UK GDP in the firing line! Up or down?..
Week Commencing Monday 28th March 2016
Overriding Market Themes
We start this week in the US, where the slowdown in fourth quarter economic growth was less severe than previously estimated. GDP advanced at a 1.4 percent seasonally adjusted annual rate in the fourth quarter, according to the Commerce Department. That was an upward revision from last months estimated growth rate of 1 percent. The output revision mainly reflects better consumer spending on services, and reinforces that the domestic economy is stable and growing. At the same time, declining profits and weak business investment show overseas uncertainty has started to sting manufacturers, energy firms and financial markets. Dicing into the figures, Friday’s revisions showed consumer spending during the fourth quarter advanced at 2.4 percent, up from the prior reading of 2 percent (The change accounted for 0.28 percentage point of the 0.4 point upward revision). With this in mind, many economists expect growth to accelerate slightly in the first quarter, although signals have been mixed. The Commerce Department’s broad measure of consumer spending showed a healthy gain in January, but retail sales were uninspiring for the first two months of the year. Durable goods orders, a measure of manufacturing demand, fell sharply in February after strong increase in January. Therefore despite the US leading the world economic recovery, it is pretty clear headwinds are here to stay.
Back on home soil, fears of a rise in UK inflation have proved unfounded after the latest official figures showed the annual increase in the cost of living unchanged at 0.3 percent in February. Inflation had risen in each of the three months between November and January after falling to -0.1 percent in October and the City had been expecting ONS data to show a further small increase in February. Although inflation has doggedly undershot forecasts in recent years, analysts said higher oil prices, rising wages and more expensive imports as a result of a falling Sterling were expected to push up prices during the course of 2016. That said, the continued weakness of inflation means there is no immediate pressure on the Bank of England to raise interest rates from the record low 0.5 percent where they have remained since 2009. This was reinforced by a unanimous vote by the Monetary Policy Committee earlier in the month, seeing Ian McCafferty reverse his hawkish stance on the board.
GBP This Week
We have a relatively quiet week ahead for the UK with GDP and Manufacturing PMI the highlights to look forward too. Starting with the all-important GDP figures on Thursday, we expect a further slowdown as currency markets ebb confidence and we draw closer to the EU referendum date. With this in mind, we expect GDP to be confirmed in at 0.5 percent for the quarter and in line with expectations. We then shift our attention to Manufacturing, which should edge up to 51.3 as the CBI Industrial Trends survey indicate a slight uptick in activity.
Given the EU referendum polls remain relatively tight, coupled with the recent Brussels attack and the resignation of Ian Duncan Smith, we expect further downside pressure against Sterling in the coming days.
USD This Week
This week we forecast Non-farm Payrolls to show payroll growth of 225k, in line with recent average growth. Additionally, we expect average hourly earnings to rise 0.2 percent on the month and 2.1 percent annually in March. Apart from this, we are watching Janet Yellen speak before the Economic Club of New York. Although the topic of her speech has not been announced yet, we will be listening to her remarks closely as they will be the first since the March FOMC meetings.
The USD found support last week and this trend to continue as we draw towards the end of the month. We expect the USD to trade long as inflation continues to firm and labour markets keep tightening at a relatively fast pace.
EUR This Week
The March inflation print is the highlight of the European calendar, with the release likely to be around the -0.1 percent mark. March manufacturing PMI should also be finalised at 51.4, well below January’s level of 52.3. Given the light week ahead, we expect most traders to concentrate on potential further easing from the ECB and the potential of “Brexit”. The Euro has performed well over the past few weeks with EUR/USD sustaining itself above 1.11 while GBP/EUR continued to drop to around 1.27. We expect this to continue unless we see some shock downside revisions to inflation.