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Week Commencing Monday 2nd November 2015
Overriding Market Themes
Growth in the UK economy slowed in the third quarter, posting a GDP figure of 0.5 percent versus the 0.7 percent growth figure posted in the second. These results undershot economists’ expectations for growth of 0.6 percent, which would have taken the year-on-year GDP rate down to 2.3 percent from 2.4 percent in June. According to the ONS, the construction and manufacturing sectors detracted from the growth rate most significantly, with construction activity contracting by 2.2 percent and manufacturing declining by 0.3 percent over the third quarter. In contrast to manufacturing and construction, the UK services sector continues to hold strong, growing by 0.7 percent between June and September. The largest sectors to gain within this group were business services and the finance sector, where activity increased from 0.6 percent in the second quarter to 1 percent between July and September. Mining and quarrying also saw a 2.4 percent increase in activity while waste management grew by 1.2 percent, both partially offsetting the disappointing decline in manufacturing. These slowdowns will put further pressure on the Bank of England to push back the expectations of an interest rate rise in the near-term.
A similar situation has been reported in the US, where US economic growth slowed sharply in the third quarter. GDP grew 1.5 percent annually between July to September, significantly lower than 3.9 percent in the second quarter, according to the report published by the Commerce Department. This was primarily due to businesses cutting back on restocking warehouses to work off an inventory surplus. Consumer spending remained robust however, with a posting of 3.2 percent rate after expanding at a 3.6 percent pace in the second quarter. The slowdown came at the same time employers eased hiring after adding more than 200,000 jobs a month for a year and a half. Measures of industrial output show the manufacturing sector bordering on a contraction, reflecting the influence of a stronger dollar and China’s slowdown. Finally, retail sales declined in September and are up less than 1 percent from a year earlier. All of this gives the Federal Reserve a job in ascertaining when the economy can withstand an interest rate hike. Very much like the UK, we expect this hike to be pushed back until the beginning of next year, especially given the above. Once thing is certainly apparent, things are not as rosy as the media may appear in the world’s largest economy!
Finally, Eurozone inflation has returned to zero in October from September’s surprise -0.1 percent print. This is important as fears of continued low inflation could lead the ECB to extend its QE stimulus program. The bond purchases are scheduled to run at least through September 2016, but the ECB has indicated it could decide to expand that program or deploy a different form of stimulus at its December meeting. Eurostat said the slight uptick in inflation was attributable to higher prices for food, alcohol and tobacco, while energy prices fell by 8.7 percent year-on-year. Eurostat also released fresh job market figures for the euro area, stating that unemployment had fallen to the lowest level since January 2012.The trading bloc's jobless rate dropped to 10.8 percent in September, with the number of people out of work in the area totalling 17.3 million. Youth unemployment remains at the astonishing rate of 22.1 percent however.
GBP This Week
We have a busy week ahead for the UK as we wait for PMI’s and the Bank of England rate decision and meeting minutes. Starting with Manufacturing, we expect a slightly lower print this month of 51.3 versus 51.5, highlighting the current slowdown in economic growth signalled by the government. Construction should also see some downside pressure, with a print expected at 58.8 versus 59.9. Finally, the all-important should be a positive news story with expectations at 54.5 versus the disappointing 53.3 posted last month.
We expect the Bank of England to keep rates on hold and QE at its current levels. The minutes will be more interesting, with the hawks still only represented by 1 vote and the rest voting to maintain the banks current posture. Any deviation from this would send a powerful signal to markets that the UK could be on track to raise rates sooner than expected. This would naturally boost Sterling, most notably against the Euro which is already depressed on the expectations of further QE.
Sterling is performing well in markets, having gained a full 3 cents versus the Euro and maintaining its relatively strong position versus the US Dollar. We expect a continuation of the same this week, with Sterling consolidating just above 1.40 while testing US Dollar strength at 1.55.
USD This Week
The US Dollar has continued to gain ground against most majors (with the exception of Sterling, which seems reasonably robust of last). In terms of data, we start the week with ISM Manufacturing PMI, which should show a marginal decline from 50.2 to 50.0. The Non-Manufacturing ISM should also show a decline, posting in the 56.5 region versus the 56.9 print last month. We then shift our attention to jobs on Friday, where we should see Non-farms payroll show a gain of 182k new jobs, while unemployment should come in flat at 5.1 percent.
Given the mixed messages above, we expect Janet Yellens testimony to the Joint Economic Committee in Washington DC to be rather noncommittal. We still believe that a hike is on track for either December (at the earliest) to the first quarter in 2016. Any hints regarding this hike will be well received on currency markets, and should give the US Dollar further impetus to push ahead versus its peers.
EUR This Week
This week Euro data should surround both the October PMI’s and German manufacturing data, in addition to a number of ECB speakers. Starting with Euroarea manufacturing on Monday and Services PMI on Wednesday, we expect a print of 52.0 and 54.2 respectively, representing a mild improvement in the composite PMI from September. German factory orders are likely to increase by just over 2 percent in September, which German industrial production should grow by 0.9 percent on the month.
This relatively positive data is unlikely to deter the ECB from easing further in December, especially when taken in the context of hyper low inflation and the large degree of economic slack. In fact, we expect both Draghi and other members of the ECB to continue with this rhetoric, and as such we expect continued downside movement in the EUR as we draw towards the end of the week.