UK GDP on the down as Eurozone woes continue to weigh
Week Commencing Monday 24th November 2014
This Week in Brief
- In the UK we have the second reading of GDP, which is expected to come in 0.2 percent lower than the preliminary forecast at 0.7 percent for the quarter,
- In the US we also expect the second round of GDP to post some minor declines, potentially pushing to 3.3 percent from 3.5 percent. CB consumer confidence should show continued signs of expansion, with the indicator projected to push into a 8 year high.
- In Europe, German Ifo is expected to rise marginally to 103.4 from 103.2 while Eurozone inflation is expected to fall to 0.3 percent from 0.4 percent previously.
Overriding Market Themes
We start this week’s report in the UK, where retail sales volumes increased more than twice as fast as expected over the month, rising 0.8 percent as shoppers were also encouraged by price cutting. Consumer spending has driven Britain's strong economic recovery which began in mid-2013 and is likely to remain its main driver as the global economic outlook worsens. Diving into the report, the figure was pushed higher than expected on the back of increases in furniture purchases and white goods, potentially buoyed by the housing market surge earlier in the year. Interestingly, this strong furniture sales number could reflect what the ONS believes to be the six-month lag between mortgage approvals and house purchases and consumers buying household goods. All in all therefore, Thursdays release was an welcome break for Sterling markets that have seen the Pound take a nosedive against most majors in recent days. Hopefully this, coupled with the relative strength of the UK economy and the 2 votes on the MPC to raise interest rates, could give Sterling the boost it needs to gather some support at its current level.
Moving to the Bank of England, the monetary policy committee voted 7-2 against raising rates in November, unchanged from last month's vote. This is despite speculation there might be a stronger vote in favour of keeping rates low, given the current deflationary environment the world finds itself currently in. The minutes did reveal however that there was a “material spread of views” amongst policy makers over the future outlook, with some more hawkish on inflation than others. Ian McCafferty and Martin Weale voted in favour of a 0.25 per cent rise in rates. This is the fourth time they have voted for a rate hike this year and provided Sterling with a small boost.
Moving to China, Chinese factory activity fell to its lowest level in six months in November, increasing pressure on Beijing to do more to spur growth as the world’s second-largest economy continued to weaken in the fourth quarter. The reading released on Thursday showed Chinese factory activity has been flat on the month. New exports orders also weakened, along with employment, although new orders overall showed some improvement. Despite this, Chinese authorities are likely to maintain their current targeted fiscal and monetary policy approach, although there are increasing pressures to take stronger action, including an interest rate cut or a reduction in the capital reserves banks are required to hold. Economists believe however that despite challenges on several economic fronts, Beijing still has some leeway before it reaches for broad-based stimulus measures—which it fears could increase bad loans and spur overcapacity—so long as employment holds up, an area it has identified as a major priority.
GBP This Week
We have a very quiet week ahead for the UK, with the only release of note in the form of the second estimate of third quarter GDP. The majority of economists believe that the preliminary ready of 0.9 percent has been somewhat overstated, and in fact the figure is more likely to be around 0.7 percent. This undoubtly will be bad news for Sterling, and although it does not drastically alter our year on year forecasts for the UK economy, it is a sign that things are slowing down. Declines should be stayed however as the drop in GDP is more directly attributable to the Eurozone and Russian sanctions than anything domestic.
USD This Week
As with the UK, the US also is releasing their second round GDP figures for the third quarter. Forecasters also point towards a slightly depressed figure of 3.3 percent from the 3.5 percent announced last month. As with Sterling, expect some risk off sentiment to affect the US Dollar on the back of such a downgrade of estimates, with US Treasuries the likely benefactor.
Moving to Tuesday we expect the CB consumer confidence figure to rise strongly to 96.0 from 94.5, making this month’s figure the best since late 2007. This rise is unlikely to shock markets however, especially given that global oil prices are pushing fuel prices lower, coupled with the cost of credit remaining drastically low and unemployment below 6 percent. Eitherway, this good news in general should be received positively in currency markets and potentially allow the Dollar to recover any lost ground from the GDP release.
EUR This Week
In Europe we have a reasonably clear week, with the German Ifo business climate and CPI the only points to note. Starting with the German Ifo, we expect a marginal rise to 103.4 from 103.2 however the risks still remain to the downside. Recently German business has been under somewhat of a microscope, and will continue to do so given its dominate place in Europe. Any further decline or stagnation in this figure will be received extremely badly by markets, and given the Euro is already at all time lows post Mario Draghi’s speech last week, things could get worse very quickly.
Finally we will be watching Eurozone CPI, which is due to be released on Friday. This has been Mario Draghi’s sole concern of late, and with estimates pointing towards another fall from 0.4 percent to 0.3 percent, we expect further negative price action.