UK Retail Sales, some good news at last?
Week Commencing Monday 19th October 2015
Overriding Market Themes
In the UK, unemployment fell to its lowest rate in more than seven years as more and more Briton’s find paid work. The jobless rate fell to 5.4 percent in the three months to August, from 5.6 percent in the three months to May as the number of unemployed fell by 79,000 to 1.8 million. This is the lowest rate of unemployment since the middle of 2008. The numbers mean that the UK is fast catching up with some of the best performing G7 rivals, including Germany and Japan. Even more encouraging is a report from the OECD stating that the UK could soon have the highest employment rate in the G7. Also, wage growth continues to strengthen with pay (including bonuses) rising by 3 percent in the quarter to August compared with the previous year, following growth of 2.9 percent in the three months to July. All this continues to support the view that Mark Carney will have a serious debate on tightening around the end of the year (despite credit markets not pricing a rise until the end of next year). Sterling reacted positively against most of its major peers on the back of the news, with GBP/EUR pushing through its recent lock in the 1.34 – 1.35 range. GBP/USD also benefited with Sterling blasting through the 1.54’s and attacking the support at 1.55.
Moving to the US, the Beige Book report showed modest growth in economic activity between August and October. The Fed's report echoes other recent reports that suggest the US economy, while still growing, has run into headwinds from continuing emerging market threats and a collapse in global demand. Most analysts forecast that growth will fall sharply in the third quarter to an annual pace of about 1.5 percent from 3.9 percent in second quarter. All this is pushing back expectations that Janet Yellen may raise short-term interest rates before the end of the year, with the market pricing in a rise at the beginning of 2016. Diving into the slowing figures, manufacturers and tourism are both struggling on the back of the strong US Dollar, which has increased some 13 percent in value versus a basket of major currencies over the past year. This was compounded by steep drops in oil and gas prices. The US remains this year’s global success story, followed closely by the UK, but these numbers continue to demonstrate the fragility of global markets. Basically, best not take off the crash helmet just yet!
GBP This Week
After a volatile week for Sterling pairs, this week is relatively quiet from a data prospective. Firstly, we forecast PSNB on Wednesday to come in at GBP 10.0 billion, which remains on the bullish side of normal according to most models. More importantly however we await retail sales on Thursday, with a 0.3 percent uptick expected on the month.
GBP has struggled to build traction against an embattled EUR, despite a reasonable bullish run on Cable. This may well be set to change however, especially with a dovish ECB press conference or a surprise announcement of further policy stimulus. Our medium term forecasts continue to point towards EUR weakness, compounded by the growth differentials between the UK and EU. This may well be tested however should we see further fiscal tightening and/or a shift in potential EU referendum outcomes.
USD This Week
We have very little out from the US this week with only housing data potentially impacting markets. On Tuesday, we expect around 1100k housing starts, which is slightly below the 1142k expectation from markets. Following this, Thursday’s existing home sales print should come in at roughly 5.4 million units, versus the consensus of 5.36 million.
All in all, a quiet week should provide some support for the Greenback, especially given weakened global markets and general risk aversion.
EUR This Week
The ECB will take centre stage this week as markets anticipate further monetary easing in the months ahead. Outside this, we look for EZ flash PMI’s to further moderate in October, especially manufacturing and services which should see drops to 51.5 and 53.2 respectively. There should also be some sizable declines in German confidence data given the recent slowdown in emerging markets.
Given the ECB meeting on Thursday is such a key event, markets should be relatively calm during the beginning of the week. Despite the recent dovish stance taken by some members of the ECB, we doubt that there will be any action at this meeting. They very well might try and talk down recent EUR strength, and should they demonstrate their willingness to either extend the QE program or drop rates even lower, we should see some currency action. Conversely however, we see upside EUR risk should Draghi withhold any signals regarding further policy measures.