The "Celtic Tiger" awakens sparking hopes that the EZ is back in business!
Week Commencing Monday 15th July 2013
This week in Brief
- We have a busy week for the UK with both the Bank of England and Retail Sales in focus. Markets expect a mixed bag in response however we remain optimistic that Sterling can continue to maintain its position above the 1.50 mark on Cable and 1.15 mark on GBP/EUR.
- The US is dominated by two speeches by Ben Bernanke on Wednesday and Thursday, so expect significant volatility as he is speaking. The Q&A on Thursday is the highlight and markets will be looking to see if he is a dove once more!
- We have a quiet week in the Eurozone with German and European ZEW the highlights. More likely to be in focus is the continued political events in Spain as Rajoy continued to battle corruption allegations.
Market Themes & Current Events
The UK economy will grow faster this year than previously forecast as consumers cut into savings to keep spending, according to the Ernst & Young think tank known as the Item club. The UK economy will expand by 1.1% in 2013, an increase of 0.5% against April’s estimate, whilst next year’s growth is expected to strengthen to 2.2% and 2015 to 2.6%. This is mostly down to the expected expansion in consumer spending coupled with Mark Carney’s vow to keep interest rates at a record low for longer. Diving further into the figures, we expect consumer spending to rise 1.6% this year, whilst savings ratios to drop to 5.6% (from a previous high of 6.3%). It certainly seems that the UK economy is back on the mend, although growth continues to remain fragile and highly dependent on stability across the channel. We seem to have our house in order, let us hope the Europeans have their in order too!
In terms of having houses in order, it seems that Europe is in store for some good news! Standard & Poor's has upgraded its credit outlook for the Republic of Ireland from stable to positive, stating that the country's debts are falling faster than expected. The emerald isle, which currently has a credit rating of BBB- (far from its AAA rating it lost in 2009) is now facing the prospect of being Europe’s first country to be awarded a credit rating upgrade. That said, while there are some positive signs of recovery, such as falling unemployment and a stabilisation in real estate prices, its economy contracted by 0.6% in the first quarter of 2013 as exports slowed and domestic spending shrank. This pushed the country back into technical recession for the first time in four years. Despite this however, the S&P forecast the economy to grow potentially by 2% this year, in stark contrast to other European nations struggling economies.
Across the Atlantic, The US government reported a budget surplus of USD 116.5bn in June, the most in five years, sparked by improved tax receipts and the sequester cuts. Government spending has plunged by 47% since January on the back of the Obama administrations government cuts and increases in income and personal taxes. Despite that strong month, the Congressional Budget Office forecasts the annual deficit will be USD 670bn when the budget year ends at the end of September. This has pushed economists to believe that the US government is once again likely to hit its debt ceiling in the autumn. The congressional approval needed to extend the ceiling is likely to be hard for Obama to win, especially after the narrow victory he secured to agree the sequester in the first place. Expect this to add further uncertainty to the US economic and political outlook, and impact the US Dollar accordingly.
Finally back to home soil as UK home sellers raised asking prices for a seventh month to a record in July, according to Rightmove, which said values will increase twice as much as previously forecast this year. Real estate priced rose by an average of 0.3% (GBP 253,658), and now could climb by as much as 4% this year. The report points to measures by the Bank of England and the government to ease the supply of credit as being the main accelerant within the sector, boosting demand for property just as the economy is shows signs of strengthening.
We have an interesting week ahead for the UK, with most eyes focusing on the Bank of England’s outlook and how Mark Carney will shape future monetary policy. With this in mind, the CPI release on Tuesday followed by the MPC minutes on Wednesday which are likely to provide the volatility within the markets. We also have unemployment and UK retail sales this week too, both of which should act as Sterling drivers this week.
Starting with CPI, inflation rose in Mervyn’s last month in office to a disappointing 2.7% and we expect to see this trend continue. Market expectations are set at inflation hitting 3% this month, which would provide little allowances for Carney to implement significant monetary policies for the time being. Given the recent climbs in this figure, we cannot rule out surprises to the downside, however any figure above the 2% mark is likely to continue to push out monetary policy expansion for the short term.
Moving to a busy Wednesday, we have both the Claimant Count Change as well as the MPC votes for Mark Carneys first meeting. The votes are expected to show a reduction of members voting in favour of additional easing, specifically Mark Carney voting against the idea! However, given the delivery of dovish forward guidance in association with the recent monetary policy decision, there is the potential for a further surprise for this release. Moving to the Claimant Count, we expect to see the number of people claiming benefits to continue to decline, albeit as a slightly slower pace than previously anticipated. We expect to see a fall by approximately 7,900, slightly below Aprils 8,600.
Lastly, Thursday’s retail sales figure is expected to show a fall from last month’s highs of 2.1% to a more modest 0.4%. We do believe that there could be significant leeway in this figure however this month, and are slightly more optimistic than most, especially as credit markets ease and weather induced consumer sentiment hits the high street.
On the currency front, the Pound had a good week against the US Dollar (not so good against the Euro!) having taken advantage of some disappointing US data. The greenback however has been quick in rebounding of late, and with most US numbers looking solid we fear it could bounce back this week (especially if the key UK releases disappoint the market). Against the Euro, the Pound continues to be locked at the lower end of our trading range, with it unlikely to weaken off dramatically more in the absence of horrific UK data. We expect GBP/EUR to continue to trade here for the foreseeable future, with the pound slowly ebbing higher as we approach the MPC voting intentions on Thursday.
US Dollar Outlook
Similarly as the UK, the US is also releasing its much anticipated Retail Sales figure this week. The mark expectation currently sees a marginal expansion to 0.7% from 0.6% in the previous month. We do not expect this figure to deviate to greatly from market expectations, however should continue to show markets that the US economy is on track and probably the healthiest out of all major developed nations.
We then have two speeches from the Federal Reserve Governor Ben Bernanke at the semi-annual monetary policy report in Washington. Bernanke has been one of the USD markets main drivers of late, most recently with dovish comments on Thursday following hawkish comments in relation to the potential tapering of the countries asset purchasing facility. The initial speech is a prepared statement, which typically provides less market reaction than the Question and Answer section which follows. The ability to ask unscripted questions always throws policymakers off guard, and is likely to derive a response which has the ability to significantly influence the markets, especially at a time where US expectations of tapering are dominating market sentiment.
We have a quiet week in the Eurozone, with German ZEW economic sentiment the main focus of the week. We expect a further rise in the indicator this month, potentially for a figure just below the 40 mark as compared with 38.5 posted in June. It is worth noting that this figure has grown at a slower pace than market expectation for some time now, and thus has the potential to prove slightly disappointing to markets this time around.
We are then followed by Eurozone ZEW, which is expected to rise from 30.6 to 31.9. Although seen as less important than its German counterpart, the Eurozone ZEW measures broad European sentiment, and therefore any expansion is likely to add a positive tone to European markets as we move towards the end of the month.
There are considerable risks to the downside for the Euro as we move into the third week of the month. Specifically Germanys lack of solid growth, the Portuguese crisis and the Spanish government scandal. As the ECB continues to maintain a clear downside bias, and has made clear that lower interests rates further is still on the table, we remain bearish on the single currency.