UK GDP potentially on the up as Europe is expected to burst into growth
Week Commencing Monday 19th August 2013
This week in Brief
We have a relatively quiet week for the UK with the second revision of GDP the only highlight of note. Although the market does not expect any change, we forecast a 0.1% upward revision to the headline rate of growth, potentially offering Sterling significant support.
There is a busy week for US data ahead with existing home sales, unemployment and the FOMC minutes. All of these releases are expected to come in better than forecast, adding to further risk on trading within global market.
Much like the UK, Europe has a quiet week ahead with only a swath of PMI’s to worry about. Germany is likely to continue its march into growth while France is likely to exit contraction. Expect some decent market news from Europe on Thursday.
Market Themes & Current Events
UK Retail Sales jumped by 1.1% in July from the previous month, boosted by the recent hot weather and an increase in consumer confidence sparked by hopes of a sustained economic recovery. The rise was considerably higher than market expectations, which sat at a more modest increase of 0.6% month on month. The result means that like for like sales are up 3% compared with last year, indicating the fastest rise since January 2011. This release, coupled with the recent PMI and unemployment figures all increase hope that economic growth in H2 will be substantially higher than in H1. The UK economy grew by 0.6% in the second quarter of the year, which was nearly double the rate in the first quarter. Economists now believe that Q3 and Q4 will beat initial expectations and push the country’s growth above 1%.
In more bullish UK news, unemployment fell by 4,000 in the second quarter, leaving the number of people unemployed at just below 2.51 million. Also, the number of people seeking financial aid in July also fell more sharply, down by 29,000 to just above 1.4 million. The means that at the end of the second quarter an additional 69,000 people found employment, increasing the UK’s employed workforce to 29.78 million, the highest level since records began in 1971. It is not all good news however; the rise in employment has almost been matched by an increase in the size of the workforce, leaving the unemployment rate unchanged at 7.8%. Also, the youth unemployment component increases by 15,000 to just under 1 million, whilst the number of people out of work for more than two years also rose by 10,000 to 474,000.
Moving to the Eurozone, the bloc's GDP grew by 0.3% in the second quarter, slightly ahead of market forecasts, putting to an end almost 18 months of economic contraction. The return to growth was widely expected as Germany began to post strong economic results in the first quarter. Diving into the figures, Germany and France both posted better than expected growth rates, expanding 0.7% and 0.5% respectively. Portugal posted a surprise 1.1% quarter on quarter growth rate despite being viewed as one of the weakest economies within the bloc. On the negative side, Spain, Italy and the Netherlands all continued to contract. Spain saw its economic output drop by 0.1% whilst the Dutch and Italians suffered a output drop of 0.2%. At the bottom of the table came Greece, where the economy contracted 4.6% during the second quarter of the year, meaning the country has seen 20 consecutive quarters of recession since the beginning of the crisis.
We have a very quiet week for Sterling ahead with the only release of note coming in the form of the second estimate of GDP on Friday. After the swath of bullish UK data we have seen, coupled with the NIESR Q2 GDP figure, there are some minor projections that GDP may be revised up to 0.7% q/q. Although this would represent a mere 0.1% increase in growth, this would undoubtedly cause considerable volatility in the market and offer substantial support for Sterling.
US Dollar Outlook
We have a busy week for the Dollar, with existing home sales kicking off play on Wednesday. The market is expecting continued improvements in the housing sector, with a rise from 5.08 million homes to 5.15 million forecast. This is by far the most important real estate indicator for the US and as such a strong reading will likely boost Dollar longs as it indicated a strong consumer and lending base.
We then move to the FOMC minutes, which are also due to be released on Wednesday. In recent months, the talk of QE tapering has all indicated that a potential reduction would take place in September, however no concrete date has been set by the Federal Reserve. In the absence of a date the minutes are likely to be heavily analysed for hints as to the amount and type of purchases that are going to be affected. As such, expect considerable volatility during the first half an hour after the release.
Unemployment claims is the next and final major release of note, expected in the early afternoon on Thursday. This week we are expecting a negligible rise from 320k to 322k, which we expect to have a muted effect on the markets. However, be aware than any large movement away from this estimate could bring about continued market volatility.
In Europe, the release of crucial PMI figures on Thursday will bring the recent good news regarding growth in the Eurozone into question. We start with the German manufacturing PMI index, which is expect to push further into expansion from 50.7 to 51.1. Given the size and importance of German industrial exports to the Eurozone economy as a whole, this figure is likely to cause the most volatility. Also, French manufacturing PMI is expected to move out of contraction and into positive territory, with a shift from 49.7 to 50.4. These two releases will be the most watched of the day, however it is worth noting that we also have German and French services PMI in addition to Euro-wide manufacturing and services PMI. Should all these releases come in above expectations than we feel that currency markets will lend itself to considerable euro support.