Services PMI set to blast the UK into the stratosphere ... better fasten the seat belts!
Week Commencing Monday 04th August 2013
This week in Brief
- US ISM Non-Manufacturing PMI is the highlight of the American economic calendar. We expect a further expansion in this key PMI, however the rate of expansion is likely to slow as government cuts impact services growth.
- In the UK, Mark Carney’s inflation report and Services PMI is the highlight of the week. We expect Services to continue to expand in line with other PMI reports while Mark Carney is expected to provide further guidance.
- In Europe, main concerns continue to be the political risks in Spain, Italy and Greece. On the data side, we expect German Industrial Production and Factory Orders to continue to climb.
Market Themes & Current Events
The US economy added 162,000 new jobs in July, according to the US Labour Department. The figure was significantly below expectations of more than 180,000, indicating that the US recovery remains tepid at best. Nevertheless, the new jobs helped the unemployment rate to fall to 7.4%, down from 7.6% leaving unemployment at its lowest for four years. This drop in unemployment does add further fuel to speculation that the Federal Reserve will taper into QE program sooner than recently thought. Other figures released on Friday include US consumer spending and inflation, which both rose in June, with the US Commerce Department saying spending is 0.5% higher and annual inflation is running at 1.3%. This however remains well below the US target of 2%.
Back on home shores, the construction industry has reached its highest levels since the beginning of the economic crisis. The Markit/CIPS Construction PMI rose to 57.0 in July from 51.0 the previous month. The recent data shows that far from being the drag on the UK economy as we say a year ago, construction is leading the economic recovery. First estimates for second-quarter GDP show the construction sector grew by 0.9%, but it still remains more than 16.5% lower than it was before the start of the financial crisis in 2008. Construction was also a major component in the recent UK GDP figure, which saw overall GDP growth for the April to June period at 0.6%.
In more PMI news for the UK, Thursday’s manufacturing PMI release indicated that the UK manufacturing sector grew in July at its fastest pace in two years. The reading put the index at 54.6 for July, from an upwardly revised June figure of 52.9. This was the strongest result since March 2011 and marked the fourth month in a row of expansion. This has prompted UK government bonds to fall for a second week as investors reduce demand for safe haven fixed-income securities and increase their risk profile.
Over in Europe, The International Monetary Fund warned in a report that a persistent recession and the government’s failure to accelerate overhauls may create an 11bn Euro hole in Greece’s finances over the next two years. The concerns come as Greece received a further 4bn Euro in aid late Wednesday from the troika, a group of lenders comprising of the European Central Bank, The European Commission and the IMF. The report also raises concerns that Greece has failed to raise substantial amounts of money by privatising state assets. This continues to add pressure on bureaucrats in Brussels as they struggle to deal with a two speed recovery. On the one hand they have Germany and France, both of which are emerging from recession and pushing the EZ economy back into growth. On the other they have soaring unemployment in the periphery and Greece, Spain, Portugal and Italy all in deep recessions.
The week begins strongly with the release of the services PMI figure on Monday morning. Unusually, this indicator is usually released alongside both manufacturing and construction PMI, this services PMI has been separated by the weekend. This allows the opportunity to re-analyse the two previous PMI’s and calculate that a further out-performance is likely given the significant spikes we saw last week. Market expectation is for a rise from 56.9 to 57.4, however the figure could go higher and push the PMI towards 60.0.
Moving further into the week, the main event comes in the format of the BoE inflation report on Wednesday. BOE Governor Mark Carney will host a press conference to discuss the report, where he is likely to elaborate on the issue of forward guidance. Given Carney’s previous employment of forward guidance at the Bank of Canada, it is known that he sees the method as a clear and effective way to clarify expectations for markets and the population. Markets will be on the lookout for comments and clarification as to how long we should expect interest rates to remain low along with any indications of what alternate methods he may seek to employ to boost the economy.
We remain unfortunately relatively bearish on the Pound as we move into August. Last week the pound had a rough time of it, dropping nearly 2 cents against both the US Dollar and the Euro. Thankfully, it managed to avert further sharp losses thanks to the superb Construction PMI release. Moving into the month, and with expectations of a strong Services PMI in our sights, we expect the Pound to consolidate at these levels and begin to reserves some of its previous losses. With this in mind, we expect GBP/EUR to begin to push back into the mid 1.15’s whilst GBP/USD to consolidate in the mid 1.52’s.
US Dollar Outlook
We have a relatively quiet week for the US Dollar with ISM non-manufacturing PMI likely to dominate the proceedings. We expect this key service based indicator to see a jump from 52.2 to 53.2, however given the relatively poor performance in the figure over the last four readings, any growth is likely to be muted at best.
We then shift attention to Tuesday’s US Trade Balance, where analysts expect to see the deficit widen to a staggering USD 43.1 billion. This comes as the US trade balance in May widened unexpectedly to USD 45.0 billion from USD 40.1 billion in April amid a fall in exports and an increase in imports. However the rise in imports also indicated improvement in domestic demand. Analysts expected deficit to reach $40.3 billion. This result may hurt GDP but at the same time suggests an improvement in domestic demand.
In line with these big bullish PMI releases, we expect to see the return of risk on trading, a pattern which is usually a US Dollar negative event. With both Europe and the UK pushing further into the black, we expect decreased demand for USD denominated assets and as such, the dollar to lose some of its accumulated value. Any loss in value is likely to be slow however, so expect to see all USD majors trade within their ranges albeit to the downside.
We also have a quiet week for the Euro where the German factory orders and industrial production figures will be closely watched to understand whether the European powerhouse continues to suffer from the global downturn. Starting with German Factory Orders on Tuesday, we expect the index to show a significant improvement from -1.3% to 1.1%, which would mark a positive shift after two consecutive negative readings in this figure. That said however, with Chinese consumer demand at an all-time low, we expect some fallout to be seen in Germany’s export led industrial sector, and there is potential that this figure could be effected.
The industrial production figure is expected on Wednesday, with median estimates coming in around 0.3% after a -1.0% contraction last month. We expect any surprise in this figure to be positive, especially given that two of the last three figures have come in above 1.2%.
We remain reasonably bearish on the Euro as we move into August. While the ECB sounded a bit more upbeat and acknowledged the green shoots, it maintains a dovish bias. A recovery in the euro-zone is still to be seen, and political crises in Italy and Spain are still brewing. Any bullish movements therefore in the single currency are likely to be short lived, or tepid at best. With this in mind, expect both Sterling and the US Dollar to not give up any further ground without a fight.