UK GDP expected to give cheer to Osbourne and Coalition - Let us hope it give Sterling some cheer too!
Week Commencing Monday 22nd July 2013
This week in Brief
UK Preliminary GDP is the only domestic highlight of the week, with markets expecting growth for the second quarter to sit at 0.6%. We expect a higher figure and Sterling to receive significant support from this event.
We have a quiet week for the US with Existing and New Home Sales the only releases of note. Both are expected to come in positive and act as further evidence that the US economy is well on the road to recovery.
European political events remain our primary focus; however German, French and EZ manufacturing PMI releases are to be watched. We expect all these figures to remain below the 50.0 growth line, so assume a muted response in the markets.
Market Themes & Current Events
UK Retail Sales rose by 0.2% in June, despite many analysts believing that the market would see a contraction. Although modest (especially against May’s strong growth of 2.1%) it continues to provide positive signals for the UK economic recovery. Diving into the figures, sales in June at non-specialist stores grew at their strongest rate since March 2012 rising more than 3% on the month. Supermarket food sales appeared to be the biggest loser, with sales volumes falling slightly by 0.1% in June. More worryingly however is that consumer spending remains under pressure from inflation, which is currently outstripping wage growth. This became ever more apparent as last week’s inflation data indicated that CPI rose to 2.9% in June, while annual wage growth rose 1% in the three months to June.
In even more positive UK news, UK unemployment fell by 57,000 to 2.51 million in the three months to May, an ONS report has concluded. Within these figures, Youth unemployment has also seen a significant reduction with the total number of under 25’s out of work dropping by 20,000. The number of long term unemployed however increased to a 17 year high. This is seen as further evidence that the UK economy is repairing itself, and acts to bolster the coalition government’s austerity plans as opinion polls suggest a shift away from a labour majority at the next election.
Across the pond, Ben Bernanke has sought to reassure markets about his plans for ending the bank’s asset purchasing program. The Federal Reserve chairman said that tapering QE was not a “preset course” and defended the banks transparent policy, stating "markets are beginning to understand our message and volatility has moderated". Over the last few months, both Mr Bernanke and other Fed officials have been sending mixed signals as to whether the QE program will be tightened and/or stopped entirely. In our view, the time is not right for the world’s biggest economy to turn off the tap of easy money. A spate of weak US economic data, including sluggish retail sales last week, in our view should give the Fed pause at it looks to taper in QE by September.
In Europe, the parliament in Greece has narrowly approved a public sector reform bill that will see thousands of people lose their jobs. The 153-140 vote approved the bill which allows for the next tranche of EU funding (worth EUR 6.8 Billion) to be released to the debt stricken country. The result came despite mass protests in Athens and country wide strikes against further government cuts. Under the bill, more than 4,000 state employees, including teachers and local government workers, face the axe this year. In total, it is thought up to 11,000 could lose their jobs by the end of 2014 if the country is to comply with the demands of the troika.
This week seems set to be a quiet one for the UK with the Preliminary GDP figure for Q2 being the only release of note. With the resilient PMI data we have seen over the past months being a brighter outlook to the UK economy, many institutions are revising up their Q2 estimates. We still see market consensus standing for a steady increase to 0.6% from 0.3% in Q1, however given the importance of this figure and its historical tendency for missing forecasts, we expect significant volatility at release.
US Dollar Outlook
Similarly, the US has very few notable events which are expected to move the markets. On Monday, the existing home sales report is expected to see sales to rise 2.0% m/m in June to 5.28mn units versus 5.18mn units in May. This comes as credit conditions continue to ease in the US whilst consumer confidence continues to flow back into the US retail and investment markets.
Moving to Wednesday, the new home sales figure is expected to rise 1.2% m/m to 482,000 for the month of June. This would represent the highest level since 2010 and would continue to signal a strengthening of the economy away from the recent downturn.
The leading releases of the week come on Wednesday in the form of the key headline PMI figures for the French, German and Eurozone areas. Starting with German PMI, we expect the Eurozone’s leading economy to see manufacturing rise from 48.6 to 49.3. Although still under the coveted 50.0 growth level, given the size and power of the German manufacturing sector, a rise in this figure is likely to boost European markets. This trend should be emulated with French manufacturing PMI, which is also expected to rise from 48.4 to 48.9. It is worth noting however that we do not expect serious volatility on the back of these releases, especially unless they breach the 50.0 mark.