Mark Carney takes the helm at the Bank of England as PMI's indicate the UK continues to grow
This week in Brief
- UK PMI’s rule the roost in this week’s Sterling calendar, with all expected to post figures in expansionary territory. With this in mind, all three of these PMI’s should be Sterling positive events.
- Mario Draghi’s press conference and the ECB rate decision on Thursday is the highlight of the European week, although no change is expected.
- This is a big week for the Dollar, with a swath of employment and PMI data being released. All releases this week are expected to be positive, so we hope this will inspire a return to some risk on as we move into the new month.
Market Themes & Current Events
Policymakers at the US Federal Reserve have tried to calm investors by emphasising that bond purchases will not halt until the economy strengthens. The comments have followed a turbulent week in the markets after Fed chairman Ben Bernanke indicated last week that the bank could start scaling back its support for the economy. The Federal Reserve currently buys USD 85 billion a month in government bonds, which is aimed at lowering long term interest rates (which in turn are used as a benchmark to determine the rates at which households and business borrow for long term investments). Markets across the board saw dramatic sell offs after Bernanke said that the central bank could begin paring its bong purchases by the end of 2013, and then stopping them completely in 2014. It seems investors principle concerns were that the so-called tapering would lead to higher interest rates, stemming the US economic recovery. Until a concrete policy decision is made, we expect rumours and speculation to continue to play a key role here, with significant volatility in both the USD and US Treasury yields expected.
Almost directly as a result of the recent tapering fiasco, Gold has continued its heavy declines, falling to its lowest level in almost three years. Gold fell to USD 1,191.21 an ounce during the Asian trading session, after breaching the USD 1,200 mark in New York on Thursday for the first time since August 2010. Analysts continue to anticipate further price falls. Gold had experiences somewhat of a renaissance of late, with uncertainty surrounding the global economic situation after the financial crisis and the sovereign debt issues all pushing gold prices higher. Things have however started to change over the past few months, especially with the US economy improving so markedly. If the Fed does begin to scale back its bond buying program, analysts expect to see interest rates rise again, making gold a less attractive option. At the same time, the risks surrounding the Eurozone crisis seem to have subsided as well, which has also led to a decline in gold prices. One thing is true however; declining gold prices tend to be a sign of increasing confidence within a market, so let us hope this is a good sign for things to come!
Sticking with the US, the US economy grew by less than previously expected in the first quarter of the year, according to the latest GDP figures published by the Commerce Department. GDP grew at an annualised rate of 1.8%, down from the earlier projection of a 2.4% rise. Weak business investment, a slowdown in consumer spending and falling exports has all been blamed for the downward revision. Equities surprisingly rose on the back of the release as analysts believed the revised figures could alter the Federal Reserve’s intention to slow down the bond buying program which was based on its anticipation that the economy would strengthen. Coupled with the breakdown above, the economy continues to be slowed by cuts in government spending, which has fallen in the first quarter to an annual rate of 4.8% (shaving about 0.9% off total q/q GDP). This has prompted the IMF to advise the US government to repeal the huge federal budget cuts introduced this year, citing the speed and severity as a major drag on medium term growth.
Moving back to home soil, it appears the UK economy did not fall into a double-dip recession in the beginning of 2012. The Office for National Statistics has updated its historical data, stating that growth was flat in the first quarter of 2012, revised up from a -0.1% contraction previously posted. This means that the UK did not technically enter recession during 2012, a statement which is likely to please Westminster lawmakers as they continue to tackle the struggling economy. The ONS did however state that the recession in 2008 was more severe than previously estimated.
Finally, EU lawmakers have reached a political deal on the hotly contested seven year budget for the European Union. The parliamentarians agreed on a EUR 960 Billion budget, which sees the budget cut in real terms for the first time in the Unions history. This prompted European Commission President Manuel Barroso to call for more money to be spent on attacking youth unemployment. The announcement came as German retail sales rose more than economists forecast in May, adding to signs that a recovery in Europe’s largest economy has gathered pace. German unemployment also unexpectedly declined in June, whilst business confidence climbed and ZEW’s investor sentiment index increased. It seems that the situation in Europe is slowly starting to resolve itself, which in turn is adding extra pressure against all EUR pairs as the currency recovers.
This is a busy week for the UK with key PMI figures alongside the latest MPC decision/Asset Purchasing. Firstly, Monday is Mark Carney’s first day at the helm of the Bank of England, and is the first non-Brit to chair the old lady of Threadneedle Street. The Canadian steps into an economy which is largely perceived to be ebbing out of the recent recession, and therefore his ability to support growth while controlling inflation will be key. Three key indicators are provided early in Carney’s career, starting with the manufacturing PMI figures which are due out on Monday.
We expect manufacturing PMI to remain at 51.3 this month, after last month’s shift above 50.0 marked the first month of expansion after three consecutive contractionary months. We do believe however that the figure could rise above last month’s figure, given the positive trend seen in the UKs economy over the past couple of months. Should this happen, we expect it to be the catalyst to begin reversing Sterling’s losses over last week.
Moving to Tuesday we have the Construction PMI figure due to be released, with many anaylsts expect a rise to 51.3 from 50.8. This PMI has outperformed consensus in the prior two months and we are therefore confident that this trend should continue.
Finally for the PMIs, the all-important Services PMI figure is due to be released on Wednesday. As usual, especially owing to the importance of this sector within the UK economy, this figure is the highlight of the week. Market expectation is for a fall from 54.9 to 54.6, however we have seen better than expected releases for five consecutive months and thus there is a clear potential for a further rise in this figure.
Finally for the UK, The Bank of Englands MPC meet to decide on both interest rates and the asset purchasing facility. There is no expectation that there will be any change in stance from the Bank this month. As this is Mark Carneys first vote, we expect him to vote against any further easing until he has had a chance to get to grips with the current economic situation. Interesting, King was a regular voter in favour of expanding the QE program, and removing his vote will be likely to tilt the committee further away from any expansion in the near future.
US Dollar Outlook
Much like the UK, the US has a busy week on the economic data front, with ISM Manufacturing and non-manufacturing, unemployment claims, non-farm payrolls and unemployment all out this week. We start with ISM manufacturing PMI, which is expected to rise above the critical 50.0 level of contraction, pushing the sector into expansion. The release caused quite a stir in the markets last month as the indicator missed expectations and posted below the 50 line, and with this in mind any further release below 50.0 is likely to stoke extreme volatility in all USD pairs.
Moving to Wednesday, we await the non-manufacturing PMI figure which many analysts expect to continue to rise. Forecasts point to a expansion to 54.3 from last month’s 53.7 reading, which would represent the third month of expansion for this sector within the economy. Again, recent US PMI data has disappointed so we will not rule out a shift to the downside in this month’s report. Also on Wednesday, we are expecting the unemployment claims figure for the preceding week. The number is expected to fall slightly from 346,000 to 345,000, which although not a vast decrease is expected to impact the non-farms later in the week.
Finally on Friday we have the unemployment rate and the non-farm payroll figures due to be released. Non-farms are forecast to fall from 175,000 to 165,000, stoking particularly volatile price action in the markets. Given the reduction in weekly unemployment claims, along with the recent out-performance of this figure, we anticipate a better than expected figure this month. This is followed by the headline unemployment rate, which is expected to fall from 7.6% to 7.5%. This comes after last month’s surprise rise in unemployment from 7.5% to 7.6%, which many analysts expect to see as a blip in the underlying figures.
We have a relatively quiet week for the EUR, which a lot of emphasis on the PMI figures early in the week, followed by the monthly ECB rate decision on Thursday. Monday starts the ball rolling with manufacturing PMI figures for both Spain and Italy. We expect both of these figures to show a slight uptick towards the critical 50 expansionary level. However, it is worth noting that given the distance and pace of the improvement, it is unlikely that these PMI’s will reach the coveted 50.0, so expect a more muted impact to markets.
Moving to Thursday, we expect the ECB to hold rates at 0.5%. There has been some speculation that the central bank may unveil a UK/US style quantitative easing program, however we find it unlikely that they will announce anything this month. As there is no shift in the benchmark interest rate we expect Mario Draghi’s press conference to be the big market mover, especially as he concentrates on the economic performance and growth related measures which are/could be in effect.