UK Manufacturing takes a plunge as the Chinese aim for the stars!
Week commencing Monday 10th December 2012
Overriding Market Themes
China has bucked the trend once more by posting a stronger industrial output and retail sales figure than expected. Industrial production rose by 10.1% in November, compared with a year earlier, along with a 14.9% increase in retail sales. This is the first official economic release since the appointment of the Communist Party’s new leaders last month, and will no doubt allow them to sleep easier at night. This news is not only good for China however; it also seems good for the global economy, as countries continue to demand more products from Chinese based manufacturers. Until the end of September, China had seen seven consecutive quarters of a slowing economic growth rate, due to both falling exports and weak domestic demand. This now seems to be reversing, let us hope that the fortunes of the UK and Europe follow suit.
On the flip side of the coin, UK manufacturing output sees a sharp fall in October, resurrecting fears of a triple dip recession. Output fell by 1.3% from September according to the office of national statistics, with food and drink output notably down. This represents the worst fall since June, when activity was depressed by extra bank holidays to celebrate the Diamond Jubilee. These new figure make for worrying reading for economists, who continually have been driving down growth forecasts for the UK economy as a whole. The NIESR (The National Institute for Economic and Social Research) stated in its report last week that, although it does not expect this anaemic rate of growth to continue, it does expect GDP growth of just 1.1% next year, not enough to begin to close the UK’s massively negative output gap and bring down the rate of unemployment in 2013.
Christine Lagarde has urged US lawmakers to reach a deal to avoid the so-called fiscal cliff, warning that the uncertainty was damaging the fragile global economy. It seems that the only was falling off this cliff can be avoided is by Democrats and Republicans agreeing to a budget deal, however politically opposed they may be. The great issue here is not the will of Washington politicians to resolve the issue, moreover the ability of either side of work together to find common economic policy, with President Obama wants to see taxes rise on wealthy Americans, and Republicans calling for larger government spending cuts. It seems that the White House may currently has the upper hand, given that Mr Obama has just won re-election and that opinion polls show that Americans would blame Republicans if the US went off the fiscal cliff, however things are far from certain. Lawmakers have until 1st January to strike a deal, and with Christmas ever approaching, time is slowly running out for the American political machine to save the day.
Italian Prime Minister Mario Monti told the head of state that he has lost support in Parliament and intends to resign, while earlier in the day, his predecessor, Silvio Berlusconi announced plans for a return to power. Monti will attempt to round up his coalition partners, which includes Mr Berlusconi’s People of Liberty party to force through the next round of austerity before handing in his resignation, however if he fails to achieve the support of his partners, he intends to step down immediately. Monti in his time succeeded in slashing Italy’s borrowing costs thanks to austerity and his push in Europe for collective crisis fighting. Berlusconi on the other hand is viewed as somewhat of a maverick, who still faces a number of personal legal battles for suspected fraud and abuse of powers.
GBP This Week
This should be a light week for Sterling, with the Bank of England Governor Mervyn King speech to the Economic Club in New York on Monday perhaps being the highlight. Sir Mervyn will no doubt discuss his views on his replacement, Mark Carney and the continuing stand the Bank will take on Quantitative Easing. I do not expect this speech to cause too much disruption in the main Sterling pairs; however it is always a good idea to keep a close eye on the content of the speech just in case any divisions in the MPC slip out. Moving to Wednesday, we are watching the Claimant Count Change, which details the change in the number of people claiming benefits during the previous month. I expect the number to decrease to 5.1K, against November’s figure of 10.1K. Although the rate of people seeking benefits is declining, this figure will likely push the level of unemployment in the economy up from 7.8% to 7.9%. The pound didn’t break out last week, but it has looked solid since mid-November, gaining close to two cents against the dollar of late. As we approach the end of the year, the markets are now focused on the looming fiscal cliff crisis. It is likely that some kind of compromise will be reached in Washington, and if the fiscal cliff is averted, market sentiment would should be positive, and this could bolster the pound even more.
USD This Week
This is a big week for the Dollar, with the US Trade Balance starting off the show on Tuesday. I expect the deficit to continue to widen in December, with the difference between imported and exported goods reaching the 42.4 billion dollar mark. Wednesday then sees the FOMC Statement, Economic Projections and Press Conference. I expect them to state that the outlook for next year is even lower than it was earlier in the year, as to amend their projections for 2013 from 2.8% to 2.5%. Thursday then sees Retail Sales, which saw October’s spending down 0.3% from September’s 1.3% gain. Although I do not expect Retail Sales to decline this time, expect the release to be subdued as further worries of tax cuts that may expire at the end of the year unless the Congress and the White House fail to reach a/ budget play havoc with confidence. Also on Thursday, we have US Unemployment Claims, with the number of Americans claiming for unemployment benefit coming in roughly in line with last week’s release at 170K. Finally, Friday’s Core CPI should show that inflation will remain stable at 0.2% for the month.
EUR This Week
The deadline for holders of Greek bonds to bid in the buyback program ended on Friday, and on Monday, Greece will announce the results of this operation. A successful operation is crucial for receiving the next tranche of aid. I would imagine this represents the greatest potential EUR/USD driver this week, so it is worth watch. A slow week on the data side for the Euro however, as the German ZEW Economic Sentiment report is released on Tuesday. Many expect the economy will worsen rather than improve in the next months, indicating a recession mood among European business-people, which continues to be reflected in the -11.4 we expect. Moving to Friday, German Flash Manufacturing PMI came in previously at 46.8 and should remain relatively stable at this level.
In Other News
Two tragic deaths occurred last week which have caught the eyes of the press, with the death of Jacintha Saldanha leading most front pages. The mother of two nurse who transferred a prank call from two Australian DJs asking about the Duchess of Cambridge was found dead at her flat in central London over the weekend. It seems sad that, after all the press intrusion in the life of Prince Williams late mother, that no lessons have been learned. Whether the call was the ‘straw that broke the camel’s back’ or not, this Australian radio station has really opened themselves up for both barrels, and I for one have no issue with giving it to them. Also, in more sad news, Sir Patrick Moore has died at the grand age of 89. I remember watching his beloved ‘The Sky at Night’ program as a child, and in many ways, blame Sir Patrick for installing in me a great passion for astronomy and space.
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