The FOMC to extend QE? Welcome to the world in 2015!
Week Commencing Monday 27th October 2014
This Week in Brief
There are no releases of note from the UK this week.
In the US we expect the FOMC to continue its current course of tapering QE while GDP for the third quarter should continue to decline marginally.
We have a mixed bag from Europe this week with inflation set to increase marginally over the month while German retail sales are expected to fall. All in all we expect a reasonably bad week for the single currency.
Overriding Market Themes
Starting with the UK, gross domestic product growth slowed to 0.7 percent in the third quarter, down from 0.9% in the previous quarter and in line with economists’ expectations. The UK economy is now 3.4 percent bigger than its previous peak in the first quarter of 2008, but manufacturing is still 4.1 percent behind and construction 8.2 percent short. Despite the slightly slower growth, the UK still looks set to be the fastest growing advanced economy this year. The slowing however will do little to allay fears that the Eurozone’s malaise could hinder the UK economy. Diving into the release, The dominant services industry, which accounts for over three quarters of the economy, showed the sharpest slowing, with growth dropping to 0.7 percent from 1.1 percent. Manufacturing growth meanwhile dropped to 0.4 percent on the quarter from 0.5 percent, its slowest rate since the first three months of 2013. In more bad news, data last week showed retail sales fell in September, while an industry survey also showed exporters took a hit from Europe's slump. A mixed bag therefore last week for the UK and Sterling reacted accordingly with very volatile major pairs all vying to find some form of direction. There we were last month thinking Sterling was sky bound, how 4 weeks can change a market!
Over in the US, CPI data last week rose marginally during September as energy costs fell broadly, painting a reasonably weak inflation picture that should give the Federal Reserve plenty of room to keep interest rates low for a while. The US Labor Department said on Wednesday its Consumer Price Index edged up 0.1 percent last month, after declining 0.2 percent in August and pushing the annual rate to +1.7 percent year on year. Inflation has weakened in recent months after strengthening in the second quarter. However economists have put this down to a strengthening dollar and slower economic growth in China and the Eurozone dampen imported price pressures. This has lead financial markets to expect the first interest rate hike in the fourth quarter of 2015 instead of the second quarter.
Finally moving to Europe, Germany's private sector grew faster in October as manufacturing rebounded, suggesting Europe's largest economy may be gaining momentum in the fourth quarter. The Markit’s flash composite Purchasing Managers Index, which tracks growth in the manufacturing and services sectors that account for more than 60 percent of the economy, climbed to 54.3 from 54.1 in September, well above the 50 threshold indicating expansion. Germany's economic outlook has deteriorated through 2014 as shown by myriad of grim looking economic data and weak sentiment gauges, sparking renewed concern for a Eurozone that is barely generating any inflation and require considerable support from its top economic powerhouses. The picture was not as rosy for the services sector, with the subindex slipping to 54.8 from 55.7. Service sector optimism has also been surveyed and is at its lowest level since December 2012.
GBP This Week
There are no releases of note from the United Kingdom this week, with all eyes firmly on the FOMC statement in the US. We expect this event to be the main driver of Sterling pairs, with GBP/USD tracking EUR/USD general sentiment. GBP should continue its somewhat subdued bull run against the EUR as we move deeper into the week. Expect GBP to test key EUR support levels should we see a poor inflation number on Friday.
USD This Week
In the US the main event is the FOMC statement on Wednesday, with many expecting to see Quantitative Easing finally coming to end. Previously it had been somewhat of a foregone conclusion that QE would have ended, however with deflationary pressures from the EU and China, many are calling for an extension. We do not expect this to happen, however if there is an extension expect markets to take it as a bearish signal and stoke up some significant volatility on major crosses.
Moving to Thursday we expect the US GDP figure to fall back towards the 3.1 percent region after the previous number of 4.6 percent. Despite the decline in GDP figures, the country remains set to become the fastest major economy in 2015 and this should further strengthen the US Dollar as we draw closer to year end.
Finally we will be watching the core PCE price index release on Friday, with many expecting to see the indication pull back from the 2 percent levels seen previously. This is widely regarded as the Federal Reserves preferred measure of inflation and as such should have a direct impact on sentiment within the FOMC and Fed. Should this indicator move lower on the month, it could spark a renewed dovish outlook from the US central bank.
EUR This Week
In Europe the main event by far is the CPI flash estimate, with even more pressure plunged on Mario Draghi should disinflation persist. Markets are expecting this figure to alleviate some of the recent downside risks, with a print of 0.4 percent expected. Either way, given this indicators relationship to current ECB monetary policy thought, the print is expected to create some significant volatility with any move lower likely to spark fresh calls for further actions from the ECB.
We then move our focus to the German retail sales figures on Friday which should provide us with a further update on how the EU’s largest economy is performing. Unfortunately we expect to print to come in around -0.8 percent on the month, and while this is no surprise (September is usually regarded as a slow consumer month) any negative print is likely to be taken poorly by international markets.