Now that the holidays are over ... let the mayhem begin!

Week commencing Monday 21st March 2014

This week in Brief

  • In the UK we expect no dissent from the MPC in terms of their voting habits while Retail Sales is expected to come in at a disappointing -0.4 percent.

  • In Europe we expect mixed signals from French and German manufacturing PMI’s while German Ifo is expected to stabilise despite continued tensions in Ukraine.  Mario Draghi is expected to speak on Thursday morning, although it is not widely believed that he will unveil any new policy measures.

  • In the US we expect a continued decline in existing home sales while Core Durable Goods are expected to edge up. To end a truly mixed week, unemployment claims is expected to edge up by a modest 5,000.

Market Themes & Current Events

Starting in the far east this week, Japan's trade deficit surged nearly 70 percent to a record 13.75 trillion yen ($134 billion) in the last fiscal year, the third straight year of deficit, as exports failed to keep pace with a surging in energy costs. A report showed from the Finance Ministry that exports in the year that ended March 31 rose 10.8 percent over the year before to just over 70.8 trillion yen while imports climbed a whopping 17.3 percent to 84.6 trillion yen. This led to preliminary data showing the deficit at 1.45 trillion yen (USD 14.1 billion) in March, the 21st straight month of shortfall. Resource-scarce Japan's costs for energy imports have soared since the March 2011 disaster at the Fukushima Dai-Ichi Nuclear Plant led to the closures of all of its nuclear reactors for safety checks. This, coupled with the weakening of the Japanese yen last year further pushed costs for all imports higher, while exports have not risen as quickly as expected. Japan's traditional exports of vehicles, machinery and electronics have shown solid growth over the past year, with car exports jumping just under 19 percent. Unfortunately however, as many manufacturers shift production to emerging markets in Asia and other regions, its imports of many industrial components are catching up.

Sticking with the east, China's economic growth continued to slow to 7.4 per cent in the first quarter of 2014, showing signs of waning momentum despite reforms, innovation and restructuring by the Chinese leadership to attempt to revitalise the world's second largest economy. The first-quarter growth exceeded market estimates of 7.3 percent, however, this is the slowest pace at which the Chinese economy has grown in the past 18 months after it registered a 7.4 per cent growth in the third quarter of 2012. The figures suggest growth in the world's second-largest economy was generally stable and marks a relatively successful beginning for the year as Chinese authorities promoted further reforms to their economic and social systems. Earlier, data showed the country's exports and imports declined 1 percent year on year to USD 965.88 billion in the first quarter while power consumption rose 5.4 percent year on year.

Moving back to home soil, wage growth finally started to outpace inflation after years of falling real earnings, and unemployment has fallen to its lowest level in five years, figures released by the ONS shoed on Wednesday. Diving into the figures, the improvement in wages was driven by pay rises in the private sector, where wages were 2 percent higher than in the same quarter of 2012-13. The public sector was not so lucky, only registering a doubling of the 0.9 percent growth against the 2012-13 quarter. The unemployment rate also fell more sharply than expected, to 6.9%, over the three months to February, from 7.1% in the three months to November. It was the lowest rate of unemployment since January 2009, however it still remains above pre-crisis levels. There are now 2.24 million people out of work in the UK, a quarterly fall of 77,000 in the three months to February. Employment jumped by 239,000 to 30.39 million, helped by the continued rise of self-employment rates.

Sticking with the UK, British inflation fell to its lowest in over four years in March, easing pressure on living standards and raising the prospect that prices may now be rising by less than wages for the first time in years. Tuesday's data showed that consumer price inflation dropped to 1.6 percent in March from February's 1.7 percent - the lowest level since October 2009, according to a report published by the Office for National Statistics. Despite this, house prices are rising at their fastest since June 2010, up 9.1 percent on the year, once again according to ONS data released alongside the CPI figures. Prices in London are up 17.7 percent, the biggest jump since July 2007. This strong rise in house prices poses complicated risks to the Bank of England's position that it is in no hurry to raise interest rates while inflation stays near its 2 percent target and unemployment is still well above its pre-crisis level. Despite the London rises, the bank has said it plans to use other tools to deal with any housing overheating before raising interest rates, and that London properties are not reflective of the rest of the country.

GBP This Week

In the UK we have a relatively quiet week ahead, with the Bank of England votes and Retail Sales headlining. Starting with the minutes from the April meeting, we are unlikely to see any change in voting outcomes and unanimity is expected on all policy settings. It is worth noting that the meeting took place before the drop of the ILO unemployment rate to 6.9%, and hence the monetary policy decision was taken in the context of the forward guidance from August. Over the past month we have seen inflation drop further below the 2 percent target while growth indicators have remained strong and consistent with BoE forecasts. With inflation pressures remaining week, we doubt that the Bank of England are in any rush to raise interest rates, and therefore doubt any decent is likely in the near term with regards to voting against the adopted forward guidance model.

Moving to retail sales, with the previous reading registering a strong gain of 1.7 percent (crushing the original estimate of 0.5 percent), markets are bracing themselves for a steep decline to -0.4 percent this month.

USD This Week

We start the US week with existing home sales, where economists estimate sales slipped 1.1% to in March to an annualized rate of 4.55 million. With sales of new and existing homes slipping in February, mainly as cold weather may have kept buyers on the side-lines, higher mortgage rates and rising prices have also pushed some potential buyers out of the market.

Moving to Thursdays Durable Goods Orders, economist’s orders climbed 2.0% in March, while capital goods orders excluding aircraft are also estimated to have climbed by 1.0%. Orders for transportation equipment increased 6.9% while transportation orders had declined 6.2% in January. Durable goods orders are expected to climb 2.1%, while Core durable goods orders are expected to edge up 0.6%.

Finally, the number of new jobless claims registered last week remained low at 304,000, near their pre-recession levels, following 302,000 posted in the previous week. With manufacturing activity accelerating in April, Economists are forecasting jobless claims to reach Jobless claims are expected to increase by 5,000 to 309,000.

EUR This Week

We start the European week with French and German manufacturing PMI releases, both of which are expected to come in mixed as usual. In Germany, after a sharp decline in March, we expect the manufacturing PMI to increase slightly again in April to 53.8 from 53.7 in March. Nevertheless, we have to mention that the index remains well below its January level (56.5), suggesting a slowdown of industrial activity in Q2. Moving to France, French PMI indices should decrease in April, to 51. We expect French PMI manufacturing to show a decline of 0.8pt, to 51.3 from 52.1.

We then shift our attention to the German IFO business climate, which is expected to stabilise at 110.7 in April. We expect a slight improvement in the manufacturing and retail sectors, while construction and wholesaling will likely weigh on the global index. Business conditions remain favourable for activity in many sectors, while expectations are likely to adjust downwards in the coming months.

Finally, ECB president Mario Draghi is expected to speak at the "De Nederlandsche Bank 200 years: Central Banking in the Next Two Decades" conference, in Amsterdam. We believe his speech will be relatively guarded, however any slips regarding future policy shifts to combat falling inflation will likely cause significant market volatility. 


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