UK GDP dominates this week events as the UK pushes for the third quarter of growth!
Week Commencing Monday 21st October 2013
This week in Brief
- In the UK the markets will likely focus on the upcoming Q3 GDP release on Friday. The general consensus is that the UK economy will grow 0.8% in the quarter; however we believe that this will come in closer to 1%. Expect Sterling to do well should we be right!
- In the US the focus has now shifted from the Federal Shutdown to the continuing debate as to when the Federal Reserve will start tapering QE. On the data side Non-Farms and the Unemployment Rate is dominating with mixed messages expected to be received on Tuesday.
- In Europe the two biggest economies are releasing a swath of PMI data, all of which are expected to be positive for the single currency. The biggest question will be can French Manufacturing push back into expansionary territory? We believe so however there are plenty of headwinds in its way!
Market Themes & Current Events
We start this week’s news with China, where economic growth picked up pace in the third quarter. The world's second largest economy grew 7.8% from a year earlier, up from 7.5% expansion in the previous quarter. Within the figures, the main drivers of growth were increases in industrial output, retail sales and fixed asset investment. This is a welcome boost to the county, where after years of blistering growth; China has seen its pace of expansion slow recently, citing fears that growth may on a downward spiral. Despite the boost, there continues to be concerns over whether the economic rebound is sustainable in the long term, not least due to the continued rise in property prices. According to some estimates, about 25% of overall investment in China goes towards property, making it one of the most important growth sectors. However, the continued surge in prices has fanned fears that asset bubbles may be forming. It is clear that the Chinese therefore, for the time being at least, are driving economic growth globally. However, much like the Japanese in the 80’s, the signs are there suggesting that the party cannot last forever!
Moving closer to our side of the planet, the European Union and Canada have struck a free trade agreement aimed at boosting growth and employment. The deal, estimated to generate over GBP 20 billion of extra trade, will help lower tariffs, streamline regulation and cut red tape. The deal is seen as a precursor to the much larger US – EU free trade agreement which is currently being ironed out between the two economic superpowers. A victory then for Europe, which could certainly use some of the vast raw material deposits which the Canadian currently sit on. One thing is certain, the more trade deals that the European commission can negotiate (especially after the collapse of the Doha Global Trade talks some time ago) the faster the region can get back into the fast lane.
Back on home soil, UK Retail sales grew by 0.6% in September compared with the previous month, following an unexpected fall in August. The ONS pointed towards furniture sales being the largest driver of the rise in sales, owing to an increase in demand within the real estate sector. This year has been a turbulent time for retail sales. In July, the good weather pushed sales up higher than expected, with food and drink leading the charge. Then the following month saw consumers reining in spending, particularly on food, leading to a drop in sales volumes. One thing is certain however, the UK has entered a full on recovery and despite the ‘yo-yo’ retail sales indicators, we believe that positive figures are here to stay. Let’s see if this week’s Preliminary GDP release on Friday will back me up on that one!
Finally, hundreds of thousands of US government employees are back at work after President Obama signed a law ending a 16 day government shutdown and extending the US debt limit. The cross party deal came hours before the government risked running out of money and potentially defaulting on its debt payments. The measure approved in Washington funds the government to 15th January, and extends the US Treasury's borrowing authority until 7th February. The deal however does nothing to resolve the budgetary issues that currently divide both the Republicans and Democrats. Instead, it has created a cross party panel to attempt to resolve the differences and is set to report back to Congress by mid-December. There is, therefore, no reason why this situation could not strike again come the New Year.
We have a notable week for the UK economy, which is dominated by the first release of the Q3 GDP figure. Alongside that we will be looking towards the Bank of England for the release of their minutes and votes from the meeting earlier this month.
The third quarter GDP figures is naturally the dominant release of the week, with many seeing it as the most accurate measure of economic strength to note. The expectation is that we will see a continuation of the positive momentum of the UK economy, with a rise in the GDP figure to 0.8% from 0.7% in Q2. Whilst this may not be the big headline rise the government were hoping, it would be a stable grounding and given that this figure is often revised higher at a later date, it could well end up 1.0% or higher. With these revisions in mind and looking at the notable strength of Q3 PMI’s, there is a possibility of a better than expected result on Friday.
The only other release of note is the minutes from the latest MPC meeting, due to be released on Wednesday. The votes are seen as somewhat of a foregone conclusion, with forward guidance meaning that the focus is away from any traditional monetary policy changes. That said, the markets will likely turn their attention to anything which could provide any weaknesses to Mark Carney’s forward guidance strategy.
US Dollar Outlook
With the US Government finally returning to work the BLS (Bureau of Labour Statistics) has the task of catching up with almost three weeks’ worth of data releases. This has meant that the BLS has had to prioritise which figures to release and which releases to defer until next month. The most notable events of the week therefore come in the form of the jobs report on Tuesday, along with the home sales figures out on Monday and Thursday.
The jobs data naturally headlines this week’s events, with the non-farm payroll and unemployment rate likely to bring the usual USD volatility in the FX market. Recently, the strength of the jobs market has been tied closely with the decision by the FOMC as to whether the current $85 billion asset purchase scheme should be tapered. However, with the full economic impact of the two week government shutdown still unknown, the decision to keep asset purchases at the current level seems almost unavoidable. It is widely felt that the closest opportunity to taper would be in December, and as such there are a further three sets of employment data the market can digest before any decision would be taken.
The non-farm payroll figure starts off proceedings on Tuesday afternoon, and is expected to show a rise in September in comparison to August, with market forecasts pointing to a increase towards the 180k mark. This would mean that the US economy added a further 11,000 jobs from the August figure of 169,000. Despite the fact that this will have somewhat of a lessened impact upon tapering chances, this event always has an interesting effect on the market, and as such we expect some significant volatility on majors as it is released.
We then shift our attention to the unemployment rate, which is also released on Tuesday. Markets are expecting little change in the August 7.3% figure, following two months of consecutive reductions in this indicator. However, given the recent batch of mixed US economic data alongside the steady improvement of the jobs market, there is a significant possibility that the country could see a further reduction to 7.2%.
Finally, the existing and new home sales figures are both notable releases to watch out for throughout the week. The existing home sales figure is released on Monday, where market expectations point towards a reduced figure of 5.31 million for September. However, given the continuation of asset purchases and incredibly low financing rates, we feel that the market expectations may well be too pessimistic. We therefore seek a slightly improved indicator this week for the US real estate market.
There is a similar story for new home sales this week, albeit with slightly more positivity surrounding the release than the existing home sales release earlier in the week. Forecasts project a rise to 425k from 421k in August, however as before, any variation in or above the 10k mark would provide significant volatility within FX pairs.
This week’s Eurozone data will be focused on the PMI releases from both France and Germany, which being the two largest EZ members should show direction for the region as a whole. The German PMI figures will of course dominate proceedings, with the manufacturing figure of particular note. The analysts point towards the continued confidence of purchase managers, with the manufacturing PMI expected to rise to 51.6 from 51.1 in September while services are forecast to rise to 54.0 from 53.7.
A similar story should be set for the French economy, where markets expect a rise in both figures. The manufacturing PMI will be the most notable event, with it representing a significant part of the French economy. We will be looking to see if it can finally break back above 50.0 expansion level, with analyst’s projecting it to hit exactly 50.0 this week. It will be interesting however if this indicator either comes in well above or below this figure, as markets should react strongly to any deviation from expectation.
There are other releases which are set to be released, both European wide and country specific, such as Italian Retail Sales and the Spanish Unemployment Rate. All these will, in their own way, impact market sentiment. However, they should be viewed collectively to give investors an idea of market direction. We believe that the zone as a whole is entering a recovery phase, and as such sentiment should push the EUR into a stronger position moving forward.