector had grown since the second quarter of 2011, and it seems that growth in private housing and infrastructure accounted for most of it. The estimated volume of all new work grew by 1.6%, while repair and maintenance fell by 0.3% compared with the previous quarter.
In more UK news, the Scottish economy gains some momentum this year, according to a survey of purchasing managers. The BOS PMI report suggests that the economy is seeing the highest level of business activity for seven months, and has indicated that output and new work picked up for business last month. Diving further into the figures, growth remained centred on the services sector, whilst manufacturing output contracted modestly, marking the seventh consecutive monthly fall in production levels in the sector. Input price inflation continued to ease, although remained sufficiently strong for businesses to raise output charges. Having said all the above, this latest expansion of Scotland's private sector economy was broadly in line with the rate of growth seen at the UK level. Well done Scotland, let us hope the situation north of the border inspires the rest of the UK countries to blast out of negative territory.
In the US, The trade gap with the rest of the world fell to $38.5bn in December, a near three-year low, according to the Commerce Department. This was helped by record overseas sales of petroleum products, while foreign import to the US dropped as shoppers continue to buy American. This data suggests that the US economy was in fact stronger in the fourth quarter than was initially estimated. In fact, the figures could result in a revision of the a 0.1% annualised contraction in gross domestic product during the quarter, which was initially calculated before these figures were available and were based on projections of a widening trade gap.
GBP This Week
We start the week with the Consumer Price Index release, however with the index pegged at 2.7% for the past three releases; we doubt there will be any change this time around. We are also watching the PPI input figures being released at the same time, with the estimate standing at a gain of 0.8%, which would be the index’s best showing since September 2011. We then move to Wednesday’s Bank of England Inflation Report followed by Mervyn King’s press conference. I doubt the inflation report will be of interest; however King’s speech is likely to throw up some volatility as the markets analyse the differences in styles between him and the incoming BOEG Mark Carney. Finally, Friday sees the release of UK retail sales, with the indicator posting several declines since mid-2012, will this be the one that breaks the mould? The estimate for the upcoming reading stands at 0.5%.
Friday also sees the start of the G20 meetings in Moscow, with the Russians interestingly inviting Switzerland to join the discussions, despite not being a member. Also, we have been hearing increased rhetoric from Japan about the value of the Yen, so expect them to kick up a fuss! I would imagine George Osbourne will be relatively quiet, although his stance on European and UK growth may stir up some market movement.
After a terrible January, the pound is starting to fight back against the US dollar, and showed some sharp movement in both directions last week. It put together a decent little rally at the end of last week, but UK data continues to underwhelm the markets. GBP will continue to have a tough time sustaining upward momentum if the UK economy continues to prattle along.
USD This Week
Wednesday kicks off the Dollar week with both Core and Non-Core Retail Sales, with consumer spending expected to slow down in the first half of 2013 amid new taxes which will affect economic growth. As such, retail sales are expected to gain 0.1% while core sales are forecast to grow 0.2%. On Thursday, we have US unemployment data out, and with the four-week average, dropping to 350,500, the lowest in nearly five years (mainly due to seasonal factors), another decline to 361,000 claims is anticipated. Finally, the University of Michigan Consumer Sentiment report is due on Friday. The low readings of previous months go in line with the federal budget negotiations calling for higher taxes and further spending cuts. The reading also revealed that the debt ceiling debate is far from being resolved and is a constant worry for the cousins.
EUR This Week
“Eurolund” starts with European Central Bank President Mario Draghi speaking at the Spanish Congress in Madrid on Tuesday. During the ECB press conference last week, Draghi said that this would represent “a unique opportunity to hear from the legislators their views about the economic situation in Spain, but also in the euro area.” Let’s hope he is carrying his hard hat just in case! Finally in Euro news, we expect Eurozone GDP to have contracted by 0.4% in the last quarter of 2012, considerably more sharply than in the third quarter, where the zone experienced -0.1%.
The so-called “Draghi drag” is likely to continue a bit more, assuming that the GDP releases will be as disappointing as we think. Also the worries about the Italian elections and the Spanish political scandal continue to weigh on the euro. However, don’t expect the euro to crumble back into the depths once again! Currency flows back into Europe are still significant and investors continue to seek the high returns both the Sovereign and Corporate Bond market present.
In Other News
England stormed to a 12-6 victory over Ireland at the Aviva Stadium in Dublin on Sunday, which although is the lowest scoring match in the history of the Six Nations, and the first between both England and Ireland without a try in 29 years, was still a ruddy good match! Just to illustrate, Ireland had 58% of possession in the match and 57% of the territory during the match. They made three line breaks to England’s none, won four line-outs on the opposition's throw and missed only three tackles to England's 11. Those numbers speak of a dominance that was rarely in evidence as England played the conditions beautifully, winding the Irish up every step of the way! This victory puts England at the top to the board with 4 points, followed by Scotland and Wales. Looks like home grown rugby is back!
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