To be in recession or not to be in recession ... that is the question Mr Hollande!

Week commencing Monday 10th February 2014


This week in Brief



  • We have a quiet week in store for the UK economy, with mark Carney’s inflation report and retail sales headlining. We expect little market volatility unless Carney unveils something new whereas retail sales are widely expected to post around the 0.4% mark.

  • In the US we have Janet Yellen’s first appearance as the new Fed chairwoman when she due to  testify on the Semi-annual Monetary Policy Report before the House Financial Services Committee. Meanwhile, retail sales and the preliminary UoM head up the economic data side towards the end of the week.

  • Again, a quiet week for Europe with GDP numbers the only releases worth watching. German and EZ growth is expected to come in strong however most eyes will be on France and whether they slip back into recession this quarter after posting the dire growth numbers in Q3.


Market Themes & Current Events


We start this week’s news across the pond, where SU job creation slowed sharply over the past two months, turning in the weakest performance in three years and raising the prospect that the economy may be losing some momentum. At the same time however, the amounts of jobs that were created did manage to push the unemployment rate down to a new five year low of 6.6%. Nonfarm payrolls rose only 113,000 last month after a scanty 75,000 gain in December, according to the report. Economists had expected payrolls to rise 185,000 in January and had looked for a big upward revision to December. Instead the December print was revised upward by just 1,000, although November's count was raised by 33,000 to 274,000, the biggest gain since February. While weather was believed to have weighed on hiring in December, it did not appear to be a major factor last month, which begs the question why is the momentum being sucked out of the US labour market? More pressingly for financial markets, how will this impact on the Fed’s bond buying scheme and its gradual tapering. All we can hope is that with its next policy setting meeting not until March 18-19, some of these black economic clouds have been lifted. Welcome aboard Mrs Yellen!


Meanwhile in Europe, an emergency measure that was credited with stabilising the euro has been referred to Europe's top court. In an apparent attempt to set the terms of the European Court's deliberations, the German court in Karlsruhe said on Friday there was good reason to think the plan exceeded the ECB's mandate and violated a ban on it funding governments. The ECB's Outright Monetary Transactions (OMT) programme, which was announced by President Mario Draghi in September 2012 at the height of the sovereign debt crisis and as yet unused, is widely credited with pulling the euro zone back from the brink. Its effectiveness lies in the promise of potentially unlimited amount of sovereign bond purchases, a prospect that calmed fears about the currency area zone falling apart and backed up Draghi's vow to do "whatever it takes" to save the bloc. Despite the referral, the decision in Karlsruhe is widely seen as a defeat for the German Bundesbank, whose president (and fellow ECB Governing Council member) was the only member to oppose the plan.


Sticking with Europe, Eurozone manufacturing grew strongly in January on the back of new orders, with the German economic powerhouse leading the way. The Markit's Eurozone Manufacturing PMI rose to 54 in January, its strongest month since May 2011. Unfortunately however, France failed to break through the 50 level of expansion.  Greece's factory sector also finally returned to growth for the first time in more than four years, fuelling hopes that the country's long slump could be easing. The report also saw manufacturing expansion in Italy, Spain, the Netherlands, Austria and Ireland. With this in mind, estimates on 2014 GDP growth for the zone are now sitting at 0.4 – 0.5 percent in the first quarter of this year, potentially marking the end of a solely German led economic recovery.


Finally, the UKs trade deficit plunged in December to its lowest since July 2012, driven by unpredictable goods such as aircraft, but smaller-than-expected manufacturing growth underscored the challenge of rebalancing the economy. The ONS said Britain's goods trade deficit was GBP 7.72 billion in December. This was more than GBP 2 billion narrower than a month before and much less than the GBP 9.3 billion forecast by market commentators. The fall of just over GBP 2.5 billion in the overall trade deficit, including services, to GBP 1.03 billion was the biggest monthly decline since records began in 1998. Diving into the ONS report, 2.7%of the jump in the volume of goods exports in December was helped by oil, chemicals and aircraft while a 5.2% fall in imports was pushed down by lower imports of erratic items such as aircraft and ships. Separate data from the ONS however on Friday did highlight the difficulty of reviving key sectors of the economy, with manufacturing disappointing markets. Manufacturing did picked up in December, led by production of pharmaceuticals, refined petroleum products, food, beverages and tobacco, but not by as much as economists had expected. It seems therefore that despite the good news, the UK economy still has some way to go to prove it has reach the escape velocity needed to finally blast out of the economic crisis.  


GBP This Week


We have very little due to be released from the UK economy this week, with the BRC retail sales monitor for January the only release of note. Recently we have seen some encouraging signs with regards to consumer spending, and therefore have no doubt that this figure will also impress. We therefore are following market sentiment and are expecting to see a print roughly in line with December’s 0.4% print.


We also have Mark Carney’s quarterly inflation report, however we do not expect this to stoke up much volatility in the marketplace. This is principally because the Bank of England’s projections recently have been pretty diabolical (sorry Mark!) thereby not making them overly reliable. Secondly, we already see that the UK economy is performing well and inflation is sitting roughly in line with the Bank of England’s current inflation target. The only threat to markets would be any shift in forward guidance policy, especially as unemployment stands a mere 0.1% above the threshold for when they will start considering interest rate hikes.    


USD This Week


In contrast to the UK and EZ economies, the US has an extremely busy week ahead. The highlight of the week will almost certainly be on Tuesday, where the new Fed chairwoman Janet Yellen is set to testify on the semi-annual monetary policy report in front of the House Financial Services Committee on Capitol Hill. Her prepared 90 minute speech we suspect will be rather vague as to the future direction of the Fed, so we will turn out attention to the Q&A session afterwards. While we doubt that we will get a big announcement on Tuesday (such as a commitment to taper the remaining bond purchases), we will get the first reaction of the poor job creation figures posted last week. This could provide significant hints about the pace of tapering going forward, which as mentioned earlier is starting at the next meeting on 18-19 March.


On the economic data front, we will look forward to the release of the January retail sales and core retail sales figures. We expect both of these to show growth of 0.3%, however in our view risk is to the upside on these, especially when December’s figures posted so strongly despite the terrible weather.


We should also see a reasonably strong uptick in the UoM consumer sentiment figure on Friday, hopefully boosting risk on trading as we push deeper into February. In January this fell slightly to 81.2, following a sharp spike higher the month before. I expect this to stabilise this month with improvements then coming over the next few as we approach summer.


EUR This Week


We have a reasonably quiet week for the Eurozone with only a handful of reports to watch out for. The biggest of these comes on Friday, with the preliminary release of the fourth quarter GDP figures for Germany, France, Italy and the Eurozone as a whole. The French figure will be the most keenly watched we imagine, with the country potentially tipping back into recession after contracting by 0.1% in the third quarter. Worryingly, the data in the fourth quarter was not overly encouraging, so the risk that the country does fall back into recession is certainly plausible.


In contrast, the Eurozone is expected to have growth by 0.2% in the fourth quarter, which is in line with expectations for the next few years as the periphery continues with austerity efforts and reforms. Germany, the engine for growth in the Eurozone, is expected to have grown by 0.3% in the quarter.

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