Scotland stays and confidence returns

Week Commencing Monday 22nd September 2014

This Week in Brief

We have no releases of note from the UK.

In the US we expect durable goods to come out mixed, while the final revisions of second quarter GDP and the UoM are unlikely to impact market sentiment. All in all, we expect a relatively quiet week from across the pond.

In Europe we expect all major PMI releases to be bearish while the key German economic indicators should indicate that Germany is heading towards recession in the third quarter (after posting a -0.2% growth rate in the second quarter). 

Overriding Market Themes

Scotland’s decision to remain part of the UK has been welcomed by the business community, including financial institutions, industry bodies and professional services firms. Standard Life, the Edinburgh-based pensions and insurance conglomerate that had threatened to move south in the event of Scottish independence, said it "respected" the decision of the Scottish people but recognised that further constitutional change is very likely following the clear result of the referendum. Despite the “No” vote however, advisers are warning it does not mean it's a case of business as usual. The increased devolution of powers to Scotland, promised in the last weeks of the campaign will give the Scottish Parliament control over certain aspects of the Scottish tax system. Politically we can see a big sigh of relief across the entire UK, however economically we are yet to see whether the referendum has caused a more meaningful dent in business confidence.

Over in Japan, the economy logged a JPY 948.5 billion trade deficit in August, the 26th straight month of in negative, as slack demand from China and the U.S. hindered exports, the Finance Ministry said Thursday. Exports fell 1.3 percent from a year earlier to JPY 5.71 trillion while imports dropped 1.5 percent to JPY 6.65 trillion, resulting in a JPY 948.5 billion deficit, according to preliminary data. Japan posted a JPY 971.4 billion deficit in August 2013. The weakening in the value of the Japanese yen has so far failed to spur a rebound in exports, despite a recovering U.S. and UK economy. Softer growth in China, Japan's biggest trading partner, has also been painful for the Japanese economy.

Back on home soil, the UK unemployment showed another improvement last week with the jobless rate falling by more than expected to a five-year low of 6.2 percent, however average wage growth remained weak at 0.7 per cent leaving the prospect of imminent interest rate rises to regulate the strengthening UK economy unlikely. The number of individuals seeking job seakers last month fell by 37,200 to 966,500, having dropped below the crucial 1 million mark for the first time since September 2008. The ONS also confirmed the overall jobless total was 2.02 million in the second quarter, down 146,000 on the previous quarter and 468,000 lower than the year before. The Bank of England has said it will pay close attention to average wage rises, which are far lower than the August rate of CPI, when deciding on the pace and the timing of the first interest rate hike. The bank halved its forecast for average wage growth last month, saying it now expects average salaries to rise by 1.25 percent this year. Last month's 0.6 percent average wage rise was the slowest pace of growth since records began in 2001.

GBP This Week

After a tumultuous week on the markets last week, we have no major events of note due to be released to UK markets this week.

USD This Week

We have a reasonably quiet week ahead for the US with durable goods and second quarter GDP stealing the limelight. Sticking with durable goods, we expect orders to plunge 17.7 percent while Core orders are predicted to rise 0.7 percent in what is widely expected to present mixed signals to the market.

The second quarter GDP and the UoM consumer sentiment releases on Friday we doubt will rock markets, especially given that both of these are final revisions and therefore not expected to be altered. If we do see some shifts however, expect markets to react quickly and violently.

We could also see some movement on the back of the Fed speeches, given that Fisher became the second dissenter at last week’s meeting, while two further members have brought forward their first rate hike forecast.

EUR This Week

This week we will be concentrating on the big German, French and Eurozone PMI’s for both the manufacturing and services sector. The PMIs are expected to show another across the board decline in confidence in both verticals, which would suggest the current economic slump will continue until the end of the year. The only positive we can draw from these releases is that the expected declines are smaller than previous releases, which may be a sign that the numbers are about to bottom out in the coming months.

We also will be watching the German Ifo business climate and Gfk consumer climate figures from Germany, however these are expected to be reasonably bearish for European markets. We have seen four consecutive declines in these business confidence numbers, and should these releases follow suit, we expect to see Germanys economy to be staring down the barrel of recession this quarter, given that we saw a -0.2 percent growth rate in the second quarter.

Finally we will be watching ECB president Mario Draghi testify before the European Parliaments Economic and Monetary Committee in Brussels on Monday. No doubt traders will be watching to see if he hints to further measures from the ECB, potentially including quantitative easing. 


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