Spain gets upgraded while the Dutch lose their coveted AAA

Week Commencing Monday 2nd December 2013


This week in Brief



  • In the UK we have all the major PMI releases, with Services PMI headlining on Wednesday. We also are awaiting the MPC press conference on Thursday although re not expecting any change in monetary policy.

  • In the US we have various jobs reports, the GDP figure and consumer sentiment. We expect GDP to be revised upward, so expect some continued risk on trading as we move towards the end of the week.

  • We have a quieter week in Europe with PMI’s due for the larger EZ economies and the ECB press conference. We expect EZ wide PMI’s to decline slightly while German PMI’s to expand. Mario Draghi is unlikely to change any policy however expect some further negative rates talk.


Market Themes & Current Events


Eurozone unemployment dropped for the first time in more than two years to 12.0% in July against 12.1% the previous month, and then remained stable in August, official data from Eurostat showed on Tuesday. The total number of people out of work fell by 16,000 to 19.17 million, but in the year since August 2012 was up by 895,000. Meanwhile, the annual rate of consumer inflation rose from 0.7% to 0.9%, easing pressure on the ECB after its rate cut to 0.25% last month. In true Eurozone style however, the fall in inflation had raised fears of deflation, a protracted fall in prices that can cause a slide in consumer spending as individuals put off purchases in the hope of getting better bargains. Deflation has blighted Japan's economy for the best part of two decades and scaremongers in Brussels fear that the same could dog the zone. We believe that the EZ is more resilient than that, but nevertheless market fears continue to weigh on the Euro.


Sticking with Europe, Standard and Poor’s have upgraded Spain’s economic outlook from negative to stable. The company cited resumption in economic growth as the main driver of their upgrade, reaffirming its BBB- status and alleviating fears that the bongs would be cut to junk. The ratings company also lowered the Netherlands to AA+ from AAA, citing weaker growth prospects than previously anticipated. That reduces the number of countries with top grades from all three main ratings companies to 10. S&P also raised its score for Cyprus to B- from CCC+.


Moving to India, economic growth quickened last quarter from a four-year low on higher factory output, a revival threatened by looming interest-rate increases to fight rising prices in the nation of 1.2 billion people. Asia's third-largest economy had been weighed down by various factors, such as high inflation, a weak currency and a drop in foreign investment. Still just when the situation seemed like it was improving, India’s credit rating may be cut to junk next year unless the general election leads to a government capable of reviving economic expansion, Standard & Poor’s said earlier this month. It seems that Europe is not the only region to


Finally and back on home shores, UK house prices rose in all regions of the country for the first time in more than six years last month as low mortgage rates helped the property revival to broaden. Fuelled by government schemes to encourage buyers, house prices have been rising at the fastest pace in at least three years, private surveys show, lending support to a nascent economic recovery. The pace of the market upturn has led some economists to suggest that a new housing bubble could be in the frame, five years after the last one climaxed in the financial crisis and deep recession.


Sterling Outlook


We have an extremely busy week for the UK with the release of all the major PMI’s and the MPC on Thursday. Starting with manufacturing PMI figure which is due on Monday morning, markets are expecting a rise from 56.0 to 56.3. The previous releases have shown considerable weakness there is a lot less confidence that a decent print will be seen today. That said, with sentiment and growth spurring on the UK growth story it should only be a matter of time before this sector begins to outperform.


Moving to Tuesday, the construction PMI figure comes into focus. The strength of housing brings a positive feeling to demand within the construction industry. That being said, the market forecasts point towards a fall in this figure from 59.4 to 59.0 this month. Given the perceived strength of the housing market, there is a general belief that we could see this confound the markets with a better than expected print. However with the current level being the highest reading since April 2007, it may well be one step too far.


Finally we have the most important of the three releases in the form of services PMI print, due out on Wednesday. The services sector is obviously the dominant driver of the UK economy and for that reason, a strong services sector is paramount to a strong UK economy. Unlike the other two PMI releases, we have seen consistently strong prints from this figure, beating expectations on 9 out of the last 10 occasions. The markets are forecasting a drop back towards the 62.1 level after a reading of 62.5 last month. However we still believe that a rise in this figure is possible. Once again however, the sector is currently sitting above pre-recession levels, so it too may be time for the services sector PMI figure to give some of its ground away.


Lastly for the UK, we have the Bank of England MPC meeting on Thursday. There is not much expected in terms of change given that the forward guidance model adopted by Mark Carney is centred around stability in the market. Despite the expectations of no change, this is a major release and as such traders will be keeping an eye on it.


US Dollar Outlook


We also have a busy week for the US Dollar with the release of various jobs reports, the GDP figure and consumer sentiment. We will start with the ADP non-farm release on Wednesday, which is generally considered one of the less notable employment figures. Market expectations point towards an improvement in the figure towards 165k, following a particularly poor October where the number was closer to 130k. We will also keep an eye out for the weekly initial jobless claims figure on Thursday, which expected to rise from 316k to 322k.


Moving to the second estimate of US GDP on Thursday, we expect a marginal increase from the 2.8% we saw last month, potentially to 2.9% for the quarter.


We then shift our focus to Friday and the Non-Farm payroll release in the early afternoon. Given the question marks surrounding the possible tapering of asset purchases by the Federal Reserve, the jobs data is now more relevant than ever in deciding how the markets will move. Job growth was widespread in October in October, excluding Federal government employment and the unemployment rate climbed mildly to 7.3% from 7.2% in September. The change in total nonfarm payroll employment for August was revised from +193,000 to +238,000, and the change for September was revised from +148,000 to +163,000. With these revisions, employment gains in August and September combined were 60,000 higher than previously reported, indicating an upturn in the job market. A job gain of 184,000 is anticipated, with a drop to 7.2% in unemployment rate.


Finally, the Preliminary UoM Consumer Sentiment report is expected at the end of the week, providing the latest insight into the mind-set of the American consumers. U.S. consumer sentiment dropped unexpectedly in November, reaching a two-year low of 72.0 following 73.2 final reading of October. Lower-income households were worried about their future financial condition, while those with incomes above $75,000 felt more confident as stock prices increases boosted net wealth gains. The government debt ceiling crisis also lowered confidence, although the end of the shutdown increased optimism. Consumer sentiment is expected to rise to 76.2 this time.


Euro Outlook


We have a quieter week for the Euro with markets focusing on some PMI releases and the ECB rate decision on Thursday. On Monday we see the manufacturing PMI figures released for all the major economies of the Eurozone, which collectively should give us a fair indication of sentiment moving into the beginning of 2014. The two major numbers to watch out for are the Germany and the Eurozone as a whole, both of which are expected to rise to some extent. The German figure in particular is forecast to rise by 0.8 to 52.5. Wednesday’s services PMI figures should be a similar story, with the only difference being that the Eurozone figure is widely expected to fall, with the German figure forecast to spike higher.


Moving to the ECB, after the surprising rate cut in November the ECB is likely to leave policy unchanged in December. The rate cut has little impact on the economy and with the hindsight of a few weeks, it had no long lasting effect on exchange rate volatility. Nevertheless, and despite fear of deflation, another move now would be problematic for the northern block and especially for the Bundesbank. So, Mario Draghi is likely to emphasize that the ECB is considering more moves in the near future, hinting about setting a negative deposit rate already in January. 

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