Housing market pressures add to interest rate hike expectations!

Week commencing Monday 7th July 2014

This week in Short

  • In the UK we expect manufacturing production to increase from 0.4% to 0.5% on the month, while the Bank of England are not expected to adjust any monetary policy levers.

  • In the US we are only looking out for June’s FOMC meeting minutes, however given the less than impressive jobs data for June we doubt there will be any fundamental shift in the FOMC’s monetary outlook.

  • In Europe we have an almost dead week, with the ECB monthly bulletin the only release worth watching.

Overriding Market Themes

We start this week’s market report from the US, where a surprisingly robust US market continues to surprise many market analysts. Employers added 288,000 jobs in June and helped cut the unemployment rate to 6.1%, the lowest since 2008. This was the fifth straight gain for this indicator above 200,000, and the best such stretch since the late 1990s tech boom. This flies in stark contrast to current US GDP, which has seen the economy shrink at a steep 2.9% annual rate in the January-March quarter, although this was mainly due to a particularly harsh winter. Exploring the release further, factories added 16,000 workers, retailers 40,200. Financial and insurance firms increased their payrolls by 17,000. Restaurants and bars employed 32,800 more people. Only construction, which gained a mere 6,000, reflected the slow recovery of previous years. There was also substantial growth in public sector employment, but this was more down to a stark decline in the figures for the first quarter as many schools/ancillary government posts were suspended due to the weather. All in all therefore, a decent week for both Janet Yellen and Mr Obama, who has been banging their heads against the wall post disastrous GDP figures. Looks like the world’s largest economy may well be back on track!

Moving across to Europe, it looks like Mario Draghi has been taking notes at the Bank of England MPC meetings, having finally decided to issue some form of forward guidance on future ECB interest rate movements. Catching up with some of its major international counterparts, the President announced last week that the institution will start issuing minutes of policy meetings from January as part of an overall that will reduce how often its Governing Council will set interest rates. Previously, the ECB had voted to keep minutes out of the public eye for fear they would open officials to criticism in their home nation, of which the Eurozone currently has 18. Mario Draghi also said that the Governing Council will now set monetary policy every six weeks rather than monthly, again in an attempt to quell market speculation ahead of each meeting. This new ECB setup is starting to look more and more like the US’s Federal Reserve, which recently shifted to eight scheduled meetings a year and publishing its accounts three weeks later. As forward guidance goes, I still think that Carney is King (if you mind the pun!), but good attempt Mr Draghi!

Finally and a little closer to home, the IBEC has significantly upgraded its growth outlook for Ireland, saying GDP could grow by as much as 4% in 2015, nearly 1% higher than previously thought. In fact, the group claims that the economy has the potential to average 4% growth annually over the next decade as inflation growth overtakes the burden of increased tax hikes. This represents an amazing turnaround from the recession hit country of a couple of years ago, which experienced a major housing bust coupled with some of the most aggressive tax increases in northern Europe. Looking to Octobers budget with this in mind, we anticipate that Finance Minister Michael Noonan will seek a fresh adjustment of spending to significantly less than the proposed EUR 2bn, potentially only in the EUR 200m region.

Finally, rapidly rising housing prices in the UK appear to be a problem spreading beyond London, with a new report citing the ever increasing risks to the economy as prices outpace many mortgage holders incomes. London prices are already pushing 26% higher than a year earlier, representing the biggest annual jump since 1987. The rest of the UK (as an average) is not too far behind, with nationwide prices up almost 12% on the year. To put this into perspective, average British wages currently growing by less than 2% a year, and BoE expectations that this growth rate will rise to just 2.5% percent for 2014. This continues to put pressure on the Bank of England to give an indication of when interest rates are likely to increase, and while they have not commented on exact timings, the market believes that a rate increase is inevitable by the end of this year.  

GBP This Week

The UK seems to have the busiest week ahead with manufacturing production followed by the Bank of England MPC meeting. Starting with Tuesday’s manufacturing release, forecasters point towards a moderate rise from 0.4% to 0.5%, representing a reverse the slowdown of growth seen over the past two months. With this in mind, anything above 0.4% should be very positive for the Pound, and could point to yet another boost in the sector.

On Thursday the latest monetary policy decision from the Bank of England is not expected to bring any surprises to the market. We doubt that they will be in a position to raise interest rates as of this week, despite rumours of the timeline being brought forward to within 2014. Mark Carney will likely fall short of any discussing any further changes to interest rates and/or asset purchases, especially given his recent “dressing down” by the Parliamentary Select Committee. All in all, we should hear a continuation of the banks current policy of keeping rates unchanged until one of Carney’s forward guidance indicators is breached.

USD This Week

We have a reasonably light week on the data front from the US, with the minutes from June’s FOMC meeting the only release of note. Given the improvements in the economy we have seen over the past month, there are growing indications that we might see the end of asset purchases brought forward faster than the current USD 10bn we are currently seeing. However, given the less than impressive June jobs report compared to the one released this month, it is unlikely that the Fed will alter from their current trajectory just yet. Traders will instead try and figure out when the there is likely to be an interest rate hike, however we still believe that the Fed are a couple of months behind a potential BoE hike.

EUR This Week

Again, we have a very quiet week ahead for Europe with the ECB monthly bulletin the only release worth watching. Due out of Thursday, we expect this release to discuss the current threat of deflation and how the monetary policy stance of the ECB is likely to impact their targets moving deeper into 2014. Given the scale of announcements in last week’s ECB press conference, we expect a slightly more bullish tone in this month’s bulletin, potentially suggesting that these new measures will address the deflation issue over the remainder of the year. 


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