Mark Carney poised to answer more interest rate questions ... Oxygen mask for Sterling anyone?

Week commencing Monday 23rd June 2014

This week in Short

  • We have a quiet week ahead for the UK with the Financial Stability Report and Mark Carney’s speech the only events of note. Expect some interesting questions of interest rates to capture the limelight!

  • In the US we expect Q1 GDP to drop to -1.7 percent while consumer confidence is expected to marginally increase on the month. Despite the drop in GDP, we expect a reasonably stable week ahead for the Dollar.

  • In Europe we have the PMI’s for both Germany, France and the Eurozone as a whole. We could see French manufacturing finally push through the 50.0 level of expansion while Germany should continue to lead to pack in both services and manufacturing.

Overriding Market Themes

Starting with the US this week, the Federal Reserve slashed its growth forecast for the US economy from 2.9 percent to between 2.1 and 2.3 percent last week. They cited bad weather at the start of the year as being party to blame for the reduction in growth forecasts, with the bank stating that “Economic activity will expand at a moderate pace and labour conditions will continue to improve gradually”. Policymakers did however feel confident enough to continue to reduce the amount of monthly asset purchases from USD 45 bullion to USD 35 billion a month. In terms of interest rate expectations, in contract to the Bank of England and with the lower than expect economic growth on the horizon, the view is that long term interest rates are likely to rise slightly slower and not as far as previously thought.

Moving back to home soil, UK inflation has slumped to a 4 and a half year low, despite a house price surge in April. Consumer price inflation dropped to 1.5 percent in May from 1.8 percent in April, the lowest reading since October 2009. Diving into the figures, the ONS stated that inflation in May was subdued by the first year-on-year drop in food prices since 2006, as well as lower clothing prices and cheaper air and sea transport costs. Interestingly, food prices have dropped by 0.6 percent as the major UK supermarkets begin a price war to win back consumers. Meanwhile, house prices continue to rise, prompting considerable concern from the MPC and the Bank of England. London house prices rose 18.7 percent on the year, while excluding London and the south east of England, house prices were 6.3 percent higher.

Sticking with the UK, retail sales have fallen for the first time since January last month, despite World Cup fever. Specifically, a drop in food, petrol and household goods pushed the numbers south in May, offsetting strong growth in other areas of the economy such as internet sales, clothing and footwear and second hand goods. Sales at sport retailers were boosted on the back of the World Cup, however no doubt this trend is likely to reverse given England’s recent performance in Brazil! All is not doom and gloom however, on a quarterly basis, retail sales rose by 1.3 percent in the three months to May, making this the longest period of growth in 6 and a half years. On an annual basis, retail sales is up by 3.9 percent. Consumer confidence continues to rise amid the growing economy, rising house prices, falling unemployment and low inflationary pressures and interest rates. Despite these factors however, wage growth remains somewhat subdued and continues to put pressure on households as falls in real pay continue to effect the majority.

GBP This Week

We have a very quiet week ahead for the UK, with the only event of note in the form of the Financial Stability Report on Thursday, followed by Mark Carney’s speech. This report is released twice a year, and largely focuses on how the bank can promote stability in the financial system moving forward. One hot topic is likely to be house prices, in particular the over-extension of the banks in loan to value ratios. Also, we expect some questions on interest rate speculation, especially after his contentious comments last week where he indicated rates could be risen sooner than markets had anticipated.

USD This Week

We have a mixed week ahead for the US with the release of consumer confidence figures as well as the GDP figures headlining. We will focus the majority of our attention on Wednesday’s final GDP release for Q1. Initially, the advance figure was published at 0.1 percent, which was lowered to -0.6 percent for last month’s preliminary figure. We are now expecting to see a figure closer to -1.7 percent on Wednesday. Despite being quite a fall, the impact on markets should remain to be seen, as they will now probably focus on more recent economic indicators. Despite this, it will distort the expected annual rate of growth and should put the USD bears back into the ring.

On Tuesday the release of the latest consumer confidence survey is likely to shed some light on the health of the US retail space. Earlier this month we saw a reasonably decent print in the May retail sales, posting a growth rate of 0.2 percent following a marginal rise in consumer confidence from 82.3 to 83.0. This week we expect another marginal rise to 83.4, which should spell out a similar growth in sales as last month.

EUR This Week

We have a busy week ahead in the Eurozone, with the first part of the week dominated with the PMI surveys, followed by the German Ifo. Starting with the PMI’s, we will be keeping a close eye on the French manufacturing PMI, which seems to be shifting back towards the critical 50 mark donating expansion. Market analysts are expecting this release to print around 49.6, however should we see expansion this could be enough to reverse the Euro’s recent bad form.

On the German manufacturing side, things are looking considerably better, and any further growth in this PMI should be welcomed by markets. The Eurozone PMI should also be an interesting read, as it is by far the most comprehensive view on how the manufacturing and services sectors are performing in the zone as a whole. We would need to see some quite powerful moves in both these indicators to shift sentiment, however with Germany progressing well and France/Italy regaining some momentum, we could see something reasonably positive this week.

Finally, Tuesday’s German Ifo business climate survey is due to be released. This figure typically requires a strong divergence from expectations to cause any volatility in the market, so we would need to see a considerable push away from the 110.4 figure we saw last month to impact sentiment. This month, we expect a reasonably flat release in line with last months figure.


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