The big three central banks prepare for a grilling!

Week commencing Monday 14th July 2014


This week in Short



  • In the UK we have Mark Carney testifying to Parliament alongside the Claimant Count and unemployment rate. We expect Mark Carney to be grilled once again on interest rates, and this poses the biggest potential GBP volatility driver for the week.

  • In the US we also have Janet Yellen testifying to the Senate, where she is likely to reaffirm her strategy to end tapering and raise interest rates. Apart from this we have retail sales and consumer confidence.

  • In Europe, Mario Draghi is speaking to the European parliament and will no doubt be pressured into questions around the possibility of a European QE program. We also expect CPI to come in flat, offering him some mild rest bite as deflationary fears are shifted to next month.  


Overriding Market Themes


Starting with the UK, the trade deficit unexpectedly grew in May, pushing the gap between imports and exports to GBP 2.4 billion, fuelling concerns that the strength of the pound is undermining efforts to increase exports. A small rise in exports in the month failed to offset a dip in April that had already sent a worrying signal that the booming domestic economy was having little impact on the trade balance. To put it in perspective, Sterling has jumped from a low of around GBP/USD 1.40 in the aftermath of the financial crisis to GBP/USD 1.71 this week. Diving into the figures, exports of goods to countries outside the European Union crept up by GBP 200m in May, but by less than the value of imports, widening that element of the deficit to GBP 4bn. Analysts had predicted a contraction to GBP 3.4bn.


Over in the US, it seems that Federal Reserve officials have decided to end its asset purchase program in October, assuming the economy stays on track, according to the minutes of the June meeting released Wednesday. According to the plan, the Fed will make a USD 15 billion final reduction at its October meeting, after trimming it by USD 10 billion at each meeting up to that point. After a discussion of its exit plan, Fed officials generally agreed to keep reinvesting the proceeds of securities that mature on its balance sheet until after it had increased the base rate of interest.


Finally, despite the rather long winded German victory in Brazil on Sunday, it seems all is not totally perfect in Europe’s number one economy. German industrial output dropped for a third month in a row in May, amid signs that the economy is starting to lose momentum. Production, after being adjusted for seasonal swings, fell 1.8% from April according to the Economy ministry in Berlin. Meanwhile, manufacturing fell 1.6%, with intermediate-goods production dropping 3% and consumer-goods output down 3.5%. However, Investment-goods production rose 0.3% and energy output was up 1%. This large downside shift in Industrial and Manufacturing production has been put down to the timing of the May 1 holiday, and should only be temporary, or so say the Economy ministry. It does continue to highlight however the fragility of the European recovery, and should serve to curtail the hope of Euro bulls for a reversal in the Euro’s current fortunes.


GBP This Week


We have an interesting week ahead from the UK with the usual mid-month jobs report coupled with Mark Carney speech from the Bank of England. Starting on Tuesday, Mark Carney is scheduled to speak before the treasury select committee, where no doubt they will revisit the proposed threat from the housing market. Also, we expect some questions also on the timing of any potential rate hike, as well as any extraordinary measures to attempt to cool the housing market. With any interest rate speculation, markets will react violently should we change our expectations. Therefore, expect any further hints on timings and/or measures to impact markets accordingly.


On Wednesday we have the unemployment rate and claimant count data for the UK, however we expect very little change from last month’s figures. The markets expect a continued drop in claims by roughly 27.4k, leading to the unemployment rate remaining at 6.6%. Despite no change being expected, it is important to note that the claimant count figure is still in decline, indicating job creation continues to remain strong and the economy is continuing on track. With this in mind, while we do not expect a vastly bullish outcome expect some significant Sterling support.


USD This Week


We start our USD week on Tuesday with the all-important retail sales figure, potentially giving us a good gauge of where US GDP is moving this quarter. This month’s release is expected to move higher towards 0.6% following the 0.3% seen for April, and would reflect a fifth consecutive positive figure. This goes some way to explaining the strength we have seen in indicators such as GDP recently, and should repair somewhat the dire picture we saw with Q1 GDP a few months ago.


Moving to the Consumer Sentiment survey on Friday, we expect this month’s figure to come in at 83.2, following a figure of 82.5 last month. Given that this indicator usually plays “second fiddle” to retail sales, alongside a relatively flat increase in the headline figure, we doubt that it will create much volatility in the markets.


Finally, Janet Yellen is addressing the Senate Banking Committee for the Fed’s semi-annual monetary policy report. With the focus of markets shifting from asset purchases to interest rates in recent months, it will be interesting to hear her answers on when the US is likely to start increasing rates. Yellen has always been keen to stress that rates will rise gradually and there will likely be sometime between the end of asset purchases and the start of the rate hikes. However, with economic indicators pointing to a flourishing US economy, there is the potential for this timeline to be pushed forward somewhat. We suspect that she will indicate rates are likely to be risen in the first quarter of 2015, however we doubt that she will be this specific as it would without doubt cause quite a stir on USD crosses.  


EUR This Week


In Europe, the only release of note is the CPI reading, which should shed some more light on where the ECB’s core economic indicators stand. Markets are looking for another figure of 0.5% this month, matching last month’s release.


Before CPI however, we have a speech scheduled by Mario Draghi at the committee on economic and monetary affairs at the European parliament. With Draghi having recently implemented a whole portfolio of inflation busting measures aimed at minimising deflation, it will be interesting to get some more details regarding those steps and what impact he expects them to have on the market. I would suspect that some of the questions will also surround the potential implementation of a full scale quantitative easing program.  

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