Merkel secures another term in office as the green shoots push Europe further into expansion.
Week Commencing Monday 23rd September 2013
This week in Brief
- We have a quiet week for the UK with the Final Q2 GDP figure the only release of note. We do not expect any revisions to the figure however with the UK’s recent good form, anything is possible.
- In the US, Tapering talk has shifted to the next FOMC meeting and as such this week’s emphasis is on the Consumer Confidence figure as well as the Unemployment Claims. Decent figures on both would increase calls for the Fed to taper at the next FOMC meeting in October.
- In the EU, markets have bounced on the news that Angela Merkel has won the German election, however we are still in the dark as to who she will strike a coalition with. Attention will be paid to the PMI’s this week, which could see France push its manufacturing sector finally out of contraction.
Market Themes & Current Events
The UK government borrowed less than previously expected in August, according to figures published by the Office for National Statistics. The Public Sector borrowing for the month came in at £13.2 billion, considerably lower than the figure posted last August which came in at £14.4 billion. This has left the UK’s net public debt standing at £1.19 trillion which equated to roughly 74.6% of GDP. This comes as further welcome news for Chancellor George Osborne, who has enjoyed a recent resurgence in popularity following the positive economic news posted by the economy of late. The total spending by central government (excluding investment) fell by 2.2%, led by a sharp drop in departmental spending and rising tax revenues. George may be having it easy at the moment, but as he should be so acutely aware, we are only halfway through the year and a lot can still go wrong.
Moving to Ireland, the republic has finally emerged from recession after posting a growth rate of 0.4% in the second quarter. Although the economy managed to push itself out of recession, the growth was considerably weaker than expected, with many analysts expecting growth of at least 0.8%. Recently, there have been signs that the economy may be over the worst, as retail sales have improved and property prices have stabilised. That said, the unemployment rate currently stands at 13% and roughly 17% of owner occupiers are in negative equity. What is worrying for the Irish government is the impact of the next round of austerity, which is due to be unveiled in October. The new budget is expected to include around €3 billion in spending cuts and tax rises, putting further pressure on the economic recovery.
It seems that the mixed signals from the peripheral European countries is set to continue, as the Greek finance minister has indicated that his country is now in recovery. Yannis Stournaras said available evidence suggested Greece will see quarter-on-quarter growth for the first time since its economic crisis began. He did however fall short of stating that his country was out of its six year recession. We have a slightly more pessimistic view however, especially as the unemployment rate stands at a record of almost 28% and the threat of further government cuts have led to national strikes and unrest. Many expect Greece to require a further €10 billion bailout in order to reach the goals set out by the troika, in addition to the €240 billion already loaned to the government. It is clear that despite Yannis’s best intentions, Greece remains a major drag on European growth and on the value of the Euro.
Finally we move to India, where the new central bank governor has raised key interest rates by a quarter of a percentage point in an attempt to curb inflation. The repo rate was raised from 7.25% to 7.50% as earlier in the week inflation hit an annual rate of 6.1%, which was a six month high. Mr Rajan, who took over as the head of the central bank earlier this month, was widely expected by economists to keep rates unchanged despite the rate of inflation. Rajan has come in as India’s economy is being hurt by a range of factors in recent months. Its growth rate has been hit by a slowdown in key sectors such as mining and manufacturing. At the same time, foreign investors have pulled out money from the country because of the government's failure to enact key reforms, as well as improving economic conditions in the US.
We have a unusually quiet week for the UK, with the only release of note the final Q2 GDP figure on Thursday. Given that this is the final release we do not anticipate any change from the revised 0.7% posted in August. That said, after the indicator being revised upwards already once, any further upward revisions will be met with extreme bullishness in the UK markets. Although this in unlikely, there is a remote possibility given the extremely positive data the UK has posted of late.
US Dollar Outlook
The markets were taken completely by surprise after the announcement from the FOMC that tapering was set to be delayed until later this year. With the two remaining meetings scheduled for October and December, many analysts are looking at economic releases in terms of their impact on tapering prospects. We therefore start the week with CB Consumer Confidence, which is due to be released on Tuesday. Market expectations point towards a fall in the figure from 81.5 to 80.7, however given the recent strength in a number of US indicators, we would speculate that this indicator will continue to rise.
Later in the week we are expecting New Home Sales and Pending Home Sales. Both figures are expected to come in better than the last release, and on recent form there is a chance that we could see another out performance. New home sales are expected to rise from 394k to 427k on Wednesday, while the pending home sales figure is expected to rise from -1.3% to -0.9% on Thursday.
Finally, Unemployment Claims are expected to rise slightly this month as previous readings have come in so strong. The jobs market is one of the primary indicators the Fed are analysing in relation to tapering, and therefore the weekly unemployment claims figure is now a major event. Expectations are for a rise to 319k from 309k last week, which despite representing a negative shift, would still be relatively positive when seen against previous figures. With the last three figures coming in better than expected there is no reason to doubt that the US economy has it in her to post some exceptional figures this time.
We have a busy week for the Eurozone as the German election draws to a close. The re-election of Angela Merkel is seen as crucial to the current plans being undertaken by the ECB and other Eurozone leaders. For that reason there has been a notable hardening of stance taken towards the potential of further bailouts for the periphery. Merkel has become increasingly popular under this stance, amplified by the increasing frustration felt by German taxpayers over the costs of the crisis. All signs point towards a clear victory for the Christian Democratic Union regaining power, with the only question mark appearing in relation to whether they will be able to obtain a majority sufficient enough to solely rule the country. More likely however is that the eurosceptic ADP party will gain above 5%, thus pushing the CDU into forming a grand coalition. However, this is fairly typical of German politics and the necessity of a coalition would generally not cause too much of an inconvenience going forward for Merkel.
We then shift our attention to a swath of PMI data from both German and France, which should continue to show the bloc is moving further into expansion. Monday sees the release of the first of six PMI’s in the form of German Manufacturing PMI. The market expects a rise from 51.8 to 52.3 this month, which would represent the highest level since mid-2011.
We then move our attention to French Manufacturing PMI, where the market forecasts point towards a push above the critical 50.0 level, signalling an expansion. Unfortunately the last release fell significantly short of expectations, so there is concern that the market is over estimating the pace of recovery in France.
We then move to the manufacturing and services PMI figure for the Eurozone as a whole, where both currently lay above the 50 mark, so we will watch closely to see if both of these manage to push further into the black.
Finally, the German IFO business climate is expected to further drive home the positive picture for the EZ on Tuesday. We expect the survey to continue to rise as sentiment in German pushing northwards.