UK Growth forecasts get a welcome boost ... hip hip hooray!

Week Commencing Monday 3rd June 2013

Overriding Market Themes

Unemployment in the Eurozone has reached a new record high, with the seasonally adjusted rate for April tipping over 12.2%, up 0.1% from March’s reading. This means that an extra 95,000 people are out of work in the 17 state bloc, taking the total number of unemployed to 19.38 million. Diving into the figures, both Spain and Greece have jobless rates over 25%, whilst Austria leads the pack with average unemployment under 5%. Even more worrying for the average “Eurocrat” is France, the Eurozone’s second biggest economy, which recently published a new record number of unemployed people. Many commentators are beginning to view France as the next potential Eurozone flashpoint, and already friction can be seen between Angela Merkel and Francois Hollande over economic policy. What can be done to stem the ever increasing tide of unemployment in the zone? Well, there are continued calls for the ECB to simply cut its benchmark interest rate once again in an effort to boost economic activity and create jobs. Alternatively, and somewhat controversially, the OECD hinted that the ECB may want to further expand its Quantitative Easing program in an attempt to accelerate growth. Whichever way the bank decides to go, one thing is certain, the EZ cannot be expected to survive with levels of unemployment that rival some of the poorest countries on earth. Mario Draghi, best get your thinking cap on!


Keeping with Europe, and tying in nicely with the previous comments in the paragraph above, the European Commission has said it will allow some EU member states to slow their pace of austerity cuts, amid concerns over growth. Specifically, France will get two more years to bring its structural deficit below the 3% of GDP mark, whilst Spain, Poland and Slovenia will also be given two years to bring down their budget deficits via spending and tax reforms. The Netherlands and Portugal are having their timetables extended by one further year. Europe as a whole has remained broadly in recession, with the bloc shrinking by 0.2% in the first quarter of 2013 and expectations of further recessionary pressures rife. 


Moving stateside, US Consumer Spending fell in April, the first time a negative reading has been filed in nearly a year. The Department of Commerce said initial calculations suggest consumer spending fell 0.2% in April. The US economy has been hit by an increase in social security taxes as well as government spending cuts, which took effect at the beginning of March. In monetary terms, this equates to a reduction in net salary of $1,000 per annum for an individual earning $50,000. Despite this, the market did anticipate that consumer spending would rise once again, matching March’s 0.1% posting. The release of the news sparked a brief sell off of the USD, allowing both Sterling and the Euro to realign themselves into higher ranges. 


Back on home soil, the British Chambers of Commerce has raised its UK economic growth forecast. The BCC said it expected output to increase by 0.9% this year, up from a previous growth prediction of 0.6%. It also increased its 2014 – 15 growth projections, with 2014 forecasted at 1.9% whilst 2015 shifting from 2.2% to 2.4%. Within the forecast it states that the Service sector is likely to lead the recovery, with manufacturing coming in at a close second. Construction however remains the weak link, and will likely continue to act as a drag on the economy unless further government reforms are made. The BCC's upgraded outlook comes after the Bank of England recently forecast that growth would be a little stronger. In contract however, the Organisation for Economic Co-operation and Development cut its prediction from 0.9% to 0.8% for the year. It still seems therefore that people are unsure of which way the wind is blowing! Let us hope it is the right way!


Finally, the number of mortgages approved for house purchases in the UK crept up to a three-month high in April, according to Bank of England figures. There were over eight thousand mortgages approved last month, which is slightly higher than the previous months and roughly 500 more mortgages more than April last year.  Growth in this sector seems to be spurred partly as a result of the Funding for Lending Scheme, which sees cheap funds offered to lenders, if this in turn is then provided to individuals and business borrowers. Also, near record mortgage rates and a slight reduction in deposit requirements by the main lenders have also impacted the numbers. This comes as the National Housing Federation, CBI and various European bodies have recommended that more affordable housing be built (especially in the South East of England), claiming that this would repair the crippled construction industry and further accelerate UK economic growth. Whilst I would rather not see the nice Surrey fields I walk the dog in paved over, they certainly have a point! Tory councillors in Tandridge, please take note!

GBP This Week

This is an important week for the UK economy, which is dominated by the three big PMI releases along with Thursday’s Bank of England monetary policy decision. This week’s MPC briefing will be the last chaired by Sir Mervyn King, who hangs up his boots after 10 years at the top of the old lady of Threadneedle Street. We expect a steady monetary policy stance, with rates being held at their current record low. Previous meetings saw voting 6-3 in favour of maintaining the current level of quantitative easing, however given the recent release of a lower than expected CPI figure it could allow for some further leeway in terms of monetary expansion. That aside, we do not believe there will be any shift as members consolidate the King era and look forward to a potential new direction under Mark Carney. 


Moving to the PMI figures, we start with manufacturing on Monday. Although manufacturing is clearly not the core driver of UK growth, its importance cannot be ignored. We are expecting to see a pick up into expansion for the first time since January, from 49.8 to 50.3. The shift above the key 50.0 mark denotes expansion rather than contraction and it is this element which we are looking for to create the positive sentiment Sterling needs to retain its current footing against the majors. Tuesday sees Construction PMI and is also expected to show a moderate rise from 49.4 to 49.7. The figure has tended to disappoint markets of late, with the last month being the only exception. The latest level is close enough to 50.0 to reasonably assume that any out-performance will push the indicator into expansion. Should this occur, we expect Sterling markets to rally quite considerably. Finally, the Services PMI figure is expected to once again post a marginal rise from 52.9 to 53.1. As this is always the most keenly watched PMI given the size and reliance upon the service sector in the UK, we expect the gain to once again boost Sterling markets. 


We were treated to some minor volatility from Sterling last week, as GBP/USD moved between 1.50 and 1.52 during a busy week on the data release side of things. Sterling did post some gains, but struggled to consolidate them. With the British economy continuing to look frail, UK PMIs will have the major say in what direction Sterling pairs will heads in this week. This could give GBP the tools it needs to consolidate above the 1.5250 on GBP/USD and break back into the 1.18’s on GBP/EUR.  

USD This Week

US PMI data starts the week off, with ISM manufacturing kicking off the set. We expect the manufacturing sector index to fall from 50.7 to 50.6, which although negative is unlikely to cause any serious market volatility. It should however set the tone for US releases for the week, and therefore may be instrumental in setting the Dollar’s direction. On Wednesday we move to ADP non-farm payrolls, which are typically seen as the precursor to the headline non-farm payroll release on Friday. The market is forecasting a sharp increase in employment from 119k to 171k. We also are watching the ISM non-manufacturing PMI release, which is again due on Wednesday. We also expect this PMI indicator to register a small but noticeable increase over the month, with the market expecting the index to rise from 53.1 to 53.4. We doubt this increase will cause considerable Dollar strength, as we only tend to see strong market reactions to these figures when they are substantially different from expectations. 


Finally we move to Friday, and the release of the US unemployment rate. The rate is expected to remain at 7.5% this month after last months unexpected reduction, despite this headline measurement changing on every month for almost a year! Subsequently I am speculating that we could continue to see a downward revision to this figure, and post 7.4% this month. 


The Dollar appeared to be somewhat on the back foot last week, especially as US consumer spending shocked the market. We do however believe that the Dollar shows continued strength, especially when the majority of US data this week seems to be skewed towards positive territory. We therefore expect it so remain relatively stable against the Pound, perhaps losing a cent over the week if strong UK data is published. EUR/USD is likely to remain under considerable pressure and risk remains firmly to the downside. 

EUR This Week

Like the UK, the Eurozone has a busy week ahead with the beginning of the week dominated by the Italian and Spanish PMI figures, followed by Thursdays European Central Bank interest rate decision. With a number of PMI’s out during the first half of the week, we have chosen to concentrate on the Italian and Spanish economies as they are generally considered to be the ones most at risk of dragging the bloc into protracted recession. On the whole we are not looking for any miracles in the figures; however what the markets are looking for is a simultaneous move in any given direction. The markets have forecasted an increase for all four and subsequently a strong rise across the services and manufacturing numbers for both countries will be likely to see some form of pickup.


Moving to the interest rate decision on Thursday, we expect Mario Draghi to keep rates unchanged at 0.50%. Usually we would not speculate over any further drops in the benchmark rates, however with a shift in focus away from austerity and towards growth, coupled with last month’s reduction in rate, there is now much more anticipation in this figure and speculation that we could see a further reduction in the number. 


We expect Draghi to drag the Euro lower on Thursday, given the sorry state of the Eurozone economy. Further talk from the ECB of it trying to “manage the euro lower” will continue to play with traders as they speculate on exactly how the ECB or member states could affect such a policy. We are therefore bearish on the Euro this week, and expect it to give up ground against both the Dollar and Sterling, potentially pushing the Pound back into the 1.18’s.

In Other News

Protesters have reoccupied the central square in Istanbul following two days of ever escalating violence. In a scary reminder of the London riots in 2011, police seem to be overwhelmed in attempting to get the situation under control. Protests began over the redeveloping of a park near Taksim Square in Istanbul, but turned increasingly ugly as police were accused of using excessive force to remove seemingly peaceful protestors. This has now sparked a wave of anti-government action which has spread country wide, effecting over 48 cities. Although the protests have yet to impact the Turkish Lira, we would remind TRY clients that the more political the protests get, to more likely we are for it to affect the country’s economic and stability ratings. 


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