Taper or not to taper, that is the question!
Week Commencing Monday 16th December 2013
This week in Brief
- In the UK we have a relatively busy week with CPI, the claimant count, the MPC votes and retail sales. All of these are expected to be reasonably Sterling positive, so expect support for the old girl to be as strong as ever.
- In the US we have the all-important potential taper on Wednesday afternoon, with current odd for a December taper standing at 1/3. We also have the Fed Chairman Nomination votes on Friday where Janet Yellen is expected to win.
- In Europe German IFO should be the highlight with expectations riding high of another decent print. French Manufacturing will likely be the only major disappointment, so expect a mixed bag from the single currency this week.
Market Themes & Current Events
With start our weekly news feed with Japan, where Japanese business confidence has soared to its highest level in six years, according to the Bank of Japan's latest Tankan survey. Big companies plan to boost spending by 4.6% in the year ending March 2014, a quarterly Bank of Japan report showed today. That compared with a 5.1% projection three months earlier. The slide contrasted with an increase in sentiment to the highest since 2007. This surprise uptick has prompted speculation that the BoJ not add to the unprecedented easing unleashed in April in its drive for 2% inflation, and instead look for domestic growth to fill the gap. Despite the good news however, it is clear that more structural changes will need to take place before the economy, which has been dogged by two decades of poor performance, can start experiencing a balanced recovery.
Moving to the UK, Output in the construction industry rose by 2.2% in October, fuelled by a big increase in house building and the implementation of large government projects, according to the ONS. Construction, which accounts for roughly 6.3% of the economy had fell by 0.5% in September, however the report (which also indicated an increase in Industrial Production in the same month) suggests the economy is maintaining into fourth quarter growth momentum. Diving into the figures published by the ONS, overall housing construction, encompassing public and private building work, increased 18.7 percent in October from a year earlier, the most since January 2011. Infrastructure work increased 7.5 percent on the month, the most since August 2012.
We start our Sterling week with Tuesdays UK CPI where inflation likely stabilised at 2.2% in November before edging up in December due to rising domestic fuel and electricity prices. Also, the HICP index is expected to print a 0.2% increase in November while Core inflation is expected to be stable at 1.7%. Following this release we will be watching Mark Carney testify before the House of Lords Economic Affairs Committee.
We then move our attention to Wednesdays Claimant Count, where we have seen the number of people claiming jobseekers decline by over 120k in the Aug to Oct period. Given that current momentum in job creation, coupled with the falling ILO, we believe that a further drop in unemployment could be seen, dropping the rate from 7.6% to 7.5%. Also on Wednesday we expect no dissent from the MPC with all members voting to maintain the current monetary policy stance.
On Thursday we expect Retail Sales to return into positive territory, posting an estimated 0.3% against last month’s dismal -0.7% print. Despite the growth, 0.3% on the month is a relatively dismal increase as it appears the surge in consumer confidence has come to a halt. With fiscal tightening set to increase next year and credit easing less focused on household and more on businesses, we expect this figure to remain relatively stayed for the coming months.
Finally, the Current Account is expected to show that the public sector deficit has been shrinking and dropped to 6.4 billion pounds last month. However, this was well above the estimate of 4.8 billion. A similar reading is expected for November.
US Dollar Outlook
We have a very busy week for the US, with the FOMC statement on Wednesday the highlight of the week. We start the week however with Core CPI, where in October the indicator edged up 0.1% for a third consecutive month due to a rise in vehicles, transportation and medical care costs. The rise was in line with market projections however, so little market movement was felt. The cost of living declined in October for the first time in six months and annual inflation rate reached its lowest in four years. As with most surprise declines, we expect both CPI and Core CPI to rebound and gain 0.1%.
We then shift our attention to Wednesday and the Building Permit release from the census bureau, covering Septembers, Octobers and Novembers prints. Our forecasts for September (890K) and October (900K) housing starts looked for a gradual pace of improvement, and we expect those gains to have continued in November with a 925K pace.
The FOMC is next and is certainly the highlight of the week with the potential of tapering back on the cards. The market expects a taper announcement next quarter, however recent economic data has raised speculation that we could see an announcement as soon as this month. We believe that the improvement in recent employment data roughly meets the Fed’s “substantial improvement” goal, while positive developments on the budget front are also constructive for the outlook.
Moving to Thursday, we expect the Philly Fed Manufacturing Index to continue to post marginal increases on the month, with expectations of the print reaching as high as 10.3. Underlying details in the November report suggested supportive momentum moving into December, with new orders expanding at a modest pace alongside gains in employment and inventories.
Finally, Friday will see the final Federal Reserve nomination vote on who will replace Ben Bernanke at the helm. It is pretty much a foregone conclusion that Janet Yellen will take the job in the end, which is generally believed to be Dollar supportive.
We have a relatively quiet week for the Euro, headlining with the German ZEW on Thursday. We start with both French and German Flash Manufacturing PMI’s on Monday morning. We expect French manufacturing to continue to decline as business confidence continues to be sapped by restrictive government policies. This should be in contract to Germany, which is expected to print somewhere in the region of 53.5, signalling continued expansion.
Also on Monday we have Mario Draghi testifying before the European Parliaments Committee on Economic and Monetary Affairs in Brussels. Draghi may talk about his call on national governments to deliver economic reforms focusing on completing the banking union, implementing growth-friendly fiscal consolidation, and structural reforms in labour and product markets. His last appearance was calm, and it boosted the euro.
Moving to the highlight, we expect the German ZEW indices to increase for the fifth consecutive month in December, moving up from 54.6 to 57.0 for the economic sentiment index and from 28.7 to 32.0 for the current conditions index. The gain in investor projections goes hand in hand with German stable growth. GDP increased 0.3% in the third quarter and the Bundesbank expected further growth in the final quarter as well. Another improvement to 55.5 is expected this time.
Finally, last month German Ifo business sentiment edged up to 109.3 points in November, beating forecasts of 107.9 and topping the recent record of 107.4 in October. German economic growth softened in the third quarter, posting a mild rise of 0.3% compared to 0.7% growth rate in the previous quarter. The main force leading the expansion was a rise in domestic demand. The Bundesbank optimistic projections for Germany’s future growth forecast further support this rise. Another improvement to 109.7 is forecasted.