UK GDP to provide the catalyst for a 1.70 push on Cable? Place your bets please ...

Week commencing Monday 28th April 2014

This week in Short

  • In the UK we have the preliminary estimate of Q1 GDP coupled with manufacturing and construction PMI. We expect most of the releases to prove Sterling positive as we move towards the end of the week, potentially giving Sterling the possibility to break through its current range.

  • In the US we have the all-important jobs report, which leads nicely into the FOMC policy meeting mid-week. We expect the FOMC to continue to taper by a further USD 10 bn while jobs should see a modest upsurge.

  • In Europe we have CPI which is expected to rise slightly on the month, which should act as some good news to Mario Draghi. We also have EZ unemployment and the German GfK, both of which are expected unchanged.

Overriding Market Themes

Starting the week with some UK news, the resurgent housing market coupled with a continued easing of credit conditions helped to keep retailers buoyant last month, pushing the overall retail sales figure higher by 0.1% and giving a healthy annual rise of 4.2% nationwide. The Office for National Statistics (ONS) said the dramatic jump was likely to be a reflection of last year's unseasonably cold March, when poor weather conditions kept shoppers at home. The latest figures come ahead of GDP data next week that is expected to show the economy on course to exceed 3% growth this year. Consumers therefore have played the biggest part in the recovery to date, in the main by spending savings made during the immediate aftermath of the economic downturn. Slightly worryingly however and something which will no doubt be worrying MPC policy members next month, the ONS did also confirmed a deflationary trend, with the average prices of goods sold in March 2014 down 0.5% after the cost of fuel fell by 5.8%. The fall in prices meant that the 4.2% rise in sales volumes since March last year only resulted in a 3.9% increase in sales values.

Having touched on this above, the Bank of England's Monetary Policy Committee has increased its UK economic growth forecast for the first quarter of the year, from 0.9% to 1%. This bout of good news was coupled with the CBI, who also published a report indicating stronger growth in order from UK manufacturers. Diving into the survey results, firms are upbeat about the next quarter, with growth expectations for domestic orders and output also the highest since the 1970s. Optimism about export prospects for the year ahead also rose strongly. Signs of a continued recovery in the manufacturing sector appear to be feeding through to investment plans over the next 12 months, with plans for capital expenditure on plant and machinery the highest for 17 years. Investment plans for innovation and training and retraining also remain robust. It seems therefore that maybe this is not the end of the UK rebound story! The Euro better watch out!

Moving to the east, Credit ratings agency Standard & Poor's has cut Russia's rating to one notch above "junk" status. In turn, the move prompted by the Russian Central Bank to hike interest rates for a second month running Friday in an effort to limit the economic damage of rising tensions over Ukraine. The bank lifted rates to 7.5% to try to contain inflation, which has been driven higher by rising import costs as the value of the rouble has tumbled. Despite this, the currency lost more ground Friday, falling by 0.6% to take its losses against the dollar to 8.4% since the start of the year. Russia's benchmark Micex equity index also slipped by 0.7%, extending its decline so far this year to 14.5%. Standard and Poor’s estimates Russia's current account surpluses will disappear in 2015, as imports are rising faster than exports. The agency also said it doesn't expect the government to tackle obstacles to economic growth, which include corruption, failure to enforce the law and a difficult investment environment in the near term. It seems that while President Putin may be set on rolling into Kiev on the top of a tank, he may have some more pressing concerns back at home!

Finally, Consumer prices in Tokyo rose at their fastest pace in 22 years in April, surging 2.7% from a year earlier, according to preliminary data from Japan’s statistics bureau. Core consumer prices in Tokyo, which exclude some fresh food, rose 2.7% in April from a year earlier in April. Most of this came from a sales-tax increase on April 1, which has pushed up the cost of many consumer goods. Stripping out the tax effect, prices rose only 1%, thereby remaining unchanged from the previous month. The data seems to bolster private economists' scepticism the Bank of Japan will succeed in its target to push inflation to 2% in 2015. The BOJ's massive monetary easing last year ended a year’s long run of falling prices, mainly through weakening the yen and pushing up import costs.

GBP This Week

We have a relatively busy week ahead for the UK, with the preliminary GDP release coupled with manufacturing and construction PMI set to dominate. Starting with GDP, we expect to see a 0.9% growth for the first quarter. This should be seen as a marginal improvement on previous quarters which, given the ongoing difficulties being seen in many other countries, is very encouraging for Sterling. Sterling is already regarded as the traders choice in the currency space, mainly due to the more hawkish stance of the central bank and the performance of the economy. It has however struggled to make a significant push higher against the US Dollar in recent months and a strong GDP reading this week could give it the boost it needs to push through that increasingly stubborn level of resistance.

We then shift our attention to manufacturing PMI on Thursday and construction PMI on Friday. The manufacturing PMI will likely set a good start to Q2, as It is expected to have increased slightly in April from 55.3 to 55.5, after declined for four months in a row. Construction is however expected to show some marginal declines from its 62.5 level posted in March, with market analysts estimating a 62.2 print this month.

USD This Week

We have a very important week ahead for the US economy, with the jobs report expected to headline the proceedings.  The April figure is set to be extremely important given the very poor performance of the report between December and February. A figure above 200,000 is essential if we are to see any potential of renewed wave of optimism within the FOMC ranks. Only a number close to 250,000 will be viewed as supporting the view that the weather was to blame for the poor performance during the winter.

This should be sufficient to see the actual monetary policy decision itself is likely to be straight forward with the Fed reducing its monthly asset purchases by another USD10 billion, bringing it down to USD45 billion.

We also wait for the first quarter GDP reading on Wednesday, where early estimates of GDP growth forecast a 1.1% rise in the first quarter of 2014 due to the effects of the cold winter. Meanwhile, factory orders likely rose 1.4% in March on top of stronger durable goods. Durable goods orders were previously reported up by 2.6%, with strength in both transportation orders and core orders with metals, communications, equipment and electrical equipment and appliances.

EUR This Week

In Europe we have the all-important CPI figure due to be released on Wednesday, which should provide some interesting talking points for Mario Draghi in next week’s ECB meeting. The inflation rate is expected to rise to 0.8% in April, which should be very good news for Draghi as it would effectively give the ECB a free pass to hold off from any punitive action at the next meeting on 8 May. A surprise drop in the rate in contrast, which would fall well below expectations, could be the proverbial “straw that breaks the camel’s back”, effectively forcing the ECB into some form of monetary or fiscal action.

Moving on to the remaining data points, The German GfK survey is expected to show that German consumer sentiment is unchanged at 8.5 points for March, despite the issues in Ukraine. Many analysts believe the crisis in Ukraine may soon start to weigh on sentiment if sanctions are imposed on Russia, and given that the situation seems to be getting worse, we could start seeing a reversal in this figure very soon.

Finally, Eurozone unemployment is expected to remain unchanged at11.9% despite many peripheral countries blasting out of recession in the last quarter. While Germany continues to have low jobless rate of 5.1%, countries that had to make spending cuts such as Spain has the bloc’s highest rate alongside Greece at 25.6%. Overall, the number of unemployed in the Eurozone declined, but only by 35,000, leaving almost 19 million still out of work.


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