The FOMC dominate proceedings this week as we ask the question "when will they start tapering"?
Week Commencing Monday 28th October 2013
This week in Brief
- In the UK the only release of note is the Manufacturing PMI figure on Friday, where we expect to see a continued decline from the 56.7 post in August, to 56.5 this month. Despite the decline Sterling should still be performing relatively well on the back of the GDP release last week.
- In the US we have the FOMC meeting, Retail Sales and the ADP non-farms. The FOMC is likely to be seen as the highlight of the week with any potential hints on tapering likely to be taking the lead. Retail Sales seems set to continue to decline, with a similar story for the ADP figure also likely.
- We have a very quiet week for Europe ahead with the EZ unemployment rate being the only release that could possibly affect market sentiment. With Spain emerging out of recession we are slightly more bullish on this indicator, and especially seeing the EUR’s resilience against GBP after the bullish GDP release last week, we expect more of the same this week.
Market Themes & Current Events
UK economic growth accelerated to its fastest pace in more than three years in the third quarter as the recovery continued across all main sectors. GDP rose 0.8%, up from 0.7% growth between April and June and the most since the second quarter of 2010, according to the ONS. Within the figures, data for construction was up 2.5% over the quarter, the second successive quarter of growth after a volatile performance over the past year. The services sector, which represents three-quarters of economic output, grew by 0.7%. Output from services is now 0.4% above its pre-crisis peak in the first quarter of 2008. Finally, the ONS said that production grew by 0.5% while manufacturing improved 0.9% in the third quarter. This presents mixed messages for the UK, which was the first of the ‘Group of Seven’ nations to report GDP for the third quarter. The country is experiencing its slowest recovery in a century, having recouped only two thirds of the output lost during the financial crisis. GDP in the third quarter was 2.5% below its pre-recession high in the first quarter of 2008. Only Italy is further behind in the G-7, while the U.S., Germany and Canada are back above their previous peak levels of output. It seems that there is still some more work to be done in the land of hope and glory!
Sticking with the UK, The Bank of England intends to boost the availability of finance for banks, a move which is hoped to continue to increase the liquidity of credit markets. The BOE will expand the range of collateral it accepts in its facilities and offer money for longer periods on cheaper terms, Carney said in a speech in London late yesterday, saying the bank was ‘open for business’. Officials will also consider making some liquidity tools available to a wider array of institutions. The hope is that this increase in liquidity should filter down to the SME market, further boosting economic growth. Let us wait and see if it helps!
Moving to Europe where the Spanish economy has emerged from recession after growing for the first time in more than two years, according to estimates from the Bank of Spain. Spain's GDP grew by 0.1% in the third quarter; however GDP was still 1.2% lower in the quarter compared with the same period last year. This fact did not stop Spanish government bonds rising however, pushing 10-year yields to the lowest level in three weeks, resting at 4.13% at the end of Friday’s London trading session. Politically, this is a life saver for the current government, as signs of export-led economic growth bolster Rajoy’s ratings, half-way through his four-year term. So far his attempts to convince Spaniards that his unpopular austerity policies will allow the nation to leave the sovereign debt crisis behind it have been met with undue scepticism, although now opinions may be changing. If this release is a victory however, he is far from winning the war! Rajoy still needs to battle a debt burden that will approach 100% of economic output next year and the 56% youth jobless rate. With the IMF forecasting that unemployment will remain above 25% until 2018, he certainly has his work cut out for him.
We have a fairly quiet week for Sterling, with the only event of note coming in the form of the manufacturing PMI figure, due on Friday. Market forecasts expect a fall in this figure, from 56.7 to 56.5, which would represent the second consecutive reduction in this measurement following six months of rises. It may also indicate a new trajectory for the indicator. It may well be possible, given that we saw a fall of 0.4 last month, a further negative release may provide markets with a more bearish outlook on the UK economy moving forward. To be fair, whilst manufacturing remains an important figure, the response is likely to be muted compared to the services sector PMI figure which is released the following week.
US Dollar Outlook
We have an important week for the US ahead, with both the FOMC, Retail Sales and the ADP non-farm payroll figures all due to be released. We start on Wednesday, where the FOMC releases their latest decision with regards to monetary policy. It seems clear that the decision not to taper in September has been the correct one, with the government shutdown and poor jobs data hitting the headlines in recent weeks. Given that the impact of the shutdown in economic terms remains unknown, it is likely that the committee will decide to hold off any tapering moves yet again this month, until we see a continued strengthening in both the employment and sentiment figures. With this in mind, the market expects no chance in either asset purchases or interest rates this month.
On Tuesday, we are expecting to receive the latest retail sales numbers, where the September print is expected to show a slightly worse figure of 0.1% after a rise of 0.2% in August. The ability of the US to keep a strong retail sales figure is critical to a sustained economic recovery, and as such expect traders to pay close attention to this release. Looking at the recent trajectory, we agree with market sentiment in so much as it has had a bearish run for some months now. There is also the possibility that it will push into negative territory, which would undoubtly give rise to some significant USD selling, so expect some volatility if this were to happen.
The final release of note is the ADP non-farm payroll numbers on Wednesday. We are hearing that market expectations point towards a reduced figure of 150k, down from the 166k posted last month. This would be the lowest level recorded in five months and once again provides the US and recovery bears with more fuel to add to the fire.
Much like the UK, we have a similarly quiet week in the Eurozone where the range of economic releases seems unlikely to provide much volatility in European markets. The only release of any note (and which could have an impact on market sentiment) is the Eurozone unemployment rate, due on Thursday. Recent strength in the region has been notable, particularly with Spain finally moving out of recession in Q3. We are expecting to see little in terms of movement from last month’s unemployment level of 12.0%. However, given strengthening of the employment conditions in countries like Spain, risk on this indicator appears to be to the upside.