Greece back in the dock as the Eurogroup gets ready to deliver a pasting!

Week Commencing Monday 9th February 2015

This Week in Brief

In the UK, we expect Industrial Production to beat estimates at 0.3 percent on the month, while Manufacturing should come in flat. The Bank of England Inflation Report should provide markets with some interesting insight into the recent dovish swing the bank has took.

In the US we are concentrating on retail sales, which we expect to post at -0.3 percent versus -0.4 percent consensus. The core figure should be somewhat healthier, coming in at 0.4 percent against a 0.3 percent forecast.

In Europe focus continues on the political situation in Greece, with traders watching the Eurogroup meeting on Wednesday for any hints on potential Greek debt write-offs. Unfortunately for the Greeks, this is not widely expected and as such we expect a generally negative response from the meeting.  

Overriding Market Themes

Starting in the UK this week, Britain's trade deficit widened sharply in December on a surge in oil imports, making the trade gap for last year as a whole the biggest since 2010.  There were signs of a shift in the trade balance in the final quarter of 2014, when the goods deficit narrowed by the largest amount in three years as export volumes rose at their fastest since the second quarter of 2013. However this, as it appears, was a short lived pipe dream! The Conservative-led government's hopes of exports playing a greater role in the economy seem to have been frustrated by persistent weakness in the euro zone, compounded by the recent wave of sanctions and economic fears surrounding Greece. That, unfortunately for Mr Cameron, seems unlikely to change before a national election on May 7. However, there are signs that exporters are being helped by the fall in the value of the pound in the second half of last year, especially against the US Dollar. Export volumes jumped 2.4 percent in December, while a survey of British business showed manufacturing export order growth has hit a five month high in January. Once again, mixed signals therefore from the UK economy and it seems that stormier waters await in the months to come.

Across the pond, The US economy added 257,000 jobs in January, beating expectations of 230,000 jobs and giving the market renewed confidence in the state of the nation’s economy. The US Labor Department also revised jobs data from November and December to show 147,000 more jobs were created than previously estimated. The revised figures for November show 423,000 jobs were created, the most since May 2010. Despite the increase in new jobs however, the unemployment rate increased slightly from 5.6 percent to 5.7 percent. Wages also increased, with average hourly earnings for all employees on private nonfarm payrolls up 12 cents to USD 24.75, following a decrease of 5 cents in December. Overall, the last 12 months have seen average wages increase by 2.2 percent, up from a previous estimate of 1.9 percent. This strong jobs report raises the probability that the US Federal Reserve may start to raise interest rates sooner rather than later. This move will without question strengthen the US Dollars resolve when pitted against other major currencies, so expect more pressure on USD buyers in the months ahead.

Finally in the “Euro-lund”! Investors are dumping Greek shares as the European Central Bank continued to tighten its grip on the country’s banking system. In a surprise announcement last week, the ECB said it would stop lending to Greek banks using the nation's government bonds as collateral (via the ECB’s LTRO and TLTRO systems), thereby piling pressure on the new Prime Minster Alexis Tsipras' to seek a compromise with bailout creditors. Mario Draghi and his committee justify the move by saying the prospects of a new deal with Athens are uncertain, and certain measures need to be taken to protect European interests. Rather defiantly, Greece hit back saying it would not be “blackmailed” by its European partners but did insist that its main aim was to find joint solutions to the countries mountainous debt and austerity crisis. This all comes as both the Prime Minister of Greece and his new Finance Minister tour Europe trying to gather support for their initiative, with unfortunately little success. With Alan Greenspan now wading into the debate with his predictions of a Greek exit from the Euro, all eyes will continue to be on the ongoing crisis and expect a very nervous EUR over the coming months.

GBP This Week

In the UK we expect the Bank of England’s Inflation Report to clarify the MPC’s thoughts on the current risks to UK inflation. In short, we expect the BoE to acknowledge downside risks to short term inflation, but upside risks to medium-term activity and wages.

On the data front, we expect December UK industrial production on Tuesday to print an increase by 0.3 percent month on month, beating market consensus of -0.1 percent. This should be coupled with manufacturing production, which is expected to be flat at 0.0 percent on the month.

USD This Week

We have a reasonably quiet week ahead for the US with the only major data release of note being retail sales on Thursday. For January figure, we expect a print of -0.3 percent, only marginally beating the consensus of -0.4 percent. Meanwhile, we expect core sales to also beat consensus, coming in at 0.4 percent versus the 0.3 percent the market expects. As these releases will be broadly in line with expectations, expect a muted response from the Dollar as we draw closer towards the end of the week.

EUR This Week

The market will most likely continue to focus on the Greek political and economic developments, coupled with further announcements from the ECB. The Eurogroup meeting on Wednesday is likely to be a key event in the discussions between Greece’s new government and its European partners regarding the countries financing program and associated conditions. Should the talks prove to be fruitless, this would further cement market fears of a Greek exit. In fact, with the current situation in mind, we believe that the likelihood of an exit is now significantly higher than at any point in 2012.


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