Olympic glory defy's UK economy gloom
Week commencing Monday 13th August 2012
Overriding Market Themes
Economic growth in Japan slowed in the second quarter of this year as Eurozone fears hurt exports and domestic consumption. Gross domestic product grew by 0.3% during the period from the previous three months, a figure which is down from 1% growth in the first quarter. It is clear that, even for the once great manufacturing powerhouse of Japan, growth may continue to slow further in the coming months amid an uncertain global economic climate. Its economy has also suffered from a fragile economic recovering in the US, which coupled with Europe are Japans two biggest markets. Also, a strong Yen has made things more difficult for the country’s exporters by making their goods more expensive and eroding their already squeezed profit margins. At least they are not in the same boat as us some would say, although a weak Japanese economy is certainly in no one’s best interest.
In more dire news for the UK economy, the trade deficit is at a 15 year high as the gap widens sharply in June. The deficit, which measures how much imported goods and services exceed exports, rose to GBP 4.3 Billion in June from GBP 2.7 Billion in May. This mas mainly due to a 4.6% drop in the value of UK exports to the Eurozone and non-European Union countries. The greatest disappointment for the economy was the deficit in services, and within that, partly financial services. Part of this huge drop can be associated with the extra bank holidays from the Diamond Jubilee celebrations, however the magnitude will cause some ministers in Whitehall to review their strategy. Will the buckle or stick the course? I would speculate the latter, however we are still none the wiser whether UK style deep austerity or French style ‘half austerity, half spending’ will prevail.
German Chancellor Angela Merkel returns to the front line of the European Debt Crisis this week as the zones leaders squabble over measures including bond purchases to avert fears that the single currency may be split up. She is set to battle with ECB President Mario Draghi, as he suggested that the central bank could purchase sovereign debt alongside euro-area bailout funds. When he suggested this, markets offered a snippet of rest bite as Spanish and Italian yields approached normality once again, however concerns over the euro compounded as flagging global growth following reports that China’s exports and industrial production slowed soon reversed any gains. It is clear that it will take some significant political willpower to find any form of resolution. Do they have it?
GBP This Week
Tuesday starts the Sterling data releases with CPI for the year, which is expected at 2.3% against 2.4% posted in July. We then end the week with the Claimant Count and the MPC Meeting Minutes on Wednesday. I expect the number of people claiming unemployment benefit to increase slightly over the month, however for the increase to have little effect on market sentiment. The MPC Minutes should be a good read, with speculation that some members of the committee may well consider expending the already massive Quantitative Easing program.
USD This Week
Tuesday also kicks off the US economic calendar with Core Retail Sales and Retail Sales expected to come in better than expected at 0.4% for the month. PPI is also due on Tuesday, which should increase from a measly 0.1% to 0.3% for the month. On Wednesday we move to Core CPI, which should remain flat against July’s release at 0.2%. Thursday is arguably the most important day of the week with Unemployment Claims, Building Permits and the Philadelphia Federal Reserve Manufacturing Index release. Unemployment Claims will likely increase marginally, whilst building permits should flat line. To end the week we have the Preliminary University of Michigan Consumer Sentiment report, which should show a slight increase in financial confidence.
EUR This Week
A relatively light week for Eurozone data, with German ZEW Economic Sentiment headlining the week on Tuesday. I expect a continued decline in sentiment in Europe’s biggest economy as exports and manufacturing continue to suffer from an embattled euro area. Apart from this release, the emphasis continues to remain on the political situation, so we will watch news wires for any agreement between German Chancellor Angela Merkel and EBC President Mario Draghi on the way forward.
In Other News
What a fantastic 2 weeks of Olympics London 2012 has put on for the world. Over the games, which I consider to be the best Olympic games the world has ever seen (sorry Beijing!), there has been heart ache and ecstasy for the athletes, and for Team GB. To simply round off this other news section, I can say I have never been so proud to be British. Well done London and well done GB.
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