German and French GDP to push back into positive territory ... Could the Eurozone crisis finally be over?

Week Commencing Monday 12th August 2013


This week in Brief



  • We have a big week for British economic announcements, with CPI and Retail Sales headlining amongst a swath of other economic releases. All are expected to be relatively Sterling positive so expect some continues GBP strength as we head into the week.

  • In Europe, we have the German, French and EZ GDP releases coupled with the usual monthly German ZEW index. We expect all three GDP releases to show positive readings this week as the single market pushes back into growth. Expect a more resilient EUR therefore.

  • In the US, we expect a slight reduction in Retail Sales as sequestrian cuts and tax hikes continue to hit American spending power. We also expect a slight reduction in the Philly Fed index as business confidence ebbs.


Market Themes & Current Events


The UK trade deficit shrank to its lowest levels in almost a year in June, thanks to a boost in export levels. The Office for National Statistics said the gap between imports and export shrank to GBP 8.1 billion in June, down from the previous posting in May of GBP 8.7 billion. This came at the end of a extremely positive week for UK economic data, crowned by a massive rise in construction PMI earlier in the month. Diving into the trade gap figures, the gap for goods imported/exported to non-EU countries fell sharply from GBP 4 billion in May to GBP 2.6 billion in June, well below market expectations of GBP 3.8 billion. Additionally, if services are taken into account when calculating the UK’#s trade deficit, it narrows once more to GBP 1.55 billion. The coalition government are capitalising on the good news, allowing the Conservative party to close 4 points behind the Labour opposition party in the latest opinion polls. It is clear that the economy is repairing, however politicians on both sides of the bench must recognise that an economy which is only due to hit its pre-crisis highs by mid-2014, is definitely not worth celebrating!


Across the Pond, the US trade deficit also narrows to USD 34.2 Billion in June, the smallest gap since October 2009. The news was backed up as the three month average of the trade deficit, which irons out monthly volatility, also fell to USD 39.5 billion in the three months to June from USD 40.5 billion in the previous period. The smaller June deficit should lead the government to revise economic growth for the April-to-June quarter up from its initial estimate of 1.7% per annum. Examining the figure more closely, imports of goods and services fell by 2.5% to USD 225.4 billion, mainly because of large declines in petrol imports and of industrial supplies and materials. Exports of goods and services also increased 2.2% to a record USD 191.2 billion.


Over to the East, India's central bank has announced new measures to reduce volatility in currency markets and support the weakened rupee. The Reserve Bank of India announced (alongside the announcement of a new RBI governor, ex-IMF Chief Economist Raghuram Rajan) that it will auction 220 Billion rupees (GBP 2.3 Billion) of government cash management bills every Monday until further notice. This prompted the rupee to hit a record low of 61.80 against the US Dollar on Tuesday. The rupee has lost more than 12% of its value since the start of the year, mainly due to capital flight out of the country, amongst other things. With the continued decline in the value of the Rupee, many analysts are raising concerns over India’s economy, which is growth at its slowest rate in more than a decade. We doubt that the release of further government bills will provide any rest bite for the embattled Rupee however. With corruption and poverty remaining the biggest drag on growth, Raghuram Rajan certainly has a battle on his hands!


Back in Europe, Greece's unemployment rate hit another record high in May of 27.6%, according to the Hellenic Statistics Authority. Even more disturbingly, the 15-24 age groups are experiencing a record level of unemployment, which is currently sitting at 64.9%. The employment news emerged ahead of a meeting between Greek Prime Minister Antonis Samaras and US President Barack Obama. Mr Obama praised the Greek government for its courage and austerity drive, however warned that a more balanced approach between austerity and measures to promote growth should be adopted. Unfortunately, Mr Samaras has few other paths to take as the IMF, EU and ECB all line up demanding further austerity from the indebted country. As Greece enters its sixth year of recession, with has claimed more than 25% of GDP so far, there is very little light at the end of the tunnel for the country.


Finally, China's economy could be stabilising, the latest set of economic figures from the country has suggested. Factory output rose in July by 9.7% compared against last year’s figures, ahead of economists’ expectations and up from the previous months figure of 8.9%. This comes as welcome news to the Chinese government, as China’s growth rate has been slowing at its fastest pace since the global financial crisis in 2008. In the second quarter of the year, the Chinese economy had grown by 7.5% compared to the previous year, down from 7.7% in the first quarter. The markets generally welcomed the news, however many stated that more evidence was needed before it would be safe to say whether the economy was beginning to recover.


Sterling Outlook


The recent announcement from the new Bank of England Governor Mark Carney, that the provision of long term low interest rates will be linked to the existence of unemployment levels sitting over 7%, has pushed the employment indicator right into focus. Therefore this is the highlight of the Sterling week.


We start with UK CPI on Tuesday, which should be given more emphasis than usual owing to Mark Carney’s indication that forward guidance would only be valid under conditions where sub 2.5% inflation is expected 18 – 24 months ahead. With this in mind, we expect CPI to remain relatively stable and declining 0.1% against the previous month release to 2.8%. This should be relatively well received by markets as it falls well into expectations for facilitating forward guidance.


Also on Wednesday morning, the Bank of England release minutes from the last MPC meeting, including the votes for both the interest rate and Quantitative Easing decision. Markets expect little change, with both voting 9-0 against any amendments to either monetary policies. We only expect to see volatility on the back of this release if a member of the MPC revolts against Mark Carney at this early stage of his tenure at the bank.


Finally, Thursday’s retail sales figures should provide a clear overview of consumer activity in July. Last month’s disappointing figure of 0.2% is expected to rise to 0.7%, which although positive, is unlikely to result in any significant market movement. Again, any sizable deviation from market expectations is likely to cause significant volatility in Sterling markets, with risks to GBP mounted to the downside.


US Dollar Outlook


We have a relatively quiet week ahead for the US Dollar, with both Core and Non-core Retail Sales headlining the week on Tuesday afternoon. With market expectations currently pointing towards a moderate reduction from 0.4% to 0.3%, in a similar manner to the UK release, markets will be looking for a significant miss to bring about a notable reaction.


We then move to the Philly Fed Manufacturing Index on Thursday afternoon after a couple of well-timed speeches by Federal Reserve member James Bullard to the Monetary Policy Outlook Committee in Washington.  The survey is expected to decline from 19.8 to 15.6 in July, which although suggests worsening business conditions, should be regarded as flat lining (with all releases above 0.0 indicating improving conditions). With this in mind we do not expect any major volatility on the back of this release, but as always a strong over/under performance would be likely to set direction for the day.


Euro Outlook


We have a big week of GDP releases in Europe to look forward to, with releases for Germany, France and the EZ as a whole. Estimates are for a sluggish push into growth for France, which is expected to post a 0.1% growth rate after the previous quarter’s figure of -0.2%. Meanwhile the German figure is expected to rise from 0.1% to 0.6%, which would represent the highest growth rate in nine months. Finally, market estimates point towards the Eurozone growing for the first time in seven months, with a 0.4% rise from -0.2% to 0.2% expected by market economists.


Finally we have the German ZEW release on Tuesday, which always headlines European data sets owing to the size and importance of the German economy within the trading bloc. The markets expect a positive reading of 40.3 against last month’s 36.3, however it is worth noting that this figure has disappointed recently, with the last four out of five releases coming under market expectations. We therefore are cautious over any potential growth in this index and expect significant volatility. 

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