To vote or not to vote...that is the question Ian McCafferty

Week Commencing Monday 1st February 2016

Overriding Market Themes

We start this week in good old Blighty, with British GDP coming in at 0.5 percent for the fourth quarter of 2015, the weakest growth in nearly three years. The figure was slightly up from the 0.4 percent posting in the three months to September however, and was in line with market forecasts. The figures are likely to ease worries that the UK is facing a sharp economic slowdown, as domestic demand appears to have remained buoyant. This does however suggest that the robust growth of the past two years will not return until the world economy regains momentum. For 2015 as a whole, the UK economy grew 2.2 percent, down from 2.9 percent in 2014 when it was widely regarded as the fastest growing major advanced economy. The global slowdown means Britain is still likely to have remained near the top of the pack in 2015. This was confirmed by the IMF too, with their forecast maintaining that the UK economy would maintain an annual growth rate of 2.2 percent through 2015 to 2017, slightly above the average for other advanced economies. Diving into the figures, industrial output recorded its first fall since late 2012, while manufacturers have reported being hit by weak foreign demand and the strength of Sterling, while mild weather strained energy demand. The UK’s all powerful services sector grew however, posting a 0.7 percent growth on the quarter.

Moving to Japan now where the Bank of Japan became the latest to experiment with below zero interest rates in a bid to boost economic growth. The Japanese Central Bank on Friday unexpectedly introduced an interest rate of negative 0.1 percent, joining the European Central Bank and the central banks of Switzerland, Sweden and Denmark in introducing below zero interest rates. The bank is introducing a three tier system, with different interest rates on commercial banks’ reserves held at the central bank. In a calming signal to markets, only new deposits will face negative interest rates. However, pressures could rise on organisations like pension funds that have to manage long term liabilities. It will also have a huge impact on the Japanese banking sector, with profits being squeezed by the narrowing gap between the rate banks lend at and the rate they take deposits at.

Finally, France posted a 1.1 percent in GDP for 2015, showing the world that the embattled country may finally be out of the doldrums. The Eurozone’s second-biggest economy grew 0.2 percent in the fourth quarter, down from 0.3 percent in July to September period. The drop in GDP was primarily because of the decline in consumer spending on account of a mild weather seen in the last quarter as well as the Paris attacks which hit business sentiment across the nation. In further signals that the economics remain downbeat, consumer spending dropped 0.4 percent in the fourth quarter versus the third, with the Paris terror attacks impacting tourism and the mild weather pushing down clothes and heating expenditure.


GBP This Week

The Bank of England Inflation Report and associated minutes on Thursday are likely to be the highlight of the week, and should most likely be a Sterling negative event. Data and market volatility are likely to mean the bank will maintain their cautious stance with a number of policy makers coming out more dovish than usual (including Mark Carney on the 19th January). The main issue could be Ian McCafferty however, with the potential of him changing his voting intentions to no, pushing the MPC back to a unanimous 9-0 against a rate hike. This would be the worst possible news for Sterling, and expect a “no” vote from McCafferty to push the pound lower versus almost all majors.

In terms of other data, we have the usual PMI released with Manufacturing PMI on Monday expected to come in 51.8. Construction on Tuesday should come in around 57.6 while the all-important services sector on Wednesday should come in at 55.1.

USD This Week

The market appears to be concentrating on non-farm payrolls on Friday, where we expect +205k for the headline number and a slight decline in the unemployment rate to an all-time low of 4.9 percent. Finally, manufacturing and non-manufacturing ISM is due to be published on Monday and Wednesday respectively. We expect the index to move higher on the month from 48.2 to 48.9 as other surveys continue to point towards an improving picture. Non-manufacturing should also rise to 56.0 from 55.3 as solid employment figure continue to point to a recovery in the sector.

EUR This Week

ECB President Draghi will present the central bank’s annual report to the EU parliament on Monday where questions could be raised surrounding the ECB’s policy stance. Policymakers are likely to be concerned given the recent Japanese easing, hyper low inflation and financial market volatility.  Draghi will again then speak on Thursday in Germany, so an important week ahead for economic speeches. In terms of approach, we expect the ECB to cut its deposit rate by 0.1 percent in its March meeting, and any indications from Draghi’s speeches indicating this could be a reality will hugely impact market sentiment.

In terms of data, final January euro area manufacturing on Monday should come in at 52.5 while services on Wednesday should come in at 53.6. Finally, December German factory orders on Friday should see some downside with a posting around -0.2 percent.



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