GDP, retail sales, BoE Minutes ... strap in its going to be a ride!

Week Commencing Monday 20th October 2014

This Week in Brief

In the UK we have a busy week, with retail sales, the Bank of England minutes and GDP all on the agenda. With little in the way of positive data expected (perhaps with the expectation of GDP which is far outstripping its peers) we are looking for a relatively lacklustre week for Sterling.

In the US we are looking forward to Wednesday’s CPI release, with markets hoping to see the figure return to 0% after its disastrous print of -0.2% last month. We also will be watching flash manufacturing where market expectations point towards a slight drop in productivity.

In Europe we have a quiet week with all focus on German and French manufacturing PMI’s. With expectations of another negative German print, expect more bad news for the single currency.

Overriding Market Themes

Starting with the UK, total unemployment dipped by 154k in the quarter to August to 1.97 million, the lowest for eight years. There was also an 18.6k fall in the narrower count of those eligible to claim Jobseeker’s Allowance in September to 952k, the 23rd consecutive monthly reduction. This has meant that the UK’s unemployment rate has reached a six-year low of 6%, the Office for National Statistics (ONS) reported, with unemployment having fallen by over half a million throughout the year, the biggest annual reduction since records began in 1972. The most keenly watched figure of the report is youth unemployment (covering 16 to 24 year olds), which fell by 88k over the quarter to 733k, giving a jobless rate among the age group of 16%. There were 162k unemployed 16-and-17-year-olds, down by 11k on the previous three months. This is another batch of good news for the government, while the opposition did appear to grit their teeth! Labour were keen to point out however that average weekly earnings in the June-to-August period, excluding bonuses, rose by 0.9% from a year earlier. Including bonuses, earnings rose by 0.7%, well below inflation, which is currently running at 1.2%. So it is not all a celebration, unless you are sitting on the board of a FTSE 250 company that is!

Across the Atlantic, the U.S. economy is growing at a "modest to moderate" pace despite concerns of a global economic slowdown and heavy upsets in financial markets. The Federal Reserve’s beige book stated says the Fed believes consumer spending, which accounts for about 70% of the economy's output is growing. Retailers are optimistic about sales through the rest of the year, particularly from tourism, although New York retailers reported weaker sales than from September's report. Most districts also say their property and banking markets are growing as overall employment expands. Although wage growth has remained relatively modest, Federal Reserve officials say pressures to raise wages within industries such as construction are increasing.

GBP This Week

We start the UK week with Wednesday’s Bank of England policy minutes, with the focus on interest rates back on the cards. Last month there was a definite push towards monetary tightening, although a lot has now changed over a past few weeks! Global downside shocks to inflation have somewhat put a dampener on interest rates, and as such has pushed back expectations of a rate rise in the immediate future. As such, these minutes will be somewhat negated if we see a continued hawkish sentiment, given they were minutes of a meeting before inflation took a tumble. With this in mind however, a dovish set of minutes should still push Sterling to the downside.

Moving to Thursday’s retail sales, we expect another downside print to this headline figure, although we doubt that markets will take too much notice. Last year saw 6 out of 12 negative prints, whereas this year we have only seen 2 out of 8 negative prints, so we do expect the estimates of -0.2% to deliver some downside GBP risk. With this in mind however, we do believe that markets will take any moderate downside print lightly.

Finally we await UK GDP for the third quarter which should dominate Friday trading. Given that the UK is on course to grow the fastest of any other major developed economy, we expect the 0.2% drop in expected GDP (given the ongoing Eurozone issues) to be negligible, with a posting of 3.0% expected instead of the original 3.2%. It goes without saying that any considerable miss on this indicator would cause some significant shifts in direction for Sterling.  

USD This Week

In the US the major release of the week is Wednesday’s CPI, which coupled with recent comments from Fed members Williams and Bullard may have the potential to delay (or indeed increase) the banks QE program. Tumbling CPI in the US, UK, Eurozone, China and alike has put the topic back on the agenda and monetary policy would typically have to become more accommodative as a response to any disinflationary threat. Given the US position in global markets, Wednesday’s CPI reading will be absolutely crucial and will cause significant volatility. We expect CPI to improve somewhat on the month however, from -0.2% in August to a flat 0% this month.

We then shift our attention to flash manufacturing PMI on Thursday, with markets expect to see a slight pullback to 57.2 from 57.5. Although not the most important release of them all, it could be yet another negative release adding to the current global risk aversion we are seeing.

EUR This Week

We have a quieter week ahead in Europe with German and French manufacturing PMI’s the only releases of note. Starting with German manufacturing, which given the importance of Germany in the Eurozone should be the release of the week. Given that it posted the first contraction figure for 15 months in September, a further deterioration would no doubt mean yet more calls for QE from the ECB. 


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