Further downside risk continues due to China's woes...
Week Commencing Monday 28st September 2015
Overriding Market Themes
We start this week with China where factory activity unexpectedly shrank to a 6 and a half year low in September, raising fears of a harder than expected landing in the world’s second largest economy. The preliminary PMI index fell to 47.0, considerably below the expectations of 47.5 and below the crucial 50.0 level which signifies a contraction. This is the seventh month in a row that activity has shrunk, with the indicators showing a huge collapse in output, prices and jobs. Economists had expected the latest PMI to remain weak but edge up slightly, as a slew of stimulus measures since last year slowly took effect and as many factories which had closed in August and early September began to reopen. However, new orders fell to a near four year low while export orders shrank at the fastest rate since mid-2013, highlighting weakened global demand. The weak PMI will reinforce views that the central government will roll out more economic support soon, including further cuts in interest rates and bank reserve requirements and higher infrastructure spending. All things being equal, things are about to get very interesting in Asia! Watch this space.
Back in the UK, Economists are becoming increasingly concerned that a worsening skills shortage could blight hopes that the UK can blast through its dire productivity puzzle. While the unemployment rate has fallen to levels last seen before the financial crisis and wage growth has started to recover after years of stagnation, the glut of low skilled jobs that accounts for most job creation at the moment is worrying policymakers. Indeed, Skill shortages in Britain worsened for a fourth consecutive year and now rank among the most severe in Europe. How can this problem be resolved? Better training, attracting highly skilled workers from overseas and higher technology investment are all part of the key. Will it be enough, who knows! Either way, growth in low skilled work may well drive up GDP in the near term, but in a decades time a national of Costa Coffee’s wont drive market leading growth!
GBP This Week
Thursday’s manufacturing PMI is likely to continue to demonstrate a marginal slowdown in UK output for September, potentially declining to 51.0 versus a 51.5 print last months. This then brings us to the final Q2 GDP print, which we expect to be confirmed in at 2.6 percent year on year. We expect this growth to continue to taper as we move deeper into the year, however a above 2 percent level is still expected for next year.
Sterling continues to hold steady versus the Euro, with its current trend battling between the 1.35 – 1.38 range. We believe that Sterling should outperform the Euro, especially given the growth differentials moving into the rest of the year. Cable is more interesting and we expect to see Sterling start declining in the coming months.
USD This Week
The headline figure for this week from the US is non-farm payrolls on Friday, with an increase of 200k in the headline expected. We also expect the rate of unemployment to remain at 5.1 percent and wages to see a real increase of roughly 2.4 percent on the year. These figures should be relatively robust enough to give Janet Yellen the confidence that the labour and business climate can absorb a rate hike in the near term.
In terms of rates, with the US Dollar absorbing risk flows on the back of renewed fears of a Asian slowdown, we expect further USD outperformance. This could well be most keenly felt on EUR/USD, where further accommodation from the ECB will most likely put the currency under renewed pressure.
EUR This Week
This week in Europe we are only looking for euro area headline and core consumer prices to increase flat and 0.9 percent respectively in September. The only other piece of news worth watching could be Thursdays final September manufacturing PMI which is likely to be confirmed in at 52.0, a marginal drop from 52.3 in August and 52.4 in July.
As muted above, a combination of slow to non-existent inflation coupled with lax economic activity is likely to force the ECB to further expand their current asset purchase program. As always with supply side economics, we should therefore see further EUR weakness in the currency sphere.