UK Manufacturing on the up - Finally some good news!
Week Commencing Monday 4th February 2013
Overriding Market Themes
Activity in the UK’s manufacturing sector has edged higher in January despite a fall in export numbers. The PMI index fell slightly to 50.8 from 51.2 in December; however levels above 50 continue to indicate expansion. It seems that factories ran down Inventories and worked through existing order backlogs as new orders grew only modestly. The poor state of the Eurozone economy has put a considerable strain on UK exports, with a 13th consecutive fall in value. It seems that domestic demand is therefore keeping this sector alive, with orders for consumer goods particularly strong. Thankfully, the modest upturn in this sector over the New Year has come as financial markets show increasing bullishness that the industrialised world may be past the worst of its post-crisis stagnation of the last five years.
Across the Atlantic, the usually high flying Americans saw their economy unexpectedly shrink at an annualised rate of 0.1% in the fourth quarter. If confirmed, it would be the first contraction logged by the US economy since the 2009 global recession. This figure surprised all but the most pessimistic economists, especially after the amazing 3.1% growth the country posted in the third quarter. Many blame the indecision that came in the last three months of the year surrounding the Fiscal Cliff question, which although was ultimately resolved, did go some way to undermine business and consumer confidence. This decline will also add pressure on the US Federal Reserve to do more to stimulate the economy, and we expect members of the Federal Open Markets Committee to announce the conclusions of their latest policy-setting meeting later on Wednesday. Diving into the figures, growth was dragged down by a 22% cut in the federal government’s defence budget and the decision of many businesses to halt the rapid rebuilding of their inventories.
In “Eurolund”, German retail sales fell a surprise 4.7% from a year ago, the biggest drop since May 2009 at the depth of the recession. Meanwhile, France is not doing much better with a decline of 0.1% as shoppers cut back on clothing and white goods. While the French data were only mildly disappointing for analysts, the drop in German retail sales came as something of a shock and appeared to contradict evidence from the German High Street. Despite this, Germany seems to be avoiding the worst the Eurozone crisis is throwing at the continent. The number of Germans unable to find work fell unexpectedly by 16,000 to a seasonally-adjusted 2.9 million, reducing the unemployment rate to 6.8% of the workforce, close to its lowest level since German reunification in 1990. The surprises continue as construction industry is enjoying a modest upturn, which makes Germany the only European nation to have growth in the sector. Whatever beer the Germans are drinking, we best have some!
GBP This Week
We start the week with both Construction and Services PMI for the UK, with expectations of both figures showing signs of a recovery. The Construction PMI index climbed to 49.7 points in the previous reading, but spent most of the latter half of 2012 below the 50 line, pointing to contraction in the construction industry. We anticipate a 49.7 reading today, but will it cross the coveted 50! The Services PMI index was a disappointment in January, surprising the markets with the first release under the 50 point level in two years. The markets are hoping that the index will rebound in the upcoming reading. We then move to Thursday with the Bank of England MPC meeting, where we expect to see no chance in the base rate or the Asset Purchasing Facility. Finally, Manufacturing PMI for the UK saw two consecutive months of declines, both of which were well below the market estimate. The markets are anticipating a turnaround, with an estimate of 0.7%.
Nothing seems to have gone right for the pound in January, which shed about five cents against the US dollar and even more against the Euro. The downward spiral could continue if UK numbers continue to point to a sluggish British economy.
USD This Week
This should be a relatively quiet week for the Dollar as we kick start with ISM Non-Manufacturing on Tuesday. The vast U.S. services sector expanded at its fastest pace in 10 months, reaching 56.1 in December, following 54.7 in November, boosted by a rise in new orders. The reading was well above economists’ forecasts of 54.2 indicating a growth trend in the US economy. A small decline to 55.2 is expected this time, but the manufacturing figure is certainly encouraging. We then move to Thursday’s Unemployment Claims. Job cuts usually appear in the second week in January as retailers dismiss temporary employees hired for the winter holidays. The four-week average, ticked up to 352,000, just above a four-year low. A small decline to 361,000 is expected this time. Finally, we are watching the Trade Balance figure, with analysts expecting the deficit is expected to narrow to 45.8 billion.
EUR This Week
Spanish unemployment headlines the beginning of the week, with the country expected to add 150,000 jobs this time. We then move to the ECB Press Conference and Minimum Bid Rate on Thursday. The previous meeting saw a significant shift from hinting about an upcoming rate cut to a unanimous decision against it. Making another big shift in either direction now could hurt the ECB’s credibility. Draghi is expected to reiterate the improving situation in the financial markets, now accompanied with better business sentiment in Germany, while expressing worries about the situation in the real economies, which is still deep in the woods. Draghi could be pleased with some unwinding of the LTRO seen recently and repeat the forecasts for a recovery in H2 2013. The overall atmosphere is likely to be hopeful, yet cautious. The euro could rise a bit at the end of Draghi’s presser. Hints of rate hikes are still far in the future.
In Other News
The new Archbishop of Canterbury will be confirmed in the role in a legal ceremony at St Paul's Cathedral later. 57 year old Justin Welby replaces Rowan Williams to become the 105th Archbishop of Canterbury. This comes at a crucial time for the Church of England as it tackles same sex marriage, the consecration of women bishops and a dwindling following. It is an important job, and although I am not religious, I do wish him and his church well and hope they can strive to overcome some of the issues which plagued Rowan Williams tenor. Also in Chequers this week the Afghan and Pakistani presidents will be meeting with David Cameron to discuss the Afghan peace process. With NATO withdrawal looming the talks could not come at a better time, especially with the memory of mistakes made during the Russian withdrawal some 25 odd years ago.
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