Lagarde revises global growth down as the Euro takes a hammering

Week commencing Monday 9th June 2012

Overriding Market Themes

Christine Lagarde and the boffins at the International Monetary Fund have cut their global growth forecast down from their original 3.5% projection.  The adjustment is being blamed on weakness in investment, jobs and manufacturing in Europe, the US, Brazil, India and China. She is not alone in her concerns on the state of the global recovery, with Interest Rate cuts in China and Europe last week, and the Bank of England’s boost to the asset purchasing program underscore the fragility of the global recovery, especially as austerity measures and debt burdens weigh down on western powers. We are pretty sure the world’s economy will expand, but the longer it takes developed nations to fight their way out of recession, the more rebalanced the world economy gets. Is this a good thing or not? 


US job creation data last week showed an 80,000 new jobs have been created in June, which falls well below the Federal Reserve’s 100,000 judged necessary for a stable jobs market. Stock markets slipped as the news was released, with the Dow Jones dropping 1% on the back of the news. Moreover, it is likely to lead President Obama’s rather positive polling results in tatters as the economy regains the top spot in the US Presidential Elections. Comparatively speaking, the US is storming ahead of their European cousins; however it seems their recovery is fragile, and perhaps more emphasis should be placed on assisting their European cousins out of the hole they dug themselves into. This jobs news caused both the greenback and the pound to strengthen against the Euro as investors sought refuge, although it also was not helped by the ECB cutting rates by 25 basis points. 


Mario Monti, in a speech likely to stoke some smiles amongst Tory backbenchers, he states that the Euro area shouldn’t isolate itself and needs to build bridges to other countries in the region, such as the UK and Poland. This throws Mario directly in the path of French politicians, who believe they should focus their attention on further integration of the Euro area. These differences go a long way to highlight the difficulty Europe finds itself in. Unfortunately tough decisions need to be made, and quickly, although if the Conservatives get their way maybe the UK won’t be a decision they will have to make.

GBP This Week

Two points of note this week as eyes concentrate on the Deputy Governor of the Bank of England, Paul Tucker, speak about the LIBOR submissions before the Treasury Select Committee at Parliament on Monday afternoon. I doubt this will stoke market reaction, especially in the currency markets, however expect heavy movement in financial stock should he start naming individual banks which could be potentially involved in the scandal. Manufacturing Production is out on Tuesday morning, which hopefully should show a return to growth for the manufacturing sector in the UK. I expect the figure to grow to 0.1% from -0.7% on the month, indicating that perhaps British manufacturers are finding it easier that their European counterparts to win contracts as the situation on the continent worsens.

USD This Week

This should be a big week for US data, with the Trade Balance heading the crowd. I expect the import/export gap to shorten this month as markets react to a strong US manufacturing base, perhaps pushing the figure to the 48.5 billion dollar mark for the month.  Shortly after this release we have the Federal Reserve minutes, which I expect to be somewhat bearish seeing how US jobs data came out worse than expect last week. Moving to Thursday, we have Unemployment Claims, which should see an increase in the number of Americans out of work by roughly 5,000. Friday finishes with PPI and the University of Michigan Consumer Sentiment report. PPI shows the change in the price of finished goods and services sold by producers, which should post another negative after last month’s -1.0%. UoM Sentiment is likely to grow, but not by much, so expect currency markets to remain relatively flat moving into next weekend. 

EUR This Week

There is hardly anything of economic importance out from the Eurozone this week, with Draghi’s speech being the only thing of note. He is due to testify before the European Parliament in Brussels on Monday afternoon, and expect to see some continued rhetoric about sluggish European growth. This could have more of a negative effect on the Euro, which has suffered greatly as a result of the US Employment Data out on Friday, although how much further the Euro can realistically drop is anyone’s guess. The Euro will need to rely on risk on trading, possibly towards the end of the week, in order to regain some of its lost ground. 

In Other News

Wimbledon nearly had a British Champion this weekend if only for a Swiss chap with a hairband didn’t get in the way. Federer played an exceptional game and effectively destroyed Murray in the last two sets with relative ease. I am happy for Roger, he is 30 and is one of my favourite sportsmen of all time, however I cannot help but think that we have only seen the beginning of what Andy Murray is capable off. Certainly his emotional address at the end did a lot to promote himself in the eyes of his critics, who previously would never entertain supporting him. Andy, our commiseration and congratulations at the same time, next year could be yours (something we could never say to poor old Tim!). 


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