EU unemployment and CPI to give Draghi another headache!

Week commencing Monday 28th July 2014


This week in Short



  • In the UK we have a particularly quiet week, with Manufacturing PMI expected to fall short of last month’s release at 57.2.

  • In the US we have a jam packed week, with the ADP non-farm payroll, advanced GDP, the FOMC decision and unemployment rate. We expect all of these indicators to be reasonably bullish, so expect some strengthening of the US Dollar as we move towards August.

  • In Europe we have the all-important CPI release with markets expecting a flat reading of 0.5 percent. Eurozone unemployment is also expected to remain flat at 11.6 percent.


Overriding Market Themes


We start this week’s report on home soil, where UK retail sales rose in the second quarter at the fastest pace in 10 years, despite stagnating last month, bolstering expectations that the economy has sustained its swift pace of recovery. Retail sales volumes rose by 1.6 percent in the second quarter as compared with the previous quarter. The disappointing figures for June (where retail sales came in at a meagre 0.1 percent on the month) had been put down to the World Cup distracting many consumers, a trend which has been noticed in the previous six tournaments and tends to be followed by a strong July. This release was coupled with news that the UK economy grew by 0.8 percent in the second quarter, matching its first quarter growth levels and putting the country on track to expand by 3.1 percent this year. Figures also show that the economy is now 0.2 percent larger than it was at its peak in 2008. Unfortunately, the services sector appears to be the only part of the economy that has passed through its 2008 peak, with manufacturing, industrial production and construction yet to outstrip levels reached previously.


Moving to the continent and the number of jobless people in Spain dropped faster than expected in the second quarter, as strong job creation led to a significant decrease in the country’s unemployment rate. The rate remains one of the highest in the developed world, however fell to 24.5 percent from 25.9 percent in the first quarter. This means that an additional 300,000 people have found employment within the April-June period. Spain remains the Eurozone’s fourth largest economy however has been battered by a particularly harsh six year recession. Thankfully, the country’s central bank has said that it expects that output has grown by 0.5 percent in Q2, pushing it to the near top of the European leader board in growth terms. The main victor in this however is Prime Minister Mariano Rajoy, whose popularity has declined significantly since he took over in late 2011. Rajoy has focused most of his economic policy towards lowering the country's unemployment rate and has stood by the 2012 reforms, despite criticism from leftist politicians saying that it is unfair for workers. Despite this bout of good news however, it is unlikely that he (and his centre-right Popular Party) will be in a position to secure enough parliamentary seats to form a workable coalition after the next general election.


In the Far East, Chinese manufacturing rose to an 18 month high in July, boosting the central government’s chances of hitting its 2014 economic growth target of 7.5 percent. The preliminary PMI showed 52.0, beating the 51.0 market expectation and well above the 50.0 level of expansion. With economic activity continuing to improve in July, it suggests that the cumulative impact of the mini-stimulus measures introduced earlier this year are starting to filter through. With this in mind we expect policy makers to maintain their reasonably accommodative stance over the next few months in an effort to consolidate the recovery.


GBP This Week


We have a very quiet week ahead for the UK with the only release of note the manufacturing PMI indicator. Typically this is released alongside the Construction and Services PMI, however these are scheduled to be released next week. Manufacturing has been enjoying a reasonably bullish time of late, with orders both domestically and internationally being particularly strong, despite an ever strengthening Pound. Unfortunately, markets are expecting this reading to move lower, with the median market expectation coming in at 57.2 from the 57.5 we saw last month. Despite this expected decline, this indicator remains extremely robust and one of the highest in the developed world, se expect little in the way of Sterling bearishness on the back of the release.


USD This Week


We have a busy week in the US ahead, with the FOMC minutes coupled with GDP and jobs data all expected. Starting with Wednesday’s ADP non-farm payroll figure, expectations point towards a pullback to 241k from the 281k figure posted last month. Given this indicators tendency to point towards the non-farm employment change/unemployment rate releases of Friday, any significant miss should result in some substantial price action.


Also on Wednesday we have the release of advance GDP, giving us the first insight into possible growth seen throughout the second quarter. After the particularly poor weather drove down Q1 GDP, we expect to see quite a turnaround for the US economy. Particularly, the strength of the shale boom has meant that they are now the world largest exporter of oil, and whilst that has been showing in the export figures, we should finally be able to see this strength reflected fully in the growth data again. With this in mind, market expectations point towards a reversal from -2.9% to 2.9%.


The third release of note on Wednesday is the FOMC minutes, which unlike previous occasions should be somewhat of a foregone conclusion (given that the FOMC have already indicated that tapering is set to end with a final cut of USD 15bn in October). With this in mind, we expect to see a USD 10bn taper and some potential hints as to when the Fed will start raising interest rates.


Finally, Friday’s jobs report should end the week with a bang. Expectations point towards a steadier month from an unemployment standpoint, remaining at 6.1%. However, we expect a major fall back from last month’s non-farm payrolls of 255k, with market expectations pointing towards a release of 230k this month. Despite this still being a very healthy number we could see some price action on the back of it, and therefore expect a volatile end to the week for the Dollar.


EUR This Week


 In Europe we also have a reasonably quiet week, with CPI set to be released alongside Eurozone Unemployment. CPI is always one of the biggest releases from Europe, and as such is taking centre stage this week. We do not expect any change from the previous 0.5 percent posting last month despite various ECB monetary tools being employed to push the indicator higher. It is somewhat concerning that inflation is remaining stable, despite cuts to the headline interest rates, and the introduction of measures such as TLTRO’s, the end of sterilisation of bond purchases and negative deposit rates. At 0.5 percent, the inflation rate is at its lowest since late 2009, and any further fall in this figure is likely to really rattle markets, and especially rattle Mario Draghi. With this in mind, this release is definitely the one to watch this week.


Moving to Eurozone Unemployment, we expect to see another flat reading at 11.6 percent for the zone, despite the decent employment data from Spain last week. Even though the figure is not expected to increase, it still bodes badly for the Eurozone and the Euro in general. With almost all the other major economies looking at unemployment rates closer to 6 percent, it is clear that the Eurozone has a long way to go before markets can look at it with any confidence in terms of a solid economic recovery.  

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