UK Manufacturing & Construction - how much higher can it really go!!

Week Commencing Monday 30th December 2013

This week in Brief

  • In the UK we have both Manufacturing and Construction PMI released. We expect Manufacturing to decline marginally from its high while construction should continue to improve. All in all, a good week for the Pound.

  • In the Us, Consumer Confidence is expected to continue to improve, especially as the Fed tapered this month. Unemployment Claims is expected to continue to decline while ISM manufacturing has mixed reviews (although we expect a decent print).

  • We have a light week from Europe with Spanish manufacturing PMI potentially re-entering contraction. A positive print should do the Euro some good, however unfortunately it is our view that the risk remains to the downside on this one.

Market Themes & Current Events

We start with France this week, which will avoid a recession this year according to the INSEE, Frances national statistics body. The report stated that the economy would grow 0.4% in the last quarter of 2013 after the phase of contraction of 0.1% in the third quarter of the year. President Francois Hollande has been under pressure to revive the economy as other Eurozone nations start growing and show signs of recovery. Despite the ‘reasonably’ bullish release from the INSEE, the country is still plagued with one of the highest unemployment levels in Western Europe. In fact, the INSEE sees the unemployment rate continuing to rise marginally, from 10.9 per cent in September to 11.0 per cent at the end of June 2014. With unemployment on the rise and a mediocre level of growth, I cannot but help agree with some commentators when they say that France appears to be the new ‘sick man’ of Europe. Best of luck Francois, you’re going to need it!

Moving to Asia, Japanese consumer prices have risen at the fastest pace in five years, showing government policies to end its deflation problem may be taking effect. Japan has faced nearly two decades of stagnant growth and falling prices as companies and households have held off on spending, based on the assumption that prices will not rise. Now, Japan is almost half way towards meeting the Central Banks goal of achieving a 2% inflation target, and is estimating meeting it by 2015. Other economic data released on Friday added to signs that the recovery in Japan is gathering momentum, adding a welcome boost to the premiership of Prime Minister Shinzo Abe. Regular wages stopped falling after 17 months of declines, while factory output rose for a third straight month, and retail sales jumped. It seems that for the first time in 20 years, we might be able to see some growth from what used to be known as the rising sun economy.

Finally, back on home soil the UK economy is growing faster than previously estimated, according to the latest figures released by the Office for National Statistics. GDP was up 0.8% in the July to September period compared with the previous quarter, confirming its previous estimate. This means the estimated annual growth rate has now risen from 1.5% to 1.9%, a revision that surprised many economists. The revisions mean GDP is about GBP 2.2bn higher than previously thought. The ONS said the revisions were largely because of better figures for household consumption. Business investment for the most recent quarter was also stronger than initially projected. Despite the improvements in the level of output, there are some fears that the economy maybe overheating and becoming unstable. Only time will tell, however by all accounts it appears that whatever the UK is doing, it is doing it pretty well. Roll on Sterling for the new year!

Sterling Outlook

The primary focus of the week’s markets is the Construction and Manufacturing PMI’s, both of which are expected to move market sentiment for Sterling. We start with manufacturing, which is coming off the back of a significantly stronger than expected release last month which pushed it to a 34 month high of 58.4. As we are coming off such a strong reading, market forecast are pointing towards a reduction from 58.4 to 58.0. Given that we had such a dramatic move last month, coupled with a marginal at best decline, I would imagine markets would not take the decline to heart and Sterling could continue to strengthen.

Moving to Construction then, we had a similar story with regards to the previous release with the above expectation rise in November shocking market analysts. On this occasion, we forecast a further increase in this figure, despite market expectations pointing to a fall. Forecasters are looking to see a fall to 62.0 following last week’s rise to 62.6.

US Dollar Outlook

We have a busy week for the US this week, with Consumer confidence, weekly unemployment and ISM manufacturing all marked with high importance on the economic calendar. Starting on Tuesday, the consumer confidence figure is widely expected to provide the markets with a much needed boost as the Fed’s willingness to taper is fed through to US households. The large fall in this measure seen in October was largely down to the government shutdown, there this coupled with the current move towards implementing a proactive bill ahead of the January deadline for the budget, it seems that confidence is returning to the US. Market forecasts point towards a sharp spike higher for December from 70.4 to 76.0.

Moving to Thursday, with last week’s unemployment claims coming in well below estimates, we will be looking for further reductions in this measure. Market estimates point towards a marginal reduction to 334k from 338k last time around.

Finally, Thursday’s ISM manufacturing PMI figure is likely to be the highlight, especially given the importance of the sector for the US economy moving into the New Year. Analysts seem somewhat mixed with their forecasting for this release, with the median figure pointing forwards a decline to 57.0 from the 57.3 printed last month. We are looking for a continuation of the recent bullish trend, so we hope to see something above the 57.3 printed this week.

Euro Outlook

There is very little in terms of data this week from the Eurozone with the exception of some manufacturing PMI’s from member states. Spanish manufacturing PMI is probably the one to watch, given its inability to maintain the figure above 50.0. The fact that Spanish manufacturing has moved back into contraction is a major difficulty to Eurozone development as a whole. Estimates put this month’s figure closer to the 50.0 mark following a number of 48.6 last time. Should this come in above 50.0, it would be a big boost for the Eurozone.


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