Inflation down and Super Mario pondering over rate cuts ... Looks like Europe is back in the news!!

Week Commencing Monday 4th November 2013

This week in Brief

  • In the UK we have a the two remaining PMI releases to contend with, with both expected to come in around their previous levels. We also have the BoE rate decision however we expect no change in policy stance in line with Mark Carney’s forward guidance model.

  • In the US we have the all-important Q3 GDP figure which is expected to show a slowdown in growth for the world’s biggest economy. We also have a number of labour releases due out which are expected to show marginal increases in the number of unemployed Americans.

  • In Europe the big event is the ECB rate decision on Thursday where there is a possibility that the central bank will drop rates by a further 25bp. If this does happen expect some significant volatility in the EUR markets and a new trend to be set.

Market Themes & Current Events

In some good news for the UK economy, UK Manufacturing continued to grow last week having posted strong October numbers. The latest PMI for the sector came in at 56.0 last month, down slightly from September's revised figure of 56.3, but still indicating robust growth. Diving into the figures, the sector was helped by a rapid expansion in export orders, which grew at their fastest pace since February 2011, while production and new orders also grew strongly. Official figures showed that the UK economy grew by 0.8% in the three months to September, with the manufacturing sector growing by 0.9%.

Over in Europe the Eurozone inflation figure for October fell to 0.7%, it’s lowest since February 2010, thanks to a fall in energy costs. Figures also showed that the zones unemployment rate hit another record high in September, putting further pressure on the ECB to look at cutting interest rates by a further 25bp this week. Within the figures, core inflation fell from an annual rate of 1.4% to 1.1% while the Eurostat agency found that 60k more Europeans were unemployed than the previous month.  France and Italy, the second and third largest economies within the bloc each saw a significant rise in their jobless rates.

It is not all bad news for the Eurozone however, with Spain seeing its first quarterly economic growth since 2011. The country's GDP grew 0.1% in the July-to-September period, after contracting for the previous nine quarters. Spain’s economy has been in serial decline since its property bubble burst in 2008. Its banks were amongst the first needing government bailouts from other European countries with billions worth of euros in Spanish mortgages defaulting every month. It has also endured one of Europe’s highest unemployment rates, with it currently sitting at 26%. Therefore despite its emergence from recession, we doubt it will be anything but a continuing drag on the Euro, at least for the short term.

Over in the US, The US Federal Reserve has voted to keep interest rates at record lows and to continue with its $85bn (£53bn) a month bond buying programme meant to stimulate the US economy. In a statement meant to precede the Q3 GDP figure this week, Fed officials said the US economy continues to grow, albeit only moderately. Within the press conference, the Fed fell short of openly blaming the government for the drop in output, however bluntly said that government fiscal policy may well be restraining economic growth. When taking the shutdown and slowdown in growth into account, we doubt that the Fed will look to taper its program until the beginning of 2014.

Sterling Outlook

We have a big week for the UK with the release of the two remaining PMI figures, followed closely by the release of the latest monetary policy decision from the Bank of England on Thursday. We start the week with the Construction PMI figure on Monday, where we are expecting a slight decline to 58.8 from 58.9. Despite the slight decline it is worth noting that this PMI is at one of the highest levels on any western country and given the governments ‘help to buy’ scheme, I believe that we could see a continuation of the recent upswing as the sector seeks to raise supply to account for the sudden increase in demand.

Moving to Tuesday and we have the most important data release of the week in the form of the services PMI figure. It goes without saying that the reliance of the UK upon the services sector remains paramount and for this reason a continually improving sector is crucial to the continued recovery of the economy. Thankfully economists continue to be positive for this release, with estimates pointing towards a marginal increase from 60.3 to 60.4. It is worth noting however that if we see another disappointing result, it could bring a negative tone to the proceedings days in the Sterling markets.

Finally, the Bank of England’s MPC will conclude with their latest monthly meeting and subsequently announce their latest decision with regards to monetary policy. Given Mark Carney’s forward guidance, this release has become somewhat of a non-event as traders have relative certainty that no changes will be made. We therefore do not expect to see any change to the current £375 billion asset purchase facility or 0.5% interest rate and are therefore looking to see if the accompanying statement will stoke up some market volatility.

US Dollar Outlook

We have a very busy week for the US as the backlog created by the government shutdown continues to effect the release times of some major data points. This week for example we are seeing the release of some key labour data alongside the Q£ GDP number, all of which were scheduled to be released last week. Also later on we are look ahead to the University of Michigan consumer sentiment figure on Friday.

We start on Thursday where the initial estimate of the Q3 GDP figure is due to be released, with market expectations pointing to a noticeable weakening in the number. Unfortunately this GDP release will not include any major element of the government shutdown, which is likely to have been a major drag on the economy over the last quarter. With this in mind, we expect to see growth come in at around 1.9% but be revised down as we move towards the end of the year.

Moving to Friday where the job reports are released, we should see one of the more volatile days of the month. The non-farm payroll figure is likely to gather the most attention, especially given its tendency to come in somewhat wide of market forecasts. The median estimate for the payroll figure is coming in around 130k, following the September figure of 148k. This will be followed by the unemployment rate, which will also be closely watched on Friday. Estimates point towards the first rise in around five months, which would cause considerable pain to the Obama administration no doubt.  

Finally, the UoM consumer sentiment figure should be interesting as it will shot how the general US population have responded following the government shutdown and debt ceiling standoff. Bear in mind that this figure has fallen short of estimates on the last 5 occasions, which could very well happen again given markets expect a rise from 73.2 to 74.3.

Euro Outlook

We have a relatively light week for the Eurozone ahead, however with the release of significantly lower inflation figures last week, the ECB meeting should be considerably more interesting than previously thought. With inflation falling from 1.1% to 0.7% the ECB’s potential decision as to whether the interest rate should be cut will be less obvious. The current headline rate of interest of 0.5% has been in place for over 6 months since the rate was cut from 0.75% in April 2013. However, the significant fall of inflation to the lowest level since the 2008-2009 financial crash has been perceived as a massive threat to some of the peripheral economies. Many commentators attribute the fall to the standoff approach from the ECB and therefore the pressure is on for a possible move in response. With this in mind, expect the press conference to play a more important role in this week’s currency markets. In addition to the press releases we also have some Spanish and Italian PMI releases, alongside the Eurozone retail sales figures. All of these however are considerably less noteworthy than the ECB press release on Thursday.


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