The US dominate the end of the week with talk of tapering in December rattling markets
Week Commencing Monday 08th December 2013
This week in Brief
- In the UK we have a number of the MPC Committee Members speaking at various events this week, while NIESR GDP is expected to be revised slightly up on the month at 0.8%.
- In the US we have a busy end of the week with Retail Sales, Unemployment and PPI. We expect some decent numbers this week from the US so we expect some extended risk on trading this week as global investors’ confidence in the US continues to grow.
- In Europe we have a relatively light week with the Eurogroup meeting and the ECB bulletin headlining. We expect Mario Draghi to be relatively dovish at this stage as inflation (at least in the medium to long term) remains stable in or around the ECB’s target.
Market Themes & Current Events
We start with the UK and the recent news from the chancellor’s Autumn budget. The government has unveiled its infrastructure spending plan for the next twenty years+, with Danny Alexzander describing it as "a blueprint for Britain". In it, he envisions a GBP 375 billion of investment in motorways, railways, other forms of transport, wired and wireless communications. Much of the money is to be raised through privatization, including the sale of the country's 40% stake in Eurostar, the operator of high-speed trains that use the Eurotunnel beneath the English Channel. This comes simultaneously to a NIP announcement, the insurance industry unveiled plans to invest £25bn in a range of infrastructure projects. The decision by a selection of large mainstream insurers to invest in infrastructure follows changes in European rules pushed for by the UK which incentivise investment in a wider range of assets. This should do much in the way of cementing growth for the foreseeable future and it appears credit agencies are taking note. It seems at least one of our AAA’s may well be safe for another day!
Sticking with the UK, growth in the UK services sector remained strong last month, according to the Markit/CIPS Purchasing Managers' Index (PMI) release last week. The gauge of activity did fall to 60 from 62.5 in October however, indicating a moderate slowdown in growth from last month. The previous print of 62.5 was the highest since May 1997. Meanwhile, construction and manufacturing growth both exceeded market estimates in November This has prompted Markit, the think tank that undertake these surveys, to upgrade their forecasts for economic growth, stating that it will accelerate to 1% this quarter from the 0.8% in the previous three months.
Across to the US now as the unemployment rate falls to a five year low of 7% in November. This has boosted speculation the Federal Reserve may start scaling back stimulus as soon as this month. Payroll figures also showed that 203,000 jobs were created last month, more than predicted, as the US economy displayed encouraging signs of strength. Outgoing chairman Ben Bernanke has previously said that when the unemployment rate dropped below 7% (very much in line with Mark Carney’s current strategy with the UK), the US central bank would end the USD 85 billion a month asset purchasing program. It is still possible however, that the November figures might have been somewhat distorted given that some federal workers, who were counted as jobless in the October owing to the 16-day partial government shutdown returned to their jobs last month. It remains however an encouraging sign that the world’s largest economy remains on track to lead to developed world out of recession.
Finally, Germany's Bundesbank has raised its forecasts for economic growth in the country after announcing that it had raised its forecast for growth this year from 0.3% to 0.5% and for 2014 from 1.5% to 1.7%. This comes however amid mixed messages from the all-important German manufacturing sectors, as German factory orders fell more than economists forecast in October. This signals that although the economy is recovering, the recovery in Europe’s largest economy is particularly uneven. The backward looking orders data contrasts with surveys in November that showed the manufacturing sector expanding at its fastest rate in nearly 2 years and manufacturers becoming more upbeat about their current business situation and their future prospects as they expected exports to gain momentum. That said, it did not deter the Bundesbank from saying the it expected the German economy to remain "fairly strong" in the fourth quarter and first three months of 2014, as long as further European bad news does impact sentiment too greatly. It was also confident that exports should rebound significantly at the end of this year.
We start this relatively quiet week for the UK with Mark Carney speaking at the Economic Club in New York on Monday. Although he is likely to keep his cards somewhat close to his chest with regards to maintaining QE and interest level, analysts will be set for any clues as to the Bank’s future monetary policy shifts. We then shift our attention to the Manufacturing Production figure on Tuesday, which is one of the key events of the week. The indicator posted a gain of 1.2% last month, matching the forecast. The markets are expecting a downturn in the upcoming release, with an estimate of 0.4%.
Also on Tuesday we await the NIESR GDP estimate for the third quarter, which although has been losing ground by dropping 0.7% in October, we expect to be revised up to 0.8% this month.
Finally we have both Martin Weale and Spencer Dale speaking at the end of the week (Wednesday and Friday respectively). Weale will speak at an event in London, where analysts will no doubt be listening for clues as to the BOE’s future monetary policy. Dale will speak at an event in Essex and will most likely be focusing on inflation. Therefore remarks that are more hawkish than expected are likely to be bullish for the pound.
The pound has been looking relatively strong over the past couple of weeks, demonstrated by its remarkable resilience against the US Dollar last week after the excellent US employment print. The British economy continuing to sail through smooth waters, and with nothing on the horizon looking to stir up bad headwinds, we think the news remains good for pound. The only threat remains the Dollar, which could very well get a boost as speculation continued to increase around a December taper thanks to strong employment numbers.
US Dollar Outlook
We have a relatively busy end of the week for the Dollar as we look forward to Retail Sales, Unemployment Claims and PPI. We start the week however with Federal Reserve Bank of St. Louis President James Bullard scheduled to speak in St. Louis. He will speak about economic outlook. Volatility could be expected as this member is neither an extreme dove nor an extreme hawk. His tendency could reflect that of Bernanke.
We then move our attention to US retail sales, which edged up 0.4% during the shutdown period in October, signaling economic recovery was stronger than originally thought. The 0.4% gain followed a flat reading in September as the holidays shopping spree is gaining pace. Analysts are expected a minor climb of 0.1% in October. In the meantime, core sales increased 0.2% after gaining 0.3% in September but again posted a better reading than the 0.1% rise predicted by analysts. Real earnings, adjusted for inflation, increased mildly mainly because inflation fell.
Also on Thursday, the number of Americans filing initial claims for unemployment benefits unexpectedly plunged last week by 23,000, reaching 298,000, raising hopes for a solid recovery in the US job market. However volatility is rising during the holiday season which could also impact job market readings. Nevertheless, the claims report showed the number of people still receiving benefits under regular state programs after an initial week of aid fell 21,000 to 2.74 million in the middle of November, which was the lowest level since December 2007.
Finally, producer price inflation weakened at the headline level in October but edged up at the core due to energy prices. PPI declined 0.2% after dropping 0.1% the month before. The reading was in line with market consensus. However the core, excluding food and energy, strengthened by 0.2% after rising 0.1% in September. The consensus forecast was for a 0.1%. Annually, PPI remained unchanged at 0.3% in October while the core rate increased by 1.4% after rising 1.2% in September.
The highlight of another quiet week for Europe is Mario Draghi’s address at Strasbourg where he is due to give his monthly ECB bulletin. With the ECB stating in its previous monthly bulletin that the Euro zone inflation may remain subdued for some time, Inflation expectations over the medium to long term remained in line with the central bank’s aim of maintaining inflation rates close to 2%. We therefore expect him, when questioned on current monetary policy, to remain relatively dovish for the near term.
We also have a Eurogroup meeting in Brussels on Monday, which will be attended by the Eurogroup President, Finance Ministers for member states, the Commissioner for economic and monetary affairs and Mario once again. The current meeting should not include the Greek issue since Greece has made progress in the financial sector and economic reforms. They may well however concentrate on the banking union issue as well as Frances return to recession.
The Euro is looking relatively calm for a change, having stuck its ground against both the Pound and the US Dollar last week despite the decent data from both countries. Are there headwinds for the single currency? Yes! US Tapering continues to pose the biggest risk to EUR strength however with Draghi saying that there was only a “brief discussion” about a negative deposit rate, there appears to be one less thing to worry about. We therefore continue to remain neutral on the Euro for the time being.