Is Mario about to turn the printers back on?!
Week Commencing Monday 5th October 2015
Overriding Market Themes
UK productivity in the second quarter suggests the flagging indicator may well be improving itself after years of lacklustre growth. On a per hour basis, output produced by employees rose 0.9 percent during the three months to June from the previous quarter, accounting for the fastest rate rise in four years. That said, UK productivity continues to lag behind the US and other large advanced economies. According to the ONS, Britain’s productivity gap with the rest of the G7 in 2014 was the largest since comparable estimates began in 1991. Interestingly, some economists say weak productivity has been in part due to UK employers hoarding more workers than they needed during the recession. This has helped produce the low levels of unemployment we have seen when compared against our European peers, however does mean there are some difficult decisions for policy makers at the Bank of England. Indeed, policy makers at the central bank have been split over how much recent wage increases have threatened their medium target of 2 percent annual inflation target. While Inflation registered zero growth in the three months to August, recent data showed regular pay for British employees is rising at the fastest pace in over six years. Also, the recent rise in the national minimum wage has already increased costs for employers, with consumers likely to face the burden in the medium term. Either way, the hawks at the Bank should have plenty to talk about and an interest rate rise remains a distinct possibility at the beginning of next year.
Over at the World Bank, a slowdown in China, weaker commodity prices and the prospects of tighter financial conditions have reduced the growth outlook for Asia. It downgraded its 2015 through to 2017 growth projections for developing East Asian economies to 6.5, 6.4 and 6.3 percent respectively. The forecasts are now marginally down from its previous estimates in April of 6.7 percent growth for both 2015 and 2016 and 6.6 percent in 2017. It expects China will grow at percent this year, before slowing to 6.7 percent and 6.5 percent in the following two years. This represents a sizable slowdown from its previous forecasts, and will have grave repercussions for the rest of the region given the countries close trade and financial links. Also, higher US interest rates also pose a risk for the region as this could impact the cost and availability of external financing for the region. Although we are all talking about slowdowns, it is important to note that these economies are still growing at rates western countries could only dream of! That said, perhaps the region is not the new 21st century powerhouse we all expected it to be!
GBP This Week
We expect the Bank of England to keep both rates and their asset purchasing program unchanged in its October meeting, in line with market expectations. The report could air on the side of the hawks however, especially as the committee fight recent dovish commentaries pushing back expectations of a rate hike to 2017. On the data front, we expect services PMI on Monday to rebound slightly from the unexpected decline in August, although it is still fighting somewhat of an uphill battle. We also expect Wednesday’s production indicator to show a 0.4 percent uptick in total, with a 0.5 percent push in manufacturing.
Given the BoE and Services, we should see some renewed GBP/EUR upside, especially as the pair continues to hover around the 1.35 level.
USD This Week
We expect the USD to remain relatively quiet this week after the weaker than expected Non-Farm Payrolls report last week. In terms of data, we expect services ISM to decline from 59.0 to 57.5, which despite the drop, remains above historical averages. We also have the minutes of the recent FOMC meeting due on Thursday. Although we do not expect any major changes compared to the statement, it will be interesting to see how the committee assess the potential impact on the US economy of the recent economic plight in AsiaWe expect the USD to remain relatively quiet this week after the weaker than expected Non-Farm Payrolls report last week. In terms of data, we expect services ISM to decline from 59.0 to 57.5, which despite the drop, remains above historical averages. We also have the minutes of the recent FOMC meeting due on Thursday. Although we do not expect any major changes compared to the statement, it will be interesting to see how the committee assess the potential impact on the US economy of the recent economic plight in Asia.
With the above in mind, we continue to believe that we will see a relatively robust USD moving into the month, especially versus the Euro and commodity currencies. With this in mind, expect 1.10 to be tested on EUR/USD and Sterling to maintain its position just above 1.50.
EUR This Week
We have a relatively weak week for Europe, with little in the way of data releases to impact already volatile markets. We will focus almost all of our attention on the ECB’s September policy meeting, where we believe Mario Draghi will begin reopening the discussion regarding expanding their QE program. Draghi will still want to talk down the Euro, especially given US interest rates are now unlikely to be upped in the extreme near term. We continue to expect further ECB easing to be announced as early as the October ECB meeting in the form of a time extension to the QE program and continue to forecast EUR depreciation in the coming quarters.