UK set to post its monthly PMI's ... anyone ready to flip a coin!

Week commencing Monday 3rd February 2014

This week in Short

  • In the UK we are awaiting the release of the all-important PMI’s. Manufacturing and construction are expected to post marginal declines from their current market highs while Services is expected to expand once again. We also await the Bank of England IR and QE decision on Thursday.

  • In the US we have a swath of labour market releases, starting with the ADP Non-Farms on Wednesday. The climax of which is reflected in Friday’s Unemployment rate which many see as the key taper decision factor.

  • In Europe we have the key PMI releases from both the EZ as a whole, France and Germany. We expect these to remain mixed with France continuing to struggle to build momentum. The ECB meeting on Thursday will likely be one of the most important events of the week as deflationary fears continue to mount.

Overriding Market Themes

Calls for the European Central Bank to help protect the fragile Eurozone recovery reached a new high lat week after the release of recent inflation and jobless data. Official figures from Eurostat indicated that Eurozone inflation fell to 0.7% in January, down from 0.8% in December and well below the ECB’s own 2% inflation target. The figures are likely to give rise to more deflationary concerns, which were ignited back when October's data showed inflation had fallen to a 47-month low of 0.7%. Already, economists are speculating what this means for this coming weeks ECB monetary policy decision, with October’s surprisingly low figures spurring the bank to cut its main interest rate to 25bp from 50bp. We doubt that Draghi has to room to perform another round of rate easing, however analysts cannot rule out a Japanese style 10bp should the situation deteriorate further. Either way, this week’s policy statement should provide markets with some much needed volatility with the Euro continuing to face considerable downside risks.

Meanwhile, French unemployment has hit a record high with more than 3.3 million people now registered as out of work. Pressures from rising unemployment, along with other policy U-turns (not least his shift this month to a more pro-business program of cuts in public spending, employer labour costs and other taxes) has caused Mr Hollande’s popularity to crumble. Despite the opinion polls, the French Labour Ministry said the rate of unemployment appeared to be slowing, with 177,800 people joining the jobless register in 2013 compared to 283,800 in 2012. Doubt was cast on the accuracy of these figures however as most of the improvement was due to state-sponsored industries creating jobs, rather than a real recovery in the broader economy. Eitherway, France remains the exception to the rule in Northern Europe and with little hope in sight, Mr Hollande has some difficult years ahead of him.

Moving to home shores, the Office of National Statistics yesterday released a report showing real wages in the UK have been falling consistently by 2.2% annually since 2010, the longest period of falls since 1964! The report showed that shorter working hours, coupled with reduced output were factors behind falling wages. This ONS report follows on from a report published by the Institute for Fiscal Studies on Thursday which suggested that a mid-range household’s income between 2013 and 2014 was 6% lower than its pre-crisis peak while also indicating that living standards will not return to pre-crisis levels under after the next general election. This also indicates that the recent uptick in consumer spending is debt not wage driven, a trend that led to the current economic crisis in 2007. It seems despite the recent flurry of good news, there is always something to dampen the spirits when the UK economy is concerned!

Across the Atlantic, The US Federal Reserve announced a USD 10bn reduction in its monthly bond purchases from USD 75bn to USD 65bn in the second straight month of winding down stimulus efforts. The FOMC said in statement that signs of continued improvement in the US economy had prompted the decision to scale back QE. In particular, it pointed to faster progress in household spending and business fixed investment. Labour market indicators had also been “mixed” but ultimately showed improvement too. The effects of the taper where most keenly felt In equity markets, where the S&P 500 ended Wednesday’s trading to close 1.02% down at 1,774.20 while the Dow Jones shed 1.19% to 15,738.79. Emerging market currencies also suffered, with the South African Rand and Turkish Lira paying a particularly heavy price as their central banks opted to raise interest rates in a bid to stabilise them. This was the final meeting for outgoing Fed chairman Ben Bernanke, as Janet Yellen took over once at the end of this week. She, along with every other member on the committee voted in favour of reducing the pace of QE. Next month’s meeting a foregone conclusion anyone?

Finally, Japan's consumer prices have risen at their fastest pace in more than five years, marking more progress in the country's battle against deflation. Core consumer prices rose by 1.3% in December from the same month a year earlier, just above the market forecast for a 1.2% gain. That followed a 1.2% increase in November, and was the fastest year-over-year gain since 1.9% in October 2008, the data showed. In 2013, Japan’s core consumer prices rose 0.4%, the first increase in over five years.

GBP This Week

In the UK we have the first half of the week dominated by the release of industry specific figures, starting with manufacturing PMI on Monday. Market estimates point towards a figure around 57.0 from 57.3 last time which would represent the second consecutive fall in the measure. It is still worth noting however that any print this far above the 50.0 mark shows strong growth within the sector, so despite the marginal decrease expect Sterling to be well supported. In fact, as a component of 2013 Q4 GDP growth, the manufacturing sector contributed 0.10% of the 0.70% overall growth of the UK economy, so a significant win should it remain well entrenched in growth territory.

We then shift our attention to construction PMI on Thursday, the least important of the three PMI releases of the week. That being said, the PMI results for this sector has been the best performing one over recent months and therefore it should not be dismissed. If we can see a positive push into higher expansion this month, despite a predicted fall to 61.6 following last month’s figure of 62.1, we should see some decent Sterling strength. Again however, the importance of this release should keep any market movements to a minimum.

Lastly for the PMI’s we have services, the most important of the three. It goes without saying that the UK services sector is absolutely key to the UK’s ability to continue to expand and therefore this is likely to be the event of the month for the country. Market forecasters point towards a potential rise back to 59.1 from the disappointing print of 58.8 last month. Ultimately, any rise in this figure would be positive for the economy and Sterling, as it would point towards a move back in the right direction for not only the sector, but most importantly the economy at large.

Finally we shift our attention to Thursday’s Bank of England MPC meeting where Mark Carney is due to announce his latest interest rate and QE decision. We do not expect him to deviate in any way from his forward guidance model, therefore we expect no shift in policy with regards to either the interest rate or asset purchase program. He did hint while in Davos that he is willing to update his forward guidance policies to encompass different tools however, so it will be interesting to see if he drops any hints regards these during his press conference at mid-day.

USD This Week

We have a very busy week for the US economy with the release of ADP non-farm payroll figures leading the way to Friday’s all important jobs report. Firstly, the fact that the ADP non-farm payroll (which is currently at the highest since December 2011) and the unemployment rate (which is at the lowest since November 2008) both came in very positively, allowed the FOMC to conclude that significant strength remained in the US jobs market, despite the fall in the non-farm payroll figures last month. I do not expect such a positive reading this month with market expectations coming closer to 191k from the 238k posted last month.

Moving to Friday we have the all-important unemployment rate and non-farm payroll figures. With non-farms coming in considerably lower than expected last month we do expect this indicator to return to normal with estimates pointing to a figure closer to 185k. This still remains somewhat subdued, however the current adverse weather conditions need to be reflected in these figures.

Also due to be released on Friday is the unemployment rate, and given this figure is being used as a target under the forward guidance model operated by both the UK and US, this could be the release of the week. Currently the level is residing at 6.7%, painfully close to the 6.5% threshold set by the previous Fed chairman Ben Bernanke. Any March FOMC meeting will likely use this figure, coupled with the above, as a key decision point as to whether to continue their current program of tapering (there is not a meeting in February). Therefore the importance of these statistics cannot be underestimated.

We have some slightly lower key releases also due this week, specifically the average weekly hours, participation rate and average hourly earnings. These will also play a significant part in the Feds decision making process next month, so again are worthy of note.

EUR This Week

We have a similar week for the Eurozone as we await the release of various PMI figures along with the latest ECB press conference. All the PMI releases are spread across two days with manufacturing set to be released on Monday, while services set to be released on Wednesday. French, German and EZ wide releases are set to dominate proceedings, with weaker areas such a French manufacturing likely to set the Euro’s tone for the week ahead.

The biggest European event of the week is the ECB monetary policy announcement on Thursday, given last week’s shocking inflation numbers which we mentioned above. Given that last time inflation rates were this low, Mario Draghi decided to cut interest rates by 25bps, you would be forgiven to think that this could happen again. Given the muted upside response the drop in base rate had on inflation, we doubt he will do it again. Instead, it will be interesting to see what type of policy measures (if any!) he had to try and combat the renewed threat of deflation. With this in mind, Mario Draghi could turn this into the event of the week.   


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