It's Bank of England time once again as the US is expected to post a mixed bag!

Week Commencing Monday 29th July 2013

This week in Brief

  • It is a relatively quiet week ahead for the UK with the BoE, Manufacturing and Construction PMI the highlights. We expect both PMI’s to continue to show significant growth whilst the Bank of England MPC decisions should be relatively uneventful.

  • We have a heavy week for US data with GDP and Non-Farms headlining the schedule. We expect US GDP to continue to slow whilst labour reports should show a reduction in job creation.

  • We have a quiet week for the Eurozone with Mario Draghi and the ECB interest rate decision the only releases of note.

Market Themes & Current Events

The UK economy is back on track, according to Chancellor George Osborne after the latest GDP figures were released last week. The official figures from the ONS saw the UK economy growing 0.6% in the second quarter of 2013, with output growing in the Construction, Services and Agricultural sectors. This means that the economy has also managed to recover half the 7.2% output it lost during the 2008 – 2009 recession. Within the figures, the services sector grew 0.6% in the three-month period, compared with the previous quarter, and was just 0.2% below the peak level it recorded in early 2008. While both the construction and manufacturing sectors bounced back in the latest quarter, they both remain far below their levels back in 2008 before the recession. Despite the relatively strong figures however, analysts said the outlook for the rest of the year remained uncertain. Let us hope there is more to come!

Over in Europe, the Spanish unemployment rate has fallen for the first time in two years, according to official figures posted by the government. The rate saw a drop of 0.9% from the record high of 27.2% in the first quarter, taking the current rate to 26.3% in the second. The drop was credited to a strong tourist season, boosting employment in many of the countries big tourist destinations. The news came as the Spanish Central Bank also forecasted that the country will return to growth before the end of the year. This is decidedly good and welcome news for the Eurozone’s fourth biggest economy; however with near record unemployment still remaining a massive problem, the country is nowhere near “out of the water” yet!

In more European news, Private sector industry in the Eurozone returned to growth in July, sparking hopes that the entire zone will soon emerge from recession. The Markit EZ Purchasing Managers Index (PMI) saw business output push through the 50.0 growth level to sit at 50.4, up from 48.7 in June and marks a 18 month high for the index. The revival is being led by Germany which saw significant growth in both manufacturing and services, whilst also experiencing strong job creation. Other European states however saw output fall, with Greece still remaining in a deep recession and both Italy and Spain struggling to post positive figures.

Finally, the US economy is also moving from strength to strength as ratings agency Moodys upgrade its outlook for the US economy from negative to stable, affirming the country’s AAA rating. Within the report it said that the US economy was growing at a faster pace than a number of its peers and has demonstrated significant resilience to major reductions in government spending. This is welcome news for the Obama administration which despite being mid-way through its second term is enjoying unusually strong support from the electorate.  

Sterling Outlook

We have a quiet start to the week for the UK with the majority of events taking place on either Thursday or Friday. We start with the manufacturing PMI figure on Thursday, which is expected to once again show improvement in the sector. The market is expecting the report to post a 52.8 figure this month, 0.3 higher than the previous month’s record posting of 52.5. It is worth mentioning that this measure has outperformed market expectations on the past three occasions, so we do feel that the risk is firmly on the upside on this release. If we see something considerably better than estimates, expect Sterling to react accordingly.

We then move to the Bank of England’s interest rate and QE decision, which once again is due to be released on Thursday. Given Mark Carney’s notable and unforeseen voting intentions last month (which saw a 9-0 vote against increasing asset purchases) we expect to see no change in policy at the bank. With this in mind we expect the event to result in only a mild impact on market direction. We do not expect a repeat of Mark Carney’s forward guidance until the inflation report on the 7th August.

Finally, Construction PMI is due to be released on Friday and we expect a further rise to 51.6 from the 51.0 posted last month. Out of the three UK PMI’s the construction index is usually the one that lags behind, however given the recent strength of the housing market, we expect this trend to start reversing. That said, as the smallest component in UK GDP (compared to manufacturing and services) the figure is unlikely to cause significant market movement unless it is well above or below our estimate.   

US Dollar Outlook

We have a busy week ahead for the US, with Q2 GDP figures paving the way for the Federal Reserve’s rate decision and various labour reports at the end of the week. We start with pending home sales on Monday which is expected to show a -1.0% slowdown after a strong reading in May. This comes as we have seen mixed report on the state of the US real estate market, with recent existing and new home sales disappointing the market. With this in mind and given the importance of the housing market as a leading economic indicator, we expect this to set Dollar direction for the week.

We then move to Wednesdays ADP non-farms and advance Q2 GDP, both of which are considered key events. The ADP non-farm employment change figure is expected to show a negligible fall from 188k to 181k and should act as a barometer for Friday’s headline NFP release.

Advanced GDP is also likely to stoke major volatility, with the figure for the second quarter of 2013 expected to show a slowdown to 1% from a downward revised figure of 1.8% in Q1. If this comes in as expected it shows the US economy is struggling to grow without the assistance of the Fed’s asset purchasing scheme, and should act as a powerful argument against any form of tapering from the central bank. Past performances of this figure have been disappointing, and with this in mind, If we see growth fall back below the 1% mark, we expect to see some significant downside volatility in USD majors.

Later on Wednesday we have the Federal Reserve’s monthly interest rate decision, which is widely expected to see no change in stance from the bank. They are also likely to confirm that any form of tapering is unlikely to take place before September. Markets will be primarily looking out for any change in the current outlook from Ben Bernanke, especially as he has provided a dovish interest rate view alongside a hawkish asset purchasing view in recent weeks.

Finally, we are watching the non-farm payroll release on Friday, with the market expecting to see the figure coming in lower at 184k against 195k last month. We expect this event to be closely watched, especially as Ben Bernanke states that strong employment figures is the core requirement to bring the tapering of QE forward. Any deviation from this market estimate is once again likely to provide significant volatility in major US pairs.

Euro Outlook

We have a relatively quiet week ahead for the Eurozone, with only the ECB rate decision proving to be of note. We forecast no change to the benchmark interest rate this month, especially given the recent improvement in some of the core figures within the Eurozone this month. We expect Mario Draghi’s speech to be more eventful than the actual release itself, as he may use the opportunity to devalue to euro once again (especially if he starts to discuss negative interest rates once again).  


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