MP's prepare to grill MPC members as indicators point towards sooner than expected rate hikes!
Week Commencing Monday 25th November 2013
This week in Brief
- In the UK we await the Inflation Report Hearings at Parliament, the second estimate of UK GDP and Mark Carney’s speech about the Financial Stability Report. UK GDP could be the biggest indicator if we can see a revision up however the Inflation Report should interest markets as MP’s put the MPC under the microscope.
- In the US the highlight is almost certainly the Unemployment Claims release on Wednesday owing to its association with a potential December tapering by the Federal Reserve. We also have Housing reports and a consumer confidence figure.
- In Europe we have a quiet week with German Retail Sales the only release of note. We expect some upside gains this month, especially after the -0.6% print we saw last month.
Market Themes & Current Events
With a quiet week for the UK last week our focus was turned to German Business Confidence, which improved markedly reaching its highest level since April 2012. The closely-watched Ifo survey of business confidence revealed an above-expected rise in November, while the ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations rose to 54.6, the highest since October 2009 and up from 52.8 last month. This prompted German bonds to decline, snapping an advance that pushed 10-year yields to the lowest in almost two weeks. But what of the rest of the Eurozone, which let’s not forget is Germany’s largest trading partner? The EZ GDP figures last week suggested that the economy posted an expansion of 0.1% in the third quarter, emerging from recession in the three months through June. France’s economy however, the regions second biggest, unexpectedly shrank while Italy extended a record-long contraction. It is clear therefore that despite Germany’s continued growth and momentum, these factors do nothing to alleviate the headwinds it faces. Times therefore seem set to remain hard for the European powerhouse.
Moving to the US, Janet Yellen is closer to becoming the next head of the US Federal Reserve after her nomination was approved by a US Senate banking committee. Should her nomination succeed, Ms Yellen, who is currently the Fed's deputy chair will replace incumbent Ben Bernanke in January, becoming the first woman ever to hold the post. Yellen was backed by 11 of the 12 Democrats on the banking committee, and three of the panel’s Republicans. Her nomination now moves to the full Senate, where a rule change today will allow her to be confirmed with a majority of votes. As one of the main architects of the Fed’s stimulus program we doubt that she will change tact anytime soon, so expect more of the same accommodative easing until she sees a robust recovery.
That assumption of ours however has flown in the face of some Federal Reserve officials who have said that they plan to begin trimming the central bank’s stimulus efforts in the coming months. Minutes of the Fed's 29-30 October policy meeting, released on Wednesday, also showed officials discussed how to distinguish between asset buying and forward interest rates guidance, including how to enhance rate guidance once they start to taper bond purchases. The Fed meets again in December, but most economists don't expect any changes in the bond program until March. That would be Janet Yellen's first meeting as Fed chairman and what a way to start the ball rolling hey!
Finally and back on home soil, the UK's economic recovery could take a "number of years" according to the Bank of England's chief economist Spencer Dale, echoing other top policymakers who have sought to counter speculation about an early rate rise. The BoE took this new approach to coaxing Britain's economy back to growth in August when the new governor Mark Carney said it would not consider raising record-low interest rates until the unemployment rate fell to 7%. Since then, unemployment has come down faster than the BoE, or anyone else had expected, raising questions about the duration of its interest rate pledge. Last week, the BoE said unemployment might fall to 7% as soon as the fourth quarter of 2014, far sooner than it predicted in August.
We start this week’s UK economic calendar with its major event, in the form of Tuesday’s inflation report hearing. This should be an interesting hearing as the forecasts of growth, inflation and unemployment were revised in a positive manner to account for the improvement seen throughout the previous months. However, this also meant that we saw a change in the timeline associated with the forward guidance set by the BoE, given that the 7.0% threshold will likely be hit around a year earlier than previously expected. Therefore, markets will be looking out for any changes in sentiment or possible wavering/shifting in the Banks forward guidance. Given the members that make up the treasury select committee, I expect they will leave no rock unturned and thus there could be significant volatility throughout Tuesday’s London session.
Moving to Wednesday and we have the second estimate of Q3 UK GDP, which is likely to dominate the markets for most of the morning session. Despite the usual steady figure everyone has come to expect, given the current upward trajectory of all UK indicators, there is a possibility of a marginal rise.
Finally on Thursday, Bank of England Governor Mark Carney will take to the stand in London to discuss the financial stability report. The report should be relatively verbose, however we will be looking out for any monetary policy aspects primarily as a possible market driver.
US Dollar Outlook
We have a moderately busy week for the US this week with the housing market, consumer confidence and the unemployment claims coming into focus. Starting with the pending home sales figure, markets are hoping for a push back into positive territory, with a figure of 2.2%, following four months of negative growth. This indicator has disappointed however on the last three occasions and given the latter part of the year often quietens down for the housing market, we would speculate that a lower figure is more likely.
Moving to Tuesday’s building permits release, the expectations point towards a rise from 918k to 940k. This indicator has not had a particularly strong run for four months now, so the emphasis will be on another possible under-performance. We do however only expect significant market swings if we see a big decline in the figure.
Also on Tuesday, the consumer confidence figure should provide a good indicator of whether the US consumer is beginning to recover from the Federal shutdown earlier in the year. The past two postings have come in considerably lower than the 81.5 figure in July, with the last posting barely scraping over 72.0. However, there is a obvious degree of stability now and therefore the possibility that we could see a robust rebound back into the mid 70′s. Market expectations point towards a 1.0 rise to 72.2 however with the potential so skewed to the upside this could be a very interesting release.
Finally we await the weekly unemployment claims figure, due out on Wednesday, which is expected to possibly be the most notable figure to watch owing to the association with a possible December tapering by the Fed. The FOMC minutes pointed towards an inclination that tapering could begin within the next few months and for that reason there is a heightened degree of sensitivity regarding anything that may change the chances of that happening. Market expectations point towards a rise in the number of claimants from 323k to 331k. Definitely watch this space!
We have a extremely quiet week for the Eurozone with only the German retail sales figures on Friday of any note. The central importance of the German economy is obvious and therefore any shifts in consumer sentiment will be big news for the region as a whole. The markets are looking for positive growth in this figure, with 0.5% being forecast, following a fall of -0.6% last month. Any minor deviations from this figure will likely go unmissed so expect a large shift to be necessary to move the Euro.