Eurozone PMI set to show the Eurozone continue to feel the pain!

Week Commencing Monday 17th June 2013

This week in Brief

  • UK Data sees the release of CPI, the MPC meeting minutes and Retail Sales. All expected to be reasonably positive for the UK and continue to boost Sterling its rivals.

  • G8 meetings being hosted the UK should centre on the continuing situation in Syria coupled with the global crackdown on tax havens.

  • US data includes Core CPI, FOMC economic projections and the Philly Fed Manufacturing Index. We expect these to be reasonably USD positive, adding pressure to Sterling to consolidate after its massive rise against the Dollar.

  • EU data is focused on a swath of PMI releases and German ZEW. We continue to see he Eurozone slumber in recession, although Germany may break the trend and post an expansion this month, releasing some Euro bulls into the equation.  

Market Themes & Current Events

UK Unemployment has fallen by 5,000, according to the latest figures release by the Office for National Statistics. The release indicated that 2.51 million people were out of work in the three months to April, and the jobless rate remained unchanged at 7.8%. In further surprising news to the markets, Jobseekers Allowance claimants fell by 8,600 in May, reducing the total number of claimants to 1.51 million, which is the lowest level in over 2 years. This is once again good news for the Conservative led coalition, who in recent weeks has enjoyed a relatively healthy set of UK indicators, including the surprising growth in all UK PMI’s and the economy as a whole. 

The IMF has urged the US to repeal the huge federal budget cuts it introduced this year, condemning them as totally excessive and ill designed. In a similar outburst to that seen in the UK and its austerity program, it said that the deficit reduction programme would be a drag on growth this year, with the organisation reducing its forecasts to 1.9% for 2013. This compared with the funds initial projections for growth that sat at 2.2%. It stated support for the Federal Reserve's USD 85bn a month quantitative easing programme, and said it should continue with the programme until at least the end of 2013.

Sticking with the US, retail sales beat forecasts in May, helped by a jump in car sales. The Retail sales indicator increased by 0.6% in May, according to official figures from the Commerce Department, whilst analysts had forecast a rise of about 0.4%. Within the figures, sales at hardware stores increased 0.9% while sales at sporting goods and general merchandise stores also rose. But sales fell 0.8% at furniture stores and 0.4% at electronics and appliance stores. This led to core sales, which exclude autos, fuel and building supplies to rise by 0.3%. The data suggests that despite large tax rises and budget busting plans in Washington, the US consumer remains reasonably resilient.

Moving to the Far East, the World Bank has cut its growth forecast for China amid warnings of slower but more stable global growth over the coming months. The bank now expects the Chinese economy to grow 7.7% in 2013, a reduction from its earlier projection of 8.4%. This also impacted global growth forecasts, which have been revised down from 2.4% to 2.2%. The bank said that growth in China has slowed as Chinese lawmakers look to rebalance its growth model, which over the past few decades has heavily relied on exports and government let investment. The recent slowdown in European and US markets has seen a huge drop in demand for Chinese exports, prompting concerns both domestically and internationally on whether China can sustain its high growth rate.

Globally, the World Bank said growth remained subdued in high income countries, especially in Europe, despite improvements in financial conditions. It also added that growth in emerging economies such as Brazil, India and some African nations, which have seen robust growth rates in the past few years, have also slowed.

Sterling Outlook

The UK has one of the busier economic calendars this week, with the release of CPI, retail sales and the Bank of England minutes dominating proceedings. Starting with CPI, we expect Tuesdays figure to rise back towards last month’s target of 2.6%. This will not be welcome news in Threadneedle Street, and will to a certain expect reduce flexibility afforded to the incoming BoE governor Mark Carney. Consequently, if we should see a figure of 2.6% or higher, expect it to be treated as a Sterling negative event.

Moving to Wednesday, we have the BoE MPC release minutes from their last meeting on June 6. Despite there being no change in either the base rate of the bank’s asset purchasing program, it is the voting element of the meeting which will undoubtly steal the limelight. The most likely outcome is for the votes to remain at 6-3 against further stimulus. However, given the recent strength in the UK economy, there is the potential for an increased majority to emerge on the anti-QE campy, which would likely put pressure upon stocks whilst lifting sterling pairs.

Finally, the retail sales figure is expect to show a pickup in comparison to Aprils disastrous -1.3%, which was the second consecutive month the figure posted a negative. In total we have seen a contraction in the last 6 of 9 releases, and therefore any speculation of a push back into positive territory is big news which is likely to move markets. The markets are expecting to see a figure around 0.8% for the month.

The Pound is rocketing against the Dollar, gaining about seven cents against an embattled greenback since late May. However, this is in our view more due to Dollar weakness rather than a newfound strength in the UK economy, as can be seen in the relatively stable price on GBP/EUR. We do expect this trend to continue however, especially if Retail Sales and CPI come in better than expected. GBP/USD could consolidate in the low 1.57’s whilst GBP/EUR could attempt to settle at the 1.18 level.

US Dollar Outlook

Once again, this is another big week for the Dollar with the FOMC economic projections, core CPI and manufacturing all in the spotlight. Starting with core CPI, we expect to see a marginal increase from 0.1% to 0.2% for the month of May. This is once again good news for the Federal Reserve, which will be able to keep rates at their near 0% record low seeing how inflation is so modest.

We then move to Wednesday and the FOMC economic projection release for the coming 2 years, which is expected to include inflation, growth and interest rate estimates. Normally, these forecasts would not cause considerable market volatility, however as all these projections are being released at the same time, we expect it to offer considerable volatility.

Finally we have the Philly Fed manufacturing index, which is expected to continue to show deterioration in the sector for June in comparison to May. That said, the rate of deterioration is expected to fall and a posting of -0.4% is projected.  Unfortunately however, this figure has had the tendency to underperform in relation to estimates and consequently the figure could come in below the -0.4 level. That said, any move above 0 (indicating improved conditions) would likely gain attention from markets.

The Dollar has a bad week yesterday, as seen by its recent move against a ultra-strong Pound and slightly more modest losses against the Euro. We expect this trend to reverse somewhat, especially is both UK and European data is muted this week.

Euro Outlook

Much like the UK and US, European markets have a busy week ahead with a plethora of PMI figures being release alongside the key German ZEW release. The emphasis will largely be upon the German economy amid all these figures, with the German ZEW economic sentiment figure predicted to rise from 36.4 to 38.2. This figure has never been as important as it is now, especially given the Eurozone’s reliance on the German economy for export led growth, this will therefore be the highlight of the week.

Thursday sees the Eurozone PMI figures being releases, and is expect to show improvements across the board from French, German and Eurozone manufacturing and services. Of all of these PMIs, we expect German manufacturing PMI to headline, with a rise from 49.4 to 49.9 projected. This provides a clear prospect for this sector to return to expansion and thus prove to be Euro positive.  

The pressure on the euro is weaker this week after Draghi put negative rates on the backburner. However, as the economic situation hasn’t improved coupled with the ECB actually downgrading its forecasts, we expect the single currency to continue to perform to the downside. This will be amplified if the PMI’s continue to show key EZ countries continue to remain in recession. 


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