The German Constitutional Court holds Europe's future in its hands ... anyone getting deja vu!!

Week Commencing Monday 06th January 2013


This week in Brief



  • In the UK we expect Services PMI to follow suit and print a softer than expected figure for December while the Bank of England is expect to leave its current monetary policy unchanged.

  • In the Us, we expect some weaker job creation numbers out from the usual monthly jobs reports, while Janet Yellen is widely expected to be successful in her nomination as the next Fed Chairperson.

  • In Europe, the German Constitutional Court hearing is headlining alongside the usual ECB monthly meeting. We expect no policy change from the ECB while the verdict of the Court ruling on the OMT is widely unknown.


Market Themes & Current Events


UK manufacturing continued to see strong growth last month according to the latest Markit/CIPS PMI print last week. While the figure was slightly down from November's near three-year high of 58.1, it printed an impressive 57.3, well above the 50 mark that indicates expansion. This was the ninth successive month of growth for the UK manufacturing sector, and was considerably ahead of its European rivals (with France in particular posting a dismal 47.0). No doubt that signs of an economic rebalancing from debt fuelled spending towards manufacturing and growth will be welcome news for George Osbourne, who is enjoying a resurgence in popularity as the economy has turned a corner.


George Osbourne should also be happy with Friday’s Construction PMI release, which saw the sector record a level of 62.1 last month. Again, although this was below the 62.6 figure that was printed in November, it continues to show significant growth in this crucial sector. Diving into the data, the survey indicated the biggest growth in commercial projects since before the financial crisis. House building remained the fastest growing area of the sector, echoing a pick-up in housing market activity and the government scheme to boost access to mortgages. Also, separate data from the Bank of England on Friday showed mortgage approvals hit a new five-year high in November.


Sterling Outlook


We have a relatively quiet first week of the month for Sterling, with the all-important Services PMI set to be released on Monday and dominating weekly proceedings. On the whole, last year was a fantastic year for services growth, with the PMI beating market expectations 9 of the 11 months while remaining above the critical 50.0 mark for the whole year. This positive trend is expected to continue for December with market commentators speculating a print of 60.7. We remain cautious however, especially as both other PMI’s come in slightly softer that their estimates. Nevertheless, any release over 60.0 is likely to continue to bolster Sterling against both the Euro and the Dollar.


We then move to Thursday and the usual monthly Bank of England MPC meeting. There is little anticipation of a change in policy stance from the committee this month, given the forward guidance model adopted by the Governor Mark Carney. Traders instead are likely to look for anything new out of the accompanying statement or Q&A session to influence market direction.


US Dollar Outlook


We have a very busy week ahead for the US, with the usual jobs releases coupled with the Federal Reserve Chairperson Nomination vote and the FOMC. We start however with ISM Non-Manufacturing, which is widely expected to come in at 54.6 against its previous print of 53.9. In stark contrast with its manufacturing counterpart, this ISM release fell in November to its lowest level since June, hitting 53.9. Although the index is still well above the expansionary 50 mark, the sector’s obvious slowing suggests that the economy may hit some turbulence in the new year. As services claim a bigger share of economic activity than that of manufacturing or construction, should we see a soft number in Monday’s release we expect Friday’s bullish tone to start ebbing away.


Also on Monday, we are due to hear from the Fed who the next appointed chairperson is. Janet Yellen remains the odds on favourite and should she succeed, she will be the first female appointment in its 100 year history.


Moving to Wednesday’s employment releases, we expect the ADP non-farms to show a December print of 199k versus the 215k seen in November. A similar result is expected in Friday’s non-farm payroll release, where despite the previous two releases coming in above the 200k mark, market forecasts point to a fall of only 194k for December. With these two releases in mind, we doubt that there will be any shift in the current headline rate of unemployment, currently sitting at 7.0%. However given that the Fed’s tapering strategy is directly linked to this release, we expect it to not only be the highlight of the US week, but also potentially the most volatile of the week. If we see any downside revisions in this number, the chances of a further taper increase dramatically.


Euro Outlook


We have a surprisingly busy week for Europe as we await the German constitutional court hearing along with the ECB monthly rate decision. Starting with the German Federal Constitutional Court, which is set to release its final ruling as to whether the ECB’s OMT (Outright Monetary Transaction Policy) is constitutional under German law. The OMT program is seen as one of the key upcoming policy decisions the ECB is developing, whose main purpose is to reduce bond yields across the zone as a whole, in turn reducing the likelihood of another crisis developing in the future. The issue being taken to the German court is that the OMT system supports the ability to buy ‘unlimited’ quantities of bonds from embattled economies, therefore removing the effectiveness of the yield in demonstrating the quality of the debt. The plaintiff states that this gives the ECB the ability to artificially instil confidence in a country, regardless of the risk profile attached to the underlying instrument, allowing for a potentially misguided belief that austerity measures such as those seen throughout numerous nations may not be necessary as long as cheap credit is freely available. Ultimately it seems unlikely that the OMT will ever be utilised, especially as the majority of EZ economies are on the mend. However, if the program is found unconstitutional it is likely to be a unwelcome knock to what still remains a fragile European recovery.


On Thursday, the ECB’s rate announcement will likely feel similar to the BoE in so much as we are unlikely to see much in the way of actual policy adjustments. This theory is compounded as we remember that Mario Draghi shocked markets in November when he decided to cut the headline rate of interest following a worrying fall in EZ inflation numbers. Since November, worries of deflation have subsided considerably and therefore we are likely to return to normal, where Draghi uses these meetings to talk down the value of the euro with mentions of negative rates and so forth. 

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