UK Unemployment down to 6.8% - What ever will Mark Carney do!

Week commencing Monday 12th May 2014


This week in Short



  • In the UK we have a jam packed day on Wednesday with the Claimant Count, Unemployment Rate and the BoE Inflation report all due out. We could well see a continued decline in the unemployment rate while the Inflation report could be an interesting read.

  • In Europe, the only release of note is the German ZEW figure on Tuesday morning which is expected to continue to decline. Market commentators are expecting a print of 41.3 versus the 43.2 that it printed last month.

  • We have a very busy week ahead for the US with Retail Sales, PPI, Unemployment Claims, the Philly Fed and the Preliminary UoM release all due to steal the headlines. We expect a mixed batch of data from across the Atlantic with the general trend to be reasonably risk on positive.


Overriding Market Themes


The president of the European Central Bank, Mario Draghi, raised the prospect of monetary easing as early as next month. Speaking at his monthly press conference, he commented that the strong Euro was an immediate concern and that “The governing council is comfortable with acting next time but before we want to see the staff projections that will come out in early June”.  The European Central Bank held its key interest rates steady on Thursday, keeping the central refinancing rate at 0.25%, the marginal lending rate at 0.75% and the deposit rate at 0%. The news did little to bolster the Euro, with EUR/USD sliding from 1.3995 to 1.3875 within an hour of the release. Also, government bonds also fell, with 10 year German bunds dipping to 1.46%.


Moving to China, exports and imports seemed to have returned to more normal growth last month as orders to the United States and the European Union surged, offering some positive signals after a weaker-than-expected start to 2014. Exports rose by 0.9% in April compared to the previous year, and after declines of 6.6% in March and 18.1% in February. Imports on the other hand grew 0.8% from a year earlier and follow the 11.3% decline in March. Despite this, some commentators are warning that the new data did not mean exports were set for a strong recovery, given the weak demand from emerging economies. It comes as the Chinese economy grew at its slowest pace in 18 months in the first quarter, while analysts are projecting an annual growth rate this year of 7.3%. This would be the weakest annual growth figures in 24 years!


Moving our attention to the US, the trade deficit fell in March on the back of a surge in exports. The gap dropped 3.6% to USD 40.4 billion, down from USD 41.9 billion in February, according to the Commerce Department. After inflation was factored in, the deficit fell to USD 49.4 billion, down from USD 49.8 billion the month before. This will no doubt be a welcome sign for Barack Obama and the US government, who have struggled in recent weeks as US growth data continues to slow. Last week, the Commerce Department said the economy expanded at just 0.1% in the first three months of the year, one of the weakest rates of growth since the financial crisis began. Many commentators blame the harsh winter on these numbers, and continue to remain mildly bullish on the economy for the rest of 2014.


This nicely leads us onto Janet Yellens testimony in front of the US congress; where she reaffirmed her believe that the US economy was on the mend. She said the Federal Reserve saw the US economy rebounding after the brutal Q1 growth figures, and once again stated that she believed this was almost solely down to the exceptionally cold winter. In a slight departure from the normal fiscal/monetary rhetoric, she did mention that geo-political events overseas, including turmoil in emerging markets and the ongoing problems in Ukraine, could impact this quarter’s growth figures. She did not indicate that she would slow the tapering of the banks quantitative easing program, despite jobs growth slowing somewhat, and cut the amount to stimulus by a further USD 10bn.


Finally, back on home soil the members of the Bank of England's interest-rate setting committee have voted to hold policy. This vote was widely expected in the market, especially as the newly improved forward guidance thresholds have not been met. Despite this however, there are indications that the Bank of England could now be first of the big four central banks to pull the trigger on a rate hike. When looking at the Bank of Japan and the ECB, they are very unlikely to be in a positive to raise interest rates anytime soon. Dovish signals from the Federal Reserve also bode well for those predicting that the BoE will be the first of the big four to raise rates. That said, with less than a year to the next general election, the bank is approaching a politically sensitive time, and any movement by the bank could be seen as favouring (or opposing) the current government. Nevertheless, with signs that the property market may well be overheating and the current strength of the UK economy, Mark Carney may well be forced to act sooner rather than later. Watch this space!


GBP This Week


We have a moderately busy week ahead for the UK, with Wednesday set to headline with the release of the Claimant count, Unemployment rate and the Bank of England inflation report. We start with the claimant count, where another decline is expected by at least 31.2 thousand jobs. With this strong decline expected in the numbers of unemployed, it may well be enough to push down the unemployment rate from its current low of 6.9% to 6.8%. This would prove markets with some considerable GBP volatility, especially as we move ever closer to triggering one of the new “forward guidance” thresholds.


We then shift our attention to Mark Carney and the Bank of England Inflation report, which is due out at lunchtime on Wednesday.  This quarterly report is eagerly anticipated by the markets and can have a significant impact on the movement of both GBP/USD and GBP/EUR. The report details the BOE’s forecast for economic growth and inflation over the next two years, and analyst will be combing through for hints as to the Bank’s future monetary policy.


USD This Week


We have a very busy week ahead for the world’s largest economy, with Retail Sales, PMI, Unemployment and the Philly Fed all set to be released. Starting with retail sales then, we expect to see further climbs by 0.5% this month, while core retail sales should also expand by a not-so-modest 0.6%. This indicator surged to a fresh 1.5 year high last month, indicating a strong rebound after the dreadful winter the US economy suffered. This should mean that if we see a decent print this month, risk on trading should be the norm as we move deeper into the month,


Moving to PMI, the top-line final-demand PPI is likely to have risen by 0.3% in April on higher food and energy prices, while inflation in the core PPI was likely more moderate with a 0.2% increase.


Over to unemployment, the number of new claims for benefits filed last week fell 26,000 to 319,000, indicating the setback seen in the Easter holiday was temporary and the US job market is regaining its strength. Despite this however, we usually see a seasonal increase in joblessness as employers lay off staff after the Easter holidays, therefore claims is expected to rise to 321,000.


Finally, we look for a slight weakening of the Philly Fed Manufacturing Index from 16.6 previously to 13.9 for April. While on Friday we expect consumer confidence to continue to improve further to 84.7. The consumer outlook is likely to remain on a positive trajectory. For the survey at the beginning of May, however, some of this optimism may be offset by the effects from recent increases in petrol prices.


EUR This Week


We have a very quiet week ahead for the Eurozone, with German ZEW the only release of note. Economic sentiment is expected to continue to drop, with market commentators projecting a print of 41.3. This will come after the fourth straight month of declines for the indicator, with the main drag likely to continue to be the ongoing situation in Ukraine and softer than expected export growth. We do however expect the economic climate for the Eurozone as a whole to edge up, with predictions averaging out at 63.5.

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