Jens Weidmann the Hawk - tell us what you have up your sleeve!

Week commencing Monday 19th May 2014


This week in Short



  • In the UK we have the inflation readings on Tuesday, followed by the Retail Sales figures and second estimate of GDP. We expect the majority of data to be Sterling positive this week, therefore expect some increases in Sterling longs as we approach the end of the month.

  • In the US we have a relatively slow week ahead, with the usual weekly jobs numbers coupled with new and existing home sales the only releases of note. If we can see jobs come in sub-300k once again, especially given last week’s disappointing figures, expect a mild confidence boost in the Dollar.

  • In Europe we have the all-important manufacturing and services PMI numbers for the zone and member states. We expect Germany to continue to outpace the rest in terms of confidence and growth numbers, however Ukraine is likely to start acting as a drag.


Overriding Market Themes


Starting in the far east, Japan's economy grew at a rapid pace in the first three months of 2014 as consumers went on a massive shopping spree, mainly thought to be to avoid a planned sales tax increase later this year. GDP grew at an annual rate of 5.9% in the first quarter, considerably quicker than the 4% figure expect by economists and a major rebound from the disappointing growth seen in the fourth quarter of 2013. On a quarterly basis, Japan's GDP increased by 1.5%. Exports and business investment were the predominant drivers, with both measures topping analyst expectations. This all comes as Japan's consumption tax was increased to 8% in April in a bid to improve the country's fiscal position. If needed, the government has the option to implement an additional increase to 10% by 2015.


Moving closer to home soil, Eurozone economic growth seems to have lost some momentum in the first three months of the year, with the official rate unchanged from the previous quarter. The European Union's Statistics Office estimated that the economy of the 18 countries sharing the euro expanded only 0.2% on the quarter in the first three months of the year, rather than the 0.4% growth expected by economists. The weaker than expected economic growth adds further pressure on the ECB and Mario Draghi to loosen monetary policy further to reduce the zones current risk of deflation. Diving into specific member states, Germany posted strong growth in the first quarter of the year in contrast to France, which stagnated and to Italy, the third largest economy, which contracted.


In the UK, the unemployment rate fell to its lowest level in more than five years in the first quarter, thanks to a record number of posts being created in the economy. The unemployment rate eased to 6.8%, it’s lowest since the three months to February 2009 and down from 6.9% in the three months to February this year, according to the Office for National Statistics. The extent to labour market improvement in the economy has come as a big surprise to policy and law makers alike, especially those sitting on the MPC. With the steeper than anticipated drop in unemployment forcing the Bank of England into amending its original forward guidance model, it will be interesting to see what they do should unemployment continue to trend downwards. Many believe that they will instead concentrate on pay growth, which over the period was stronger than consumer price growth in the month of March, which was 1.6%. The first time wages outstripped inflation wince 2010 according to an ONS report.


GBP This Week


We have a relatively quiet week ahead for the UK, with the Inflation figures, retail sales and second estimate of GDP the only releases of note. Starting with inflation, we expect a marginal improvement in April with the rate rising to 1.7%. This should come as welcome news to markets, especially as the rate has now been bobbing below the Bank of England’s 2% target for some time now. A prolonged period of low interest rates may well make it difficult for Mark Carney and the bank to consider raising bank rate in the near term, so any upside movement in this figure is likely to give Sterling a reasonable trading boost.


Moving to the retail sales numbers on Wednesday, the numbers over the last few months have been reasonably volatile, especially with the heavier than expected winter season. We expect April’s figures to start to normalise however, with a modest but stable 0.4% growth in the indicator versus March’s figure.


Finally, we expect the second estimate of UK GDP to remain unchanged at 0.8% for the quarter. We doubt that this will cause a considerable stir in markets, especially seeing how there is no adjustment in the rate. However it is worth noting that a consistent and stable growth rate is a sign of a sustained rebound, so should serve to aid Sterling bulls as we move deeper into the second quarter.


USD This Week


We have a surprisingly quiet week ahead for the US with most of the releases of note due to be released at the end of the week. We start with watching the weekly jobless numbers, which are becoming ever more important as the labour markets continue to see significant improvements. Last week the number breached 300,000, which shocked markets as most of the releases of the year had been somewhat encouraging. Optimism should return should we see another print with numbers below 300,000, and if it is widely believed to become a regular feature.


We also will be watching the string of housing releases set to enter the public domain this week, with existing home sales and new home sales expected on Thursday and Friday respectively. While it may be a while until both of these markets see pre-banking crisis levels, an improvement here would give a strong indication that the economy , and more specifically the housing market is on the right trajectory.


EUR This Week


In Europe we have the all-important manufacturing and services PMIs, as well as the German Ifo business climate numbers. With the Ukraine crisis continuing to escalate, most of these readings from Germany, France and the Eurozone as a whole are expected to fall marginally. Germany is likely to continue to lead the pack, and has given rise to the concern of a two-speed Eurozone after it grew more than expected in the first quarter, while France, Italy, Portugal and Holland all disappointed. Should these PMI figures confirm this trend, it will make Mario Draghi’s job of steering the economy considerably harder.


The German Ifo will also be an interesting read, especially if the above is confirmed and Europe really does rely on Germany for its modest growth numbers. Ukraine is likely to be at play with this release, especially its effect of business confidence given the harsher sanctions being imposed on Russia. To date we have seen little impact of this crisis on these figures, however with the situation heating up, risk aversion could start pushing this indicator back down south.


Finally, Bundesbank President Jens Weidmann is speaking on Monday. As the most outspoken hawk on the ECB’s governing council, he has become convinced that a more aggressive approach is needed by the central bank to combat the disinflation the Eurozone is experiencing. The speech on Monday, coupled with the Q&A session, may well give some insight into whether Jens has managed to push stimulus measures onto the agenda for Junes meeting, and if so what measures they are considering.

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