Is France the "Sick man of Europe"? Manufacturing & Services to tell the tale this week!
Week Commencing Monday 20th January 2013
This week in Brief
- In the UK we have a relatively busy week with the Claimant Count, Unemployment Rate and the MPC voting decisions all due for release. We expect the claimant count to continue to decline, potentially pushing the unemployment rate to 7.3%. Unanimous 9-0 voting also expected.
- In the US we have a quiet week in store, with only Unemployment Claims and Existing Home Sales worthy of note. We expect Unemployment claims to marginally increase from 326k to 331k while real estate sales is expected to increase marginally on the month.
- In Europe we have the German ZEW coupled with a raft of French, German and EZ PMI’s. We expect further growth in the ZEW while German should continue to see respectable increases in both Services and Manufacturing. France on the other hand should continue to post figures well below the 50.0 level indicating contraction.
Market Themes & Current Events
UK Retail sales rose at their fastest pace in over nine years in December, according to official figures published by the ONS on Friday. Sales had been expected to been mixed, and earlier this month the BRC (British Retail Consortium) reported annual growth of just 1.8%. December's sales however were up 2.6% compared with November, taking many analysts by surprise. Indeed, the print has caused some City analysts to immediately cast doubt on the reliability of the figures. Diving into the release, large supermarkets seemed to suffer the worst out of the pack, with disappointing sales through all ranges. Department stores fared slightly better with the majority posting significant increases in sales over December. Overall, the positive retail sales for December bode well for the growth outlook for the final three months in 2013, causing us to increase our estimate of Q4 GDP from 0.8% to 1.0%.
Moving to Europe, Irish sovereign debt has been upgraded from junk grade to investment grade by credit ratings agency Moody’s. It is the latest in a run of good news for Ireland, which became the first euro zone country to complete a bailout, leading it to make a strong bond market return last week. The upgrade comes as the economy shows signs of advancing on two years of limited growth, with house prices on the rise, the jobless rate falling to 12.5% from a 2012 peak of 15.1% and GDP growth of 2% expected this year. The upgrade should now allow some sovereign wealth funds and large central banks to re-join the scramble for the so-called “Celtic Tiger paper”. This push has already caused yields on Irish 10 year bonds to fall from their mid-2011 highs of 15% to just below 3.5% now.
Sticking with the European theme, Germany's economy grew by a weaker-than-expected 0.4% in 2013. The preliminary GDP estimate from the Federal Statistics Office, released on Wednesday, fell just short of the consensus forecast for a 0.5% expansion, leaving many analysts making a quick exit of Euro long positions. Recent forward-looking data had been strong, with business, consumer and investor sentiment rising to multi-year highs over the past month, while industry orders surged in November. Germany's economy had remained a strong point of the Eurozone, and was credited with helping to haul the single currency bloc out of recession last year. This latest release therefore provides a worrying turn of events for the 17 nation bloc, with the zones second largest economy, France, also struggling to gain momentum.
Across the pond, US consumer inflation spiked in December, driven higher by rising fuel prices. The consumer price index rose 0.3% on a seasonally adjusted basis, the US Labour Department stated in their monthly inflation report. It seems companies are starting to gain pricing power as rising employment, stocks and home prices help boost household wealth and spending. A pickup in inflation towards the Fed’s critical 2% goal, coupled with faster growth means that the central banks unprecedented quantitative easing program is working, which should allow policy makers to continue reducing the pace of its monthly asset purchases.
Wednesday is the critical day for Sterling this week, as we await the release of the Claimant Count, unemployment rate and the latest round of MPC voting. We start therefore with the Claimant Count, which is without doubt the highlight of the week. This gauge of the health of the UK employment market had been posting sharp declines, as the employment situation improves as the UK economy picks up. Another strong drop is forecasted for December, with a print of -32.3K expected. This should allow the Unemployment Rate to edge lower to 7.3%, down from 7.4% last month. We expect markets to react relatively strongly to a decline of this nature, especially as it pushed the unemployment rate even closer to Governor Carney’s coveted 7% figure where interest rate hikes will be considered. With this in mind, should we see an decent print expect firm Sterling trading towards the end of the week.
Moving to the MPC, the markets are expecting another unanimous, 9-0 vote for the most recent QE decision, which kept QE steady at 375 billion pounds. We also expect a unanimous 9-0 breakdown in favour of the most recent decision to maintain the rate at 0.50%.
US Dollar Outlook
We have a surprisingly quiet week for the US, with Unemployment Claims and Existing Home Sales on Thursday proving to be the highlights. We start with Unemployment Claims, which seems to be the highlight of the US week. The number of Americans claiming for unemployment benefits fell 2,000 last week to a seasonally adjusted 326,000, pushing the four week average by 13,500 to 335,000. Jobless claims are forecast to increase this month to 331,000 however, mainly on the back of poor weather effecting festive retail growth. Despite the increase, it must be noted that the US economy continues to perform well and the number of new claims has stabilised near pre-recession levels, so we expect this to be more of a blip than a reverse in trend.
Moving to home sales, the indicator declined sharply in November to an annual rate of 4.90 million units, the lowest level in nearly a year, owing mainly to an increase in interest rates. Fed tapering coupled with the Federal Housing Finance Agency’s plan to reduce the maximum size of mortgages has further exacerbated the situation. With this in mind, I expect a more modest than market expectation rise to 4.99 million units to take place.
We start Europe’s economic calendar with the German ZEW Economic Sentiment release on Tuesday. In November, the actual release was in line with the 54.6 market estimates, while December’s printed 4.7 points ahead of market expectations. On Tuesday there, market analysts have placed estimates around 63.4, which given the poor GDP numbers last week may be too optimistic. If the actual release is in line or above this market forecast, expect the Euro to gather some fundamental support. On the other hand however, a drop in this indicator could mean another hit for the Euro Area, and more crucially the Euro.
Moving to Thursday we have the Flash manufacturing and services PMI’s from both France and Germany. French manufacturing PMI is the first release to be tabled, with figures this month expected to come in at 47.6. With analysts remaining particularly bearish on French industries at the moment however, we would not be surprised if this figure were to disappoint. German manufacturing on the other hand is expected to post somewhere around 54.7, hopefully pushing the total Eurozone figure up to the 53.2 mark.
Moving to Flash Services PMI, we expect French services to come in around the 48.2 mark while German services should print a more respectable 53.5. These two figures, alongside the other member states should post a combined EZ figure of 51.5.