UK Retail Sales dominates while Greece continues to weigh on EUR strength

Week Commencing Monday 8th June 2015

This Week in Brief

In the UK most eyes will be on Mark Carney’s speech at Mansion House, where we expect a continuation of his somewhat dovish tone following poor UK economic data and continuing Greek/European issues. On the data front, UK IP and manufacturing are both expected to decline marginally on the month. With this in mind, it could be a tough week for Sterling.

In the US we have retail sales dominating the week, where a decent print will be seen by many as sanctioning further hawking moves by the Fed with respect to rate hikes. A decent print should affirm our September 15 projection for the first rate hike.

In Europe Greece continues to dominate, which it likely to be the principle topic at the G7 event held in Germany this week (along with the Russian/Ukrainian situation. GDP is the principle data release for the week, with a decent print of 0.4 percent on the quarter expected. 

Overriding Market Themes

We start this week’s news round in the US, were the US economy managed to add 280,000 new jobs in May, beating market estimates and reviving hopes that growth is back on track. The headline level of unemployment rose slightly to 5.5 percent however as labour force participation ticked slightly higher to 62.9 percent. Wages also showed growth with the average hourly wage rising by 8 cents, equating to a 2.3 percent annual increase. Economists had been expecting the print to come in somewhere around 225,000 and the rate of unemployment to hold firm at 5.4 percent. Diving into the report, the Service sector led the way in May by adding 63,000 positions, while the hospitality trade grew by 57,000. Healthcare increased by 47,000, retail by 31,000 and construction by 17,000. This may not be enough of a move to start persuading the Fed to push rates higher in the immediate future, however it does run in line with most expectations that a hike is due in the early fourth quarter.

Sticking with the US theme then! The IMF wading into the rate setting debate last week by asking the US Federal Reserve to delay an interest rate hike until the first half of 2016, citing both wage growth and inflation as the main drivers. The fund’s annual economic assessment of the US comes as some rate setters at the central bank are also pushing for some modest delays in rate hikes, at least until clearer signs of a sustained recovery are evident. Christine Lagarde, the IMF managing director, stated “The Fed's first rate increase in almost nine years has been carefully prepared and telegraphed. Nonetheless, regardless of timing, higher US policy rates could still result in volatility ... with consequences that go well beyond the US border”. We do not disagree with her on that one, US rate policy will without question impact currency flows and asset allocation in the near term. I suspect that the Fed will go ahead and do it anyway, however just how important this is in global terms can be seen in this unprecedented statement from Lagarde. It is very unusual for the IMF, or any other NGO for that matter, to wade into the domestic affairs of member countries! All I can say, is watch this space!

Moving to Europe now, Greece surprised markets last week by delaying a debt payment due to the IMF until the end of the month. The decision was taken on Thursday, just hours after Prime Minister Tsipras was presented with a tough deal from lenders asking for tax hikes, privatisations and pension reforms. In an effort to raise the stakes, Athens decided to postpone the payment of the EUR 300m loan, and although this does not signal a technical default, is certainly very unusual!  Greece's bailout agreements expire at the end of June, and if no reform deal is done by then, default is almost certain. This would push the Eurozone into uncharted waters and open the way for Greece to exit the single currency (potentially setting a precedent for other heavily indebted countries to follow suit). In a sign of further unease from international investors, the main Athens stock exchange fell 5.16 percent in the afternoon session on Friday, while Greek and EZ bond yields continued to climb higher. After five months of exhaustive talks, we are approaching a crunch point in this sage, will Greece default or will they compromise? This is the question on everyone’s mind, and will certainly play a huge role in future EUR prices moving forward.

GBP This Week

We have a relatively quiet week ahead for the UK, with Bank of England Governor Carney speaking at Mansion House coupled with the April IP and manufacturing print. Starting with Mr Carney, he is likely to reiterate his somewhat dovish tone following the recent May inflation report, particularly given the recent swath of disappointing UK data, market volatility and ongoing Greek debt issues. Moving to IP, we expect a modest 0.3 percent decline on the month while manufacturing is expected to contract by 0.2 percent on the month.

USD This Week

Most eyes will be centred on the retail sales figures on Thursday, where a strong print should allay fears from the Fed that the US consumer is not ready for a rate hike. We continue to believe that the Fed will increase rates in September and that the market remains underweight, which should demonstrate that there is further upside leverage left in the Greenback. In terms of numbers, we expect a monthly increase in the headline retail sales figure by 1.4 percent, beating the market consensus of 0.9 percent, while core is expected to rise 0.4 percent.

EUR This Week

As per usual, Greece continues to dominate, with political developments likely to continue to be the primary deriver of the EUR. In terms of data, we expect a modest rebound in German IP for April after several months of declines in the indicator. Euro area GDP for the first quarter should be confirmed in at 0.4 percent in line with market consensus, while euro area IP should rebound strongly by 0.5 percent on the month. The main data point is GDP, were the release should show private consumption leading the charge, especially given the continued depression of global oil prices.

On the political side, the G7 is currently convening in Bavaria and Greece is likely to make up part of the agenda. We doubt that anything solid on Greece will be delivered from the meeting, however it will be interesting to hear what countries other than Germany have to say about the ongoing saga. 

08 June 2015


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