Russia goes into the Red and UK election woes continue to dominate GBP
Week Commencing Monday 27th April 2015
This Week in Brief
In the UK we expect GDP to have increased to 0.8 percent in the quarter, signalling continued strong growth in the domestic economy. Manufacturing PMI should also increase slightly on the month, pushing to 52.1 from 51.5. Election fears remain in the forefront of investors’ minds.
In the US we have a busy week with Consumer Confidence expected in higher at 102, GBP lower at 1.0 percent, a hawkish FOMC statement and ISM slightly up on the month. Despite the mixed news, expect a robust US Dollar especially as international issues such as Greece and UK election worries continue to weigh on the crosses.
In Europe we have some economy data, although all eyes continue to focus on the Greek question. Any further developments on this issue will likely dictate EUR direction, especially given that EUR data this week seems to be mixed at best.
Overriding Market Themes
We start the week in the UK with the latest retail sales figures, which saw the volume of sales drop by 0.5 percent in a surprise shock to the market. The slump was led by petrol prices, which showed a 6.2 percent decline in the month. The drop socked global investors, who had been expecting an increase in sales of 0.4 percent. When fuel is excluded, retail sales rose 0.2 percent on the month. Economists in the main are reasonably upbeat about the retail sales story in the UK however, and are expecting a prolonged period of strong sales growth. They believe that store discounts, coupled with strong employment growth, high consumer confidence and near zero-inflation will keep household spending in a upward trend in the coming months.
Moving to Russia, Russian Prime Minister Medvedev released news stating that the Russian economy shrank 2 percent in the quarter, indicating that international sanctions are working. He attributed the drop in output to the pressure of sanctions relating to the Ukrainian saga, and the weak oil prices. He estimated that losses relating to sanctions have smashed income from foreign exports by a minimum of EUR 25 billion, or 1.5 percent of domestic output. He also mentioned that he believed the figure could get considerably worse! Last year, the Russian rouble collapsed to record lows, causing import process to rocket and export income to shrink. The issues were only exacerbated by a near total collapse in global oil prices, with prices remaining stable now at USD 50 dollars a barrel. The central bank has said that it expects Russian GBP could fall by up to 4 percent this year, especially if oil remains at its current lows. Putin has the political support, and in many ways the popular vote, but economically his stance appears to be doing some considerable damage. Somehow, I doubt this will change the current situation in any way!
Finally, it would not be news these days without mentioning Greece, the European “problem child”! In only a few week’s time, Greece is scheduled to make a further payment to its creditors for roughly EUR 1 billion, and with bond yields continuing to shoot skywards, it is struggling to raise the capital. Greece’s new left wing government, led by Syriza, is definitely in a difficult position. It remains under extreme pressure from its creditors to cut government spending and increase taxes, but was elected under a mandate to end austerity measures forced upon them by the troika! Best of luck to Greek Finance Minister Yanis Varoufakis, he is going to need it!
GBP This Week
We have a reasonably quiet week ahead, excluding further election news of course, with UK GDP and Manufacturing PMI the only releases of note. We expect preliminary GDP for Q1 to increase to 0.8 percent in the first quarter from a 0.6 percent forecast. This should be led by stronger household consumption, lower energy prices and a rebound in investment. Manufacturing on Friday should also show some modest gains, adding further buy signals to Sterling.
The above, followed by the more hawkish rhetoric from the Bank of England last week, should continue to put upside pressure on Sterling against both the US Dollar and Euro. Data aside, election fears continue to act as a partial drag, with no indication on any potential breakout from the two main political parties.
USD This Week
We have a busy week for the US ahead, with the FOMC meetings the highlight, followed by consumer confidence, advanced GDP, ISM Manufacturing and Chicago PMI all of note. Starting with the FOMC, a more constructive Fed is likely to support USD strength leading up to the first rate hike. Although we expect no firm commitments in terms of dates, we would suspect some further hawkish rhetoric, confirming our expectations of a late 2015 hike. Our forecast for GDP are slightly below consensus at 1.0 percent for the quarter, while consumer confidence should come in higher at 102.5 versus 101.3 previously. Chicago PMI is expect to come in at a flat 50.0 against a previous release of 51.1, while slightly above on ISM manufacturing to 52.0 from 51.0.
EUR This Week
Despite the ongoing issues between Greece and its international creditors, the Euro has been relatively robust. The troubles with Greece are expected to remain in the forefront of Euro news for the coming weeks, especially given that the next official payment of EUR 1.8 billion in wages and pensions is due shortly. The next scheduled meeting of the Eurogroup is on the 11th May to discuss the problems, however it is not outside the realm of impossibility that a further meeting would be called sooner! All things being equal, the Greek question remains the most important in global markets and seems set to continue to be until a solution, whatever it may be, is found.
On the data front, we forecast euro area HCIP to have pushed up to 0.0 percent on the month, while core HCIP should also increase to 0.7 percent from 0.6 percent previously. German retail sales are expected to drop somewhat on the month, potentially pushing negative to -0.1 percent.