The world waits as the US Government decide whether to extend our the debt ceiling, or push the world into a financial Armageddon!

Week Commencing Monday 30th September 2013

This week in Brief

  • In the UK we have the usual first week PMI releases, with both Construction and Manufacturing PMI’s all expected to continue to rise. Services made a big push last month, and may be the only indicator to begin to flat line.

  •  In the US, the debt ceiling and budget are the most important events of the week, with resolution critical to the continued recovery of equity and forex markets. We also have a raft of employment data due out, which should continue to demonstrate that the FOMC can taper sooner rather than later.

  •  In Europe, markets continue to react positively to Merkel’s re-election. This week we have a number of peripheral PMI’s which should show continued expansion in both Italy and Spain.   

Market Themes & Current Events

Asian markets have fallen cross the board as fears rise that the US may be heading for a shutdown of government services. The government needs to agree on a new spending bill before the financial year ends at midnight Monday, however political divisions have created a stalemate in the senate. The economic impact of failure to act is unprecedented, leading to a funding gap for many non-essential federal services and staffing.  One of the key areas of debate between the Democrats and the Republicans has been Obama's proposed healthcare law, popularly known as Obamacare. Republicans (who control the House of Representatives) have already been passing laws to complicate the implementation of Obama’s flagship healthcare system. Also, both the government and the Republicans are disagreeing over the extension of the government’s borrowing limit. Earlier this month, Jack Lew said that unless the US is allowed to extend its borrowing limit, the country will be left with about $30bn to meet its commitments, which on certain days can be as high as $60bn. This event is unlikely, however its impact on market sentiment cannot be ignored. Already on Monday’s Asian session, the Japan's Nikkei 225 index fell 1.7%, Hong Kong's Hang Seng and Australia's ASX dropped 1.2%, while South Korea's Kospi shed 0.7% on fears alone. Markets in Europe are likely also to be hit.

Back on home soil and Sterling continues its rise against its peers as Bank of England governor Mark Carney said that he saw no further needs to extending Quantitative Easing. He states that in his view, the recovery had strengthened and broadened, and he did not support the case for more QE. It does seem that the advanced economies are having a better time of it, which should certainly help the UK as the majority of UK exports are to the advanced not the developing world. Minutes from September's meeting of the MPC said that recent economic data and business surveys "provided further evidence" that growth was picking up. Not only would the economy be stronger than first thought in the July-to-September quarter, but the likelihood was that growth would continue to strengthen for the rest of the year, the minutes said. Maybe there is therefore no further need to stimulate the economy, however if I were Mr Carney, I would say “never say never”!

Sticking with the UK growth story, the final revision of UK GDP was released last week, confirming that the economy grew by 0.7% in the second quarter of the year. Construction and Industrial production have led the way as both indicators expanded at their fastest pace for three years. It was not all a bed of roses however, with the pace of consumer spending and business investment all falling during the three months. Despite the mixed message from the ONS, the recovery seems set to continue, with growth forecasts for both 2014 and 2015 being revised higher. We are still a long way from reaching US growth levels, but it seems the UK is back in the frame, with Sterling leading the way on global league tables.

Sterling Outlook

The UK has an interesting week ahead, with manufacturing, construction and services PMI’s all set to be released from Tuesday to Thursday. We start with Manufacturing which is due out on Tuesday, where market expectations point towards a further rise from 57.2 to 57.5. Given that the last five releases have come out better than expected, there is a distinct possibility that we could have another strong figure. Evidently, watch this space.

Moving to Wednesday, the construction PMI figure is a similar story. We had very pleasing readings over the past month or so, which provided for a positive outlook for the sector. Market forecasts continue to point towards a further rise from 59.1 to 60.1, which would represent the highest reading since September 2007.

Finally, the most important of the three is the services PMI release, which is due on Thursday. The services sector remains the key driver of the UK economy and for that reason, the strength of services is vital to a strong recovery. The current figure of 60.5 is at the higest level since the end of 2006, so there is certainly a possibility that the readings will start to flat line at some stage. Market estimates point towards a marginal reduction to 60.4, however with the prior 8 readings coming in above estimate, we are expecting a marginal rise in the figure.

US Dollar Outlook

We have a major week ahead for the US economy, with a number of key releases which are likely to dictate the tone of the coming month. The on-going worries surrounding the US budget seems set to continue as we push closer to the Monday evening deadline. The ability to reach a conclusion will likely dominate this week’s markets, especially during the first part of the week.

We start this week’s economic calendar however on Tuesday, with the ISM manufacturing PMI figure for September. Market expectations are for a reduction from 50.7 to 50.3, which would represent the first fall in five months. The reaction from this fall should be small however, given we have seen an out-performance of market forecasts in the past two months. That said, any push below the critical 50.0 mark would likely bring a significant response in the markets.

Moving to Wednesday, the September ADP non-farm employment change figure represents the first of four major employment releases, where market expectations point towards a marginally higher figure of around 177k. This is generally seen as a less important figure than the other employment releases, however given the recent tapering question, all employment indicators have been pushed into the limelight.

Moving to Thursday, the weekly unemployment claims figure provides a more short term view of the employment conditions in the US. Recently we have had some very strong readings in this indicator, with the last four releases coming in better than expected. We do not see why this trend should change, and therefore we expect the country to post a better than expected figure of 300k this week.

Finally on Friday, the release of the September non-farm payroll and unemployment rate figure should bring about the most volatile day of the week. Given the connotation that the US jobs market is directly likely to the likelihood of an potential October taper, both of these two releases will undoubtly be the most eagerly anticipated event of the week. Starting with Non-Farms, with the previous two releases missing estimates we expect a rise from 169k to 179k this week. Meanwhile, the unemployment rate should remain relatively static, with no expectation for a rise in the figure. Yet given the past two months have seen a fall, there is a potential for a further drop to 7.2%.

Euro Outlook

We have a busy week in the Eurozone also, with the ECB providing their latest monetary policy decision, along with a handful of PMI figures out of Spain and Italy. We start the week on Wednesday, where the ECB will announce the latest interest rate decision. There will almost certainly be no change from the current 0.5% level, so expect markets to remain relatively muted. We also doubt that any previous talks over negative rates are likely to come into reality, especially as indicators are now all pointing towards a Eurozone recovery. The only risk to EUR pairs remains Draghi’s usual dovish push to drive the single currency lower. We think that markets are becoming more used to this tactic, so expect his speech to have less of an impact.

The rest of the week brings Spain and Italy into focus with the release of manufacturing on Tuesday and services on Thursday. The PMI figures will be closely watched, especially given that these two countries represent a significant proportion of the potential risks to the single currency. Both these countries performed well last month, with manufacturing in particular seeing the two economies push into expansionary territory. Italian services PMI is certainly one area of protracted weakness, posting a contractionary figure of 48.8 last month. Market expectations are for a rise in all four measures, which would provide a noteworthy boost for the region. 


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