German and Italian economies in recession - what next for Europe!

Week Commencing Monday 09th November 2014

This Week in Brief

  • Apologies for the lack of weekly market report last week, this was due to an issue with our mailing software. If you would like to receive our more concise “daily” report, please get in touch with your NU Currencies dealer.

  • In the UK we expect unemployment to drop below 6 percent for the first time since the beginning of the financial crisis. Mark Carney should maintain his somewhat dovish tone at this week’s inflation report, especially given the current inflation led troubles over in Europe and other parts of the world.

  • In the US we expect a reasonable uptick in retail sales to 0.2 percent from last month’s contraction of -0.3 percent. The University of Michigan is expected to post a slight decline on the month from its post-recession highs in October while jobless claims is expected to post its ninth consecutive sub-200k release.

  • In Europe we expect both German and Italian GDP to continue to push into negative, while both France and the Eurozone in general to either flat line or enter recession. Eurozone inflation could be the only semi-decent release of the week for Mario Draghi. With analysts expecting a uptick to 0.4 percent this month.

Overriding Market Themes

We start this week’s news on home soil, where the UK services sector expanded at the slowest rate in 17 months in October, adding to signs that the pace of the economic recovery is cooling. Markit reported that the UK services purchasing managers' index fell to 56.2, the lowest reading since May 2013, from 58.7 in September. Analysts had expected the index to tick down slightly on the month to 58.5. This weak data has led to many believing that the Bank of England will keep interest rates on hold for longer than previously thought, in order to gauge the full extent of the slowdown in the recovery. GBP/USD was down 0.70 percent ahead of the release of the data, which Sterling also weakened against the Euro, with GBP/EUR dropping a more modest 0.20 percent.

Across the channel, The European commission has slashed its forecasts for Eurozone growth this year and next, while warning there would be no quick cure to the zones current economic fortunes. The Commission cut its forecasts for growth in 2014 to 0.8 percent from a previous forecast of 1.2 percent. It also expects growth in 2015 to be a less than impressive 1.1 percent, 0.6 percent lower than it previously stated. Germany is not immune to the current round of economic bearishness, with the economy expected to grow by just 1.3 percent this year, and just 1.1 percent in 2015. This compares with the UK, which is expected to grow by 3.1 percent this year and 2.7 percent next year. Ireland is expected to be the fastest growing EU economy in 2014 with growth expected at 4.6 percent. Meanwhile, Eurozone inflation is forecast to remain low for the foreseeable future, with the 2014 forecast sitting at 0.5 percent before rising to 0.8 percent in 2015 and 1.5 percent in 2016.

Sticking with the European theme, business activity in the Eurozone’s private sector picked up slightly in October, although companies did cut their prices at the fastest pace since early 2010. This in turn makes it more likely the European Central Bank will soon have to announce a third wave of stimulus measures, adding further pressure to the embattled single currency. In the meantime, the Eurozone’s two largest economies continued to diverge. While German surveys pointed to a slight acceleration of activity, French surveys pointed to a deepening decline. The French survey also indicated that a recovery is unlikely soon, with new orders falling and businesses cutting jobs for the twelfth straight month. In contrast, German manufacturers hired workers at the fastest pace in almost three years. Their diverging economic performances have led to political tensions between the two nations, with the usual allies starting to butt heads. The French government, which is deeply unpopular with their electorate, has urged its German counterpart to invest an additional EUR 50 billion over three years as a way of countering budget cuts in France. This is unlikely to happen, and the further these two nations at the heart of the Euro project push away from each other, the more unstable the project will become.

GBP This Week

We have a particularly quiet week ahead for the UK with Wednesday being the only day where releases of note are scheduled to be released. This time we expect the news to be somewhat bullish for the Pound, with unemployment looking like it is going to breech the all-important 6 percent threshold. This will be the first time this indicator has been below 6 percent since November 2008, so traders should find this hugely psychological and will no doubt trade on the back of it.

We then shift or focus to the Bank of England inflation report and accompanying press conference. We expect a somewhat more dovish tone from Carney this week as he is caught between “a rock and a hard place”! In theory the UK is in a position where interest rates should be elevated (we have a shrinking unemployment base and growing GDP/PMI’s, coupled with a stable level of inflation), however globally the situation is not so rosy. With this in mind, we expect Carney to re-iterate his stance of observing global inflation trends before committing to a rate hike.   

USD This Week

We also have a quiet week ahead for the US, with Tuesday the Veterans Day bank holiday and nothing of importance out on Monday. Towards the end of the week things liven up somewhat, with the release of the October retail sales figure and the UoM consumer sentiment index. We start with retail sales, which we expect to rise to 0.2 percent from last month’s disappointing -0.3 percent. Seasonally, October is usually the start of the Christmas sales push, therefore traders will tend to assume that retail sales will be somewhat inflated as we draw closer to December.

Moving to the University of Michigan consumer sentiment survey, we expect the headline figure to have dropped to 86.5 from its post-recession high in October, perhaps reflecting a pullback in consumer expectations. This is still a solid posting so we doubt it will be a Dollar-Bear event, however should we see a reading deviate significantly from this expectation we could see some significant volatility.   

Finally, we will be watching the jobless claims figure on Thursday with most analysts expecting to see the ninth posting sub-200k.

EUR This Week

Again, we have a quiet week ahead for Europe with industrial production, GDP and final CPI the only releases of note. Starting with the most important, we expect GDP readings for the major Eurozone economies to be disappointing. Firstly, Germany and Italy are both at risk of falling back into recession, having contracted by 0.2 percent and 0.1 percent respectively during the second quarter of the year. France and the Eurozone as a whole are likely to continue to flat line at best and are at risk of also posting negative results. If this where to happen, it would mean that both France and the Eurozone as a whole would now be in technical recession.

Moving to CPI on Friday, we expect the reading to push slightly higher to 0.4 percent on the month, potentially giving Mario Draghi some breathing room at the next ECB meeting. If we see a reversal in this figure expect markets to assume that the current monetary easing the ECB are undertaking is ineffective, and will most likely prompt the ECB into acting once again next month. 


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