French employment woes put Hollande under pressure

Week Commencing Monday 1st September 2014

This week in Brief

In the UK we expect all of the PMI’s to continue to head south, although remain firmly above the critical 50.0 level of contraction. We do not expect the Bank of England to raise rates this month, with many traders looking to the minutes for further hints on voting intentions.

We have a busy week ahead for the US despite Monday’s bank holiday. We will be concentrating on the release of the Beige Book, which should provide some insight into state specific economic progress. Also the jobs report on Friday will be the highlight of the Dollar week, with decent figures projected for both Non-Farms and the Unemployment Rate.

In Europe we expect a continued worsening of the PMI situation in the major EU economies, especially with the continuing situation in Ukraine. We doubt that the ECB will unveil any further stimulus measures either, with all focus on Mario Draghi’s press conference as per usual.

Overriding Market Themes

We start this week’s news in Brazil, where the economy slid into recession for the first time in more than five years, ahead of the October presidential election, as lower confidence eroded investment. Meanwhile, consumer spending continued to remain weak, advancing just 0.25 percent in the second quarter after declining 0.2 percent in the first quarter. The news came after Latin America’s largest economy shrank by 1.5 percent in June, the fifth straight monthly decline and the worst since the middle of 2013, despite the tourism attracted by the World Cup. This recession will no doubt add further pressure on Brazil’s central bank to reduce interest rates in an attempt to lower borrowing costs and put more spending power back into the hands of its embattled consumers. It also puts pressure on President Dilma Rousseff, running for re-election, and her challengers Aecio Neves and Marina Silva to talk up economic reforms.

Moving back to the UK, the British Chambers of Commerce has predicted the UK economy will grow quicker than expected this year and in 2015. New figures suggest the UK economy could grow by as much as 3.2 percent in 2014, well above the 2.7 percent forecast by the government’s statistics agency, the Office for Budget Responsibility. The business group believes that a stronger labour market, coupled with stronger than expected growth in the second quarter. Were two powerful reasons to upgrade the projection. It was not all a bed of roses however, with the group warning that the UK’s long-term growth may be affected by weakened export levels, having reduced their forecast down from 1.9 percent to 0.8 percent. The forecast is less optimistic than an estimate made by the Bank of England earlier this month, which predicted export growth of 2.25 percent this year.

Finally, the number of unemployed in France rose 0.8 percent in July from June, setting yet another record high at a time when President Francois Hollande is struggling to convince French voters, and even his political allies, that he has a credible plan to resuscitate the French economy back to life. The figures make particularly poor reading, with the total number of unemployed reaching 3.4 million in July. President Hollande's economic plans have come under fire from within his own party in recent weeks, with dissidents criticizing public spending cuts while advocating personal and corporate tax reform. The president reacted quickly to these dissidents by dissolving his government and expelling the individuals from public office! With this in mind, I think France is in store for a long and hard road to economic recovery.

GBP This Week

We have a relatively quiet week ahead with the PMI’s being the only releases of note. Of all of the releases, services takes the limelight as it accounts for just over 70 percent of the entire UK economy, with Manufacturing and Construction following in economic importance. Services are expected to decline slightly on the month, with projections looking for a print around 58.6. Manufacturing is expected to drop by 0.3 to 55.1 while construction should drop to 61.5 from its high of 62.4.

Also worth watching is the Bank of England decision on Thursday, which could well be a major event. The two votes in favour of a rate hike last month has put everyone on a knife edge, with expectations that the first rise in interest rates in more than seven years could be just around the corner. All things being equal, I believe that it is still too early for a rate rise, however I do now expect the Bank of England to be the first major bank to raise rates. With this in mind, I expect this to be a non-event and all eyes to focus on the minutes in a couple of weeks.

USD This Week

We have a busy week ahead for the US, despite the Labour Day bank holiday on Monday. We therefore start on Tuesday with the ISM Manufacturing PMI release, where a slight drop to 57 is forecasted this time.

We then move to Wednesday with the release of the Beige Book, which provides information on the economic conditions in each of the regions that the Federal Reserve operates. This should be a good read as it can potentially show traders how each Federal Reserve member’s regional economy is performing, and potentially how they might vote in the FOMC rate decision. 

The most important release of the week should be in the form of the US jobs report on Friday. The report includes the unemployment rate in August, the Non-Farm Payroll figures and earnings data for the same month. U.S. Non-Farm Payrolls is expected to gain 222,000 jobs while the unemployment rate is expected to decline to 6.1%.

EUR This Week

 Much like the UK, we have a similar setup in Europe with the release of the PMI’s and Mario Draghi speaking at the ECB on Thursday. With regards to the PMI’s, the story could not be more different to the UK’s if it tried, with Ukraine and continued economic woes impacting growth in almost every sector. We expect further signs of confidence falling again this month, especially after Augusts disappointing figures from both Spain and Italy.

We are unlikely to see any additional measures implemented by the ECB this month, despite the worsening economic position of many of their member states. This is principally because the stimulus package announced a few months ago needs time to find its way to the real economy, and the results seen. Secondly, while inflation fell to 0.3% in August, core inflation (which excludes many extremely volatile components) rose to 0.9%, potentially signaling that the benefits of stimulus are beginning to be felt across the wider economy. The press conference could be more interesting, especially as traders try to decrypt what Mario Draghi has to say.


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