G20 fail to whip Japan whilst UK Retail Sales drops unexpectedly
Week Commencing Monday 18th February 2013
Overriding Market Themes
Finance ministers of the G20 nations meeting in Moscow over the weekend have fallen short of criticising Japan for weakening the Yen, according to a leaked draft communique. This led to early losses in the value of the Japanese currency, dropping over 1.5% against the greenback in early Monday trading. The new Japanese government has demanded looser monetary policy since taking office in an attempt to boost export growth, in turn causing the Yen to fall 15% in value since September. The price advantage this gives Japanese manufacturers has raised fears of a currency war being sparked between large export nations, especially China and the Korea. Quite frankly, it is surprising that Japan has been let off so easily by its peers, and although other developed economies have expressed concern, the lack of strength on this could very well inspire other exporter nations to intervene directly in the currency markets to weaken their own currencies.
Perhaps part of the reason for the Japanese governments frustration with the economy is that economic growth contracted for a third quarter in the three months to the end of December. During that time, the economy shrank 0.1% whilst many economists believed the economy would grow by 0.1%. When annualised, the drop equates to a 0.4% decline in gross domestic product. With interest rates left unchanged at between 0% and 0.1%, there is now very little the government can do to try and stimulate the country out of recession. It seems likely therefore that further devaluation is likely, and soon.
Back closer to home; UK Retail Sales fell unexpectedly in January, surprising many analysts including ourselves. Volumes fell 0.6% from December 2012 according to the Office of National Statistics, whom blames heavy snowfall for the declines. The ONS also highlighted weak sales in the food sector, which declined 2.6% y-o-y to the lowest level since April 2004, whilst stating that smaller food stores have borne the brunt of this decline. This data once again raises some serious questions on the UK economy, which shrank by 0.3% in the fourth quarter. We are starting to see more and more analysts projecting the economy to contract once again in the first quarter of 2013, pushing the UK back into recession. If, like the ONS suggest, the snow is the major contributor to retail sales decline in January, then we still remain optimistic that we will push back into growth. Just remember to keep your fingers and your toes crossed!
In what has been hailed at the biggest trade talks in history, the European Union and the US will begin formal talks on a free-trade agreement this week. A deal would see the removal of all trade barriers between the two largest economies in the world, and go some way in levelling the playing field against the roaring Asian economies. No doubt the negotiations will be difficult, and no final deal is likely to be on the table for at least a year, but this could easily be described as one of the biggest economic events in history.
Finally, in even more bad news on the GDP side of life, The Eurozone recession has deepened in the final three months of 2012. The economy of the 17 nation Euro-area shrank by 0.6%, considerably worse than expected by the markets. It is the sharpest contraction since the beginning of 2009 and marks the first time the region failed to grow in any quarter during a calendar year. The big three economies were the main driver of the declines, with Germany, France and Italy all posting declines greater than the market anticipated. The news has started to push the Euro lower after its ferocious march against the dollar, which currently stands at 1.3320, a figure still relatively high against 2012 figures. The high euro may well be hampering the situation with European exports become comparatively more expensive than even our own. This has led the French to recently call for a target to be set to stop the single currency from becoming so strong it damages the recovery. It seems unlikely that the EU would go down the same path Japan has gone down, however in these economic times, who knows what is going to happen next!
GBP This Week
This week is relatively light on Sterling data, with the Claimant Count Change being the highlight on Wednesday. This key unemployment figure has posted back-to-back declines, indicating some welcome improvement in the UK employment picture. The markets are now expecting another decline in February. The Unemployment Rate, which dipped down to 7.7% in January, is expected to come in flat. We then move to the MPC Meeting Minutes, which is released the week after the Bank of England’s Interest Rate and QE decision. We are interested to see if this months ‘no change’ decision was unanimous, or if there was dissenting opinions as well.
Whilst the UK continues to find direction and most economic indicators point to on-going weakness, the pound will most likely struggle to gain strength. Having shed over seven cent against the Dollar since the beginning of the year, we are unlikely to see a repeat of last week’s huge declines, but we do not expect this to be the end of Sterling’s weakness. Expect further modest declines against both the Euro and the Dollar this week therefore, but with the pound finding more support than usual.
USD This Week
The Dollar week starts on Wednesday with Building Permits kicking off the releases. US housing permits increased to roughly 903k in December, and it seems that momentum is here to stay with markets anticipating a further improvement to 920k this month. PPI is also due on Wednesday, and whilst US producer prices declining 0.2% in December, we expect a correction this time with a rise of 0.3%. Moving to Thursday, Unemployment Claims showed the number of people filing initial claims for unemployment benefits dropped sharply by 27,000 last week, indicating hiring has improved. This was the lowest level in three weeks and an increase to 361,000 is expected this week. Finally for the week, the US Philly Fed Manufacturing Index saw factory activity in the US Mid-Atlantic region unexpectedly declined in January, dropping to 5.8 points after posting 8.1 points in December. The released missed market expectations for a 7.1 release; however a gain of 0.7% is forecast this time.
EUR This Week
We start the week with Mario Draghi speaking before the European Parliaments Economic and Monetary Committee in Brussels. We are always wary of his speeches as they usually cause heavy volatility in euro crosses. Moving to Tuesday, German ZEW should show that sentiment had improved in January, surging to 31.2 from 7.6 in December. This time we expect a further rise to 35.5, adding further momentum to the euro. Moving to Thursday, Flash PMI should show the overall economic conditions in the Eurozone continued to improve in January. Both manufacturing and services PMI should still show contractions but movements towards positive territory are expected.
With GDP figures even worse for the Eurozone then expected we are reminded that the real economy is suffering, and with Italian elections looming, fears that Berlusconi will come back is haunting the single currency. With all of this in mind, the Euro is likely to remain volatile with some downward pressures present.
In Other News
David Cameron is in India in an attempt to rekindle partnerships of old, as the biggest UK trade delegation in history sets foot in Mumbai. With business as the focus, representatives from Rolls Royce, BAE and BP are amongst the swarm of British business looking to build bridges which, of late, have been moving in the direction of big American and European rivals. Let us hope our globetrotting PM does what he needs to secure more UK business overseas, we could certainly do with it British business fighting back. Much like Rafael Nadal, who won his first title since last year’s French open as he saw off David Nalbandian in straight sets in the final of the Brazilian open, slamming in a victory at 6-2 6-3.
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