Week Commencing Monday 9th November 2015
Overriding Market Themes
We start the week in China, where imports dropped for the twelfth consecutive month in October giving further cause for concern over the Chinese economy. The slowdown in China’s economic expansion has sent fears across global stock markets and was even cited in September by US Federal Reserve chair Janet Yellen as one of the reasons for delaying the long expected interest rate hike in the US. Overseas shipments dropped 6.9 percent in October in USD terms, while weaker demand for coal, iron and other commodities from declining heavy industries helped push imports down 18.8 percent, leaving a record trade surplus of USD 61.6 billion. Output this year is on pace for the slowest expansion in a quarter century, with the world’s second-largest economy growing 6.9 percent in the three months through September. This accounts for the slowest pace of expansion since 2009. Although the weak trade figures may again cast doubt on the chances of a rate rise in December, one of Janet Yellen’s colleagues has called for the Fed to start the so-called “lift-off” sooner rather than later. In fact, traders boosted their bets on such a move after a US government report on Friday, which showed the economy added considerably more jobs than expected in October, sending the jobless rate down to 5 percent.
Moving to the UK, manufacturing output rose by 0.8 percent in September, according to official figures, the biggest monthly increase since April 2014. The report defied economists’ expectations for a fall and instead jumped to 55.5 in October from an upwardly revised 51.8 in September. The market had forecast the reading to come through at 51.3. Manufacturing accounts for roughly 10 percent of the UK economy, which means forecasters will tend to be more focused on the Services PMI releases to get a clearer picture of whether GDP growth will rebound in the final quarter. Signs of a manufacturing recovery could however help sway more Bank of England policymakers to vote for an interest rate rise in the coming months. Currently, only one member of the nine member monetary policy committee, Ian McCafferty, has voted for an increase in recent months.
GBP This Week
The September employment report on Wednesday will be the next important data release for GBP. We expect the unemployment rate to remain unchanged at 5.4 percent and look for a somewhat softer pace of wage growth. We expect average weekly earnings to post a 2.9 percent quarterly, below consensus expectations of a 3.2 percent. Core wages should increase by 2.8 percent, in line with consensus expectations. A confirmation of the above, coupled with the recent dovish BoE rhetoric will likely keep GBP under pressure against mainly the USD, but also the EUR.
USD This Week
The USD is poised to resume its upward trajectory as markets continue re-pricing further hikes for the Fed for 2016. We see the latest employment report as a confirmation that the US economy remains very robust, and that the job market keeps its momentum. Also, if wages continue to increase, we should see renewed confidence to the FOMC that inflation is going to reach the 2 percent target in the years to come.
This week we will get data that is likely to confirm our view of a healthy consumer, with Retail Sales and University of Michigan Consumer confidence. For the former, we expect an increase of 0.4 percent m/m in line with market consensus. For the latter, an increase to 91 from 90 is forecast.
EUR This Week
The EUR under performed last week after of the swath of bullish US data hit the market, including last Friday’s employment report and recent Federal Reserve speech, increasing market expectations for a December Fed rate hike. This week’s data will likely continue to keep the EUR under pressure. We look for euro area GDP to moderate somewhat on Friday to 0.3 percent for the quarter with risks skewed to the downside.