It seems some of the wind has come out of the UK's sails! George better get the oars out I guess!!

Week Commencing Monday 12th January 2013

This week in Brief

  • In the UK we have CPI and Retail Sales out this week. CPI is expected to remain unchanged while Retail Sales should show a decent festive month for British retailers.

  • In the US we have Retail Sales, the Philly Fed and the UoM Consumer Sentiment Index, all of which are expected to be reasonably good for the world’s biggest economy.

  • In Europe we have a quiet week with only the German Constitutional Court being of any note. We expect them to approve the ECB’s OMT program however should they find the program unconstitutional, expect disaster in European markets.

Market Themes & Current Events

We start this week’s report focusing on the UK, where a swath of new economic data last week has cast doubt over the strength of the recovery. According to official ONS figures, both manufacturing activity and the broader Industrial Output figures were flat in November. Meanwhile separate figures showed construction activity fell by 4 percent last month, the sharpest decline since June 2012. On an annual basis, all three sectors showed considerable growth, with manufacturing up 2.8 percent in November while construction output has increased 2.2 percent in the year. Previously, the extremely bullish UK releases were prompting some analysts to consider tightening the current Bank of England’s monetary policy stance, suggesting that wholesale rates of interest should be increased. This new move by the UK economy should do much to diminish those calls as it is clear that any UK recovery remains fragile at best. In less sobering news, the National Institute of Economic and Social Research (NIESR) released estimates on Friday suggesting that GDP grew by 0.7 percent in the final three months of 2013. It seems in every cloud there is a silver lining!

Also last week both the European Central Bank and the Bank of England left interest rates unchanged at their current record lows. In his press conference, Mario Draghi states that rates would “remain at their present levels for an extended period of time”, eroding any speculation that the bank would act to boost the fragile growth rate in the trading bloc. Even more worrying for the incumbent, with Eurozone inflation falling below 1 percent, there are fears that deflation could strike the zone with many consumers electing to delay purchases in the hope of prices falling further. Mark Carney on the other hand had a slightly more upbeat press conference, despite the speculation that he might have to refine his threshold for increasing rates. With the economy improving (despite the concerns raised in our first paragraph) and unemployment falling to within 0.4 percent of hitting his red line, there has been some discussion suggesting Mr Carney should give a firmer idea of when he is looking to raise interest rates. In the main however, the City is still not expecting a rise in rates before mid-2015 at the earliest. According to City analysts however, the UK is now the odds on favourite to be the first major economy to raise interest rates!

Crossing the pond, December’s Federal Reserve minutes revealed that a clear majority agreed that the bank should taper its quantitative easing program. The minutes run into detail on how the board decided to decrease stimulus efforts in stages to avoid surprising markets, hence the smaller than expected USD 10 billion reduction at the end of its December meeting. The bank has purchased over USD 4 trillion in bonds since the financial downturn in 2008, a move that was met with apprehension by many US politicians. It will now be up to the incoming head Janet Yellen to decide how to reduce this program further, although she will no doubt maintain the current policy of pegging further reductions to increases in employment.

Sterling Outlook

We have a quiet week for the UK with the only releases of note set to come out on Tuesday and Friday in the form of CPI and retail sales. CPI is always an important indicator, not least because of its relationship to the existence of the Bank of England and its commitment to the Chancellor. That being said, market focus has shifted to the unemployment rate, especially as this acts as a trigger for any potential future interest rate rises. Has inflation fallen out of favour therefore, absolutely not! It is however less important that it was before the economic crisis took hold. Expectations point towards the rate remaining flat at its current 2.1 percent mark following its 0.6 percent fall over the past two months.

We then move to Friday’s crucial retail sales figure which should be an interesting read, especially as we gauge how successful the festive season has been to retailers. With the time of year in mind, we expect a further rise of 0.5 percent month on month following the 0.3 percent last month. The annual figure will possibly prove more interesting; with the BRC suggesting that we could see a rise towards 1.8 percent.

US Dollar Outlook

We have a busy week for the US with a total of nine potentially market moving releases of note due to be released. Firstly, we will be concentrating on the all-important retail sales release which is due on Tuesday. Following Novembers release where we saw the highest sales growth rate for five months, this month’s market expectations are set for a reduction to 0.2 percent. In our view this is somewhat pessimistic, however clearly should the release out-perform than we expect some decent Dollar strength on the back of it. Should it come in as expected or underperform, this would clearly mean a stagnation or deterioration in spending over the festive season.

We then shift our attention to the Philly Fed manufacturing index figure, set to be released on Thursday, which should indicate how manufacturers perceive their current economic conditions. This month we expect a rise to 10, which should be welcome news coming off the back of two previously disappointing releases for October and November.

Finally we will be watching the University of Michigan consumer sentiment index which is set to be released on Friday. This should be an interesting read as compliments the earlier retail sales figure well as it allows us to not only have a quantitative but also a qualitative idea of the US retail space. Market expectations point towards a further improvement pushing the figure to 82.5, which would represent the highest level since July 13. It should be noted that this is only the preliminary reading, and therefore has the propensity to be somewhat inaccurate. Despite this it will also have the most keenly felt impact on the market and probably represents the highlight of the week as economic releases go.

Setting the above releases aside, we also have Core CPI and Unemployment Claims on Wednesday. On Friday we await for the latest Building Permits release, and finally we expect current Fed Chairman Ben Bernanke to speak at the Brookings Institution, in Washington DC on Wednesday evening.

Euro Outlook

We have an extremely quiet week in the Eurozone with the German Constitutional Court the only release of any note. This was originally scheduled to take place last week (hence its inclusion!) however it has now been provisionally scheduled for this Friday. As we cited during last week’s report, some German law makers have argued over the validity of the OMT program. It was designed by the ECB as a way of stabilising member states sovereign bond yields, by entering into their markets and purchasing unlimited quantities to curb excess volatility. The OMT policy is widely perceived as one of the key central confidence backstops for the weaker and increasingly divided Eurozone. Whilst the OMT programme seems increasingly unlikely to be used, a move by the Germans to threaten the existence of the program could throw some of the more fragile economies (such as Greece, Portugal and Spain) back into crisis. 


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