UK trembles as 'Triple Dip' rears it's ugly head!

Week commencing Monday 7th January 2013

Overriding Market Themes

UK service sector activity fell in December, raising fears of a triple dip recession hitting the country as we move further into the year. The PMI services index fell to 48.9 from 50.2 in November, with any score below 50 indicating a contraction in the sector. With the UK only emerging from a double dip recession last summer, it seems that the country is far from being out of the woods yet! Indeed, the service sector is seen as a good indicator of the health of the wider UK economy as it accounts for nearly 75% of the UK’s total gross domestic product. Earlier in the week there was more optimism to be found as UK Manufacturing PMI posted a healthy gain, however this was later foiled by a dismal contraction in the Construction sector.


This all continues to play havoc with the Coalitions plan of retaining the UK’s coveted AAA rating. All three of the credit rating agencies have placed the UK’s growth outlook on negative, which tends to be a precursor for any demotion on the credit rating tables. Will this change the policies of the government however? Unlikely! They are right to continue to seek to keep interest rates on UK government debt low, and certainly the deficit if being reduced, if slightly slower than expected. Unemployment however, along with a lacklustre pace of capital spending, does seem to be hampering any real prospects of growth. Whilst we do not forget that David Cameron inherited a very poisonous chalice from the previous Labour government, we do need to see the government do considerably more to install confidence in the British economy.


In Germany, Chancellor Angela Merkel is shifting her focus to the German economy from the beleaguered Eurozone as the State Elections draw near. With the CDU and the main opposition Social Democrats espousing similar policies to solve the debt crisis, Merkel will likely focus on creating jobs to distinguish her policies from rivals. As Europe’s biggest economy slows, a recovery in euro-area bond markets may help broaden voter support for Merkel, and it seems that a third term could well be odds on. 

In even more good news for Angela Merkel, retail sales in Germany rose by as much as 2.1% last year as Europe's largest economy took the eurozone debt crisis in its stride, according to the Federal Statistical Office. However, if you strip out inflation, turnover at retain stores fell between 0.1% and 0.3% form 2011. Figures this week also showed the jobless rate was unchanged at 6.9% last month with the total jobless at about 2.8 million. 


Across the pond, a number of Federal Reserve regional bank presidents have said that a decline in unemployment may prompt a halt to the USD 85 billion a month bond purchases. This comes as the Federal Reserve also indicated it may end the buying as early as this year. The US generated 155,000 jobs last month whilst gains in wages and the workweek exceeded projections. All this is making Fed officials debate when to end purchases of mortgages bonds and Treasury securities that are aimed at fuelling economic growth and reducing the 7.8% unemployment rate. Also, The FOMC said it will also keep rates at near zero levels as long as joblessness is above 6.5%, inflation is projected to be no more than 2.5% and longer term price expectations are reasonably stable. 

GBP This Week

With most of the important data releases set for the end of the week, we start the UK calendar on Thursday with the MPC Rate Statement and other BoE related statements. The Bank releases its QE amount each month, and the markets carefully monitor not only the actual amount, but also the breakdown of the vote prior to the decision. QE has remained pegged at 375K since June, and the markets are not expecting any change in the January announcement. Also, the bank has not changed the level of interest rates in over 3 years , and markets are not expecting any change in the January announcement. Moving into Friday’s session, Manufacturing Production has shown some volatility of late. This key indicator declined by 1.2% in December, well below the forecast of -0.2%. The markets are expecting a turnaround in January, with the estimate standing at a gain of 0.6%.

USD This Week

Once again, Dollar news seems set to be released at the end of the week, with unemployment claims due out on Thursday afternoon. The number of Americans seeking unemployment benefits increased unexpectedly to 372,000 from 362,000 last week, but the increase may be due to the winter holidays distorting readings for the second week. The job market in general is in a positive condition with increased hiring and fewer redundancies, therefore a drop to 161,000 is expected now. We then move to the Trade Balance release on Friday afternoon, and with a decline in exports indicating weaker demand from Europe to Asia and slower imports signals, a small improvement to a deficit of 41.1 billion is forecasted this time.

EUR This Week

A relatively light week for the Euro, with the ECB rate decisions the highlight of the week. There is more than a 50/50 chance that the ECB will cut the main interest rate from 0.75% to 0.50%, but this does not seem to be priced into EUR/USD at present. With PMIs pointing to more weakness in manufacturing and with a weak Christmas season, the scene is set for the ECB to act. In addition, inflation is almost at the 2% target, and is forecast to slide. Mario Draghi will probably refrain from pushing the deposit rate into negative territory and leave this policy option to a future deterioration. If the ECB does announce a negative deposit rate, this would be another step in the “currency wars” and the euro could be sold off.

In Other News

It seems that the Oscars are going to pay tribute to 50 years of great James Bond movies, with the organisers describing the films about the spy as “the longest-running motion picture franchise in history, and a beloved global phenomenon”. Skyfall, the latest film to join the franchise, has made more than GBP 600 million globally so far, and with more to come once the film is released on DVD. The film also became the first Bond film to be nominated for the top prize at the Producers Guild of America (PGA) Awards. The PGA awards are seen as a good indicator of which film could win best picture at the Oscars, the most coveted film prize of the year and highlight of the

movie calendar.


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