UK Unemployment shoots down as AAA rating is under threat

Week commencing Monday 17th December 2012

Overriding market Themes

EU leaders have agreed on a roadmap for Eurozone integration beyond the previous idea of a centralised banking supervision, according to the German Chancellor Angela Merkel. The dates of which this plan would fall under have not yet been released, but Herman Van Rompuy said a deal should be reached next year on a joint resolution scheme for winding up failed banks. The guts of the deal have not yet been released, but they are thought to include much closer EU scrutiny of national budgets, and penalties if governments rack up unsustainable debts. There is also talk of tax harmonisation across the zone, however these agreements would be more contractual, and are likely to require contractual change, therefore will probably be put off for the short term. Where does this leave good old England? Well, the UK, along with Denmark, has a formal opt-out from joining the euro, and will not take part in any new banking union. That said, the UK’s banking pre-eminence in Europe makes it necessary for it to take a keen eye on the negotiations. Expect David Cameron to be clocking up those air miles then over the coming months!


Fitch has maintained the French Government’s top credit rating, the only major credit ratings agency to continue to support their coveted AAA score. Rival organisations Moody’s and Standard & Poors both cut the rating on French Government Debt this year, although Fitch has kept its negative outlook, suggesting a downgrade could be imminent. This leaves only Canada, Germany and the United Kingdom to possess a AAA rating from all three agencies. A cut to a credit rating means that a country is perceived as more risky to lend to, which means the cost of borrowing from international investors can rise. France is in a predicament, having narrowly avoided falling into recession during the third quarter of 2012 and the economy as a whole more or less stagnating over the year. The French socialist government is also enacting reforms which fly in the face of austerity in Europe, such as the president reinstating some retirement privileges for people over 60, whilst increasing the highest levels of income tax to 75%. This has led to some senior analysts to speculate that the French economy is hugely under competitive and over dependent on government spending. Only time will tell if Monsieur Hollande has it right or not however.


The number of people out of work in the UK fell by 82,000 between August and October, putting the total number of unemployed in the country at 2.51 million, according to the ONS. This represents the biggest quarterly fall in unemployment since 2001. In even more good news for the coalition, the Office of National Statistics also said that the number of people claiming Jobseekers Allowance fell by 3,000 to 1.58 million in November. Unsurprisingly, many analysts have questioned why unemployment is so low, given the general weakness in the economy. Some traders have speculated that the flexibility of the workforce is partly responsible, with large numbers of part-time jobs being created in previous months, small rises in average wages and the increase in self-employment. Either way, good news is welcome in this country, as hopefully a big increase in employment should spark a relatively big jump in productivity, which should continue to push this country into growth. 


The US Federal Reserve has said it plans to keep interest rates at close to zero until the US unemployment rate falls below 6.5%, indicating a shift from a date-driven target to a data-driven target. The Federal Reserve also said it will continue to buy $85 billion a month of government bonds and mortgage-backed securities to try to boost the economy. This news was received relatively warmly from American traders, however it seems the majority of Americans are more concerned over the Fiscal Cliff. This has led to some companies delaying investment and hiring, whilst also leading to some consumers cutting back on their Christmas shopping. The coming weeks will be critical for the country, and any delay in agreement in the Senate will cost the country dearly. This is almost certainly (now that Europe in on the road of agreement) the biggest global threat to stability we currently face. Watch this space.

GBP This Week

Tuesday kicks off the week for Sterling as we await CPI for the year, and the Bank of England’s Inflation Letter to George Osbourne. This key inflation index has been hovering close to the mid 2% level in the second half of 2012. The markets are expecting more of the same in the upcoming release. Moving to Wednesday, we are expecting the MPC Meeting Minutes, which details a breakdown of the vote of MPC members on the most recent interest rate and QE decisions. The market expectation is that both votes were unanimous. If this turns out not to have been the case, this could have an impact on market sentiment and the movement of GBP/USD. Thursday then bring about Retail Sales in the UK, and with November’s figures being a huge disappointment (declining by 0.8%), the markets are expecting a strong rebound. I would estimate a 0.3% gain should be likely. Friday sees the publication of the UK Current Account, which was dreadful in November, posting a deficit of 20.8 billion pounds. The markets are expecting a lower deficit in the November release, with a forecast of -13.7B. Finally, Final GDP is one of the most important releases, and any unexpected readings can affect the movement of GBP/USD. After three consecutive quarters of negative growth, the markets are anticipating a turnaround in December, with an estimate of a healthy 1.0% gain. 


The pound has posted some impressive gains against the Dollar of late, well since mid-November! Will this strength continue? As we approach the end of the year, traders continue to focus on the looming Fiscal Cliff in Washington. It is, in my view, highly likely that some king of stop-gap resolution will be reached, and if dropping off the cliff can be averted; expect market sentiment to be positive. This should, in all good theory, bolster the pound against the greenback as we move into January.

USD This Week

We start the USD week with Building Permits on Wednesday. The number of building permits issued in October reached 870,000, indicating the housing sector remains strong. Despite the growth trend however, both building permits and housing starts figures are still below historical levels. I expect the number of building permits to remain in or around this level for the foreseeable future. On Thursday, US Unemployment Claims should see a slight increase, despite the number of Americans filing initial claims for unemployment benefit dropped down by 29,000 last week to a near four year low of 343,000 (the fourth straight week of declines). US Existing Home Sales is also due, with a rise to 4.85 million forecast as sales of previously owned homes unexpectedly surged in October to 4.79 million, despite record low mortgage approvals and subdued house prices. Lastly on Thursday, Manufacturing in the Philadelphia region showed a sharp decline in November, dropping to -10.7 from 5.7 in the previous month, as hurricane Sandy disrupted work in the region. Friday sees the final release of the week, US Core Durable Goods Orders, which I expect to decline 0.1% this month after last month’s huge 1.5% gain against projections of a 0.5% decline. 

EUR This Week

German Ifo Business Climate kicks off the Euro data week on Wednesday, as with the great improvement in the ZEW indicator I expect a rise of somewhere in the region of 101.9 now. We are also watching Mario Draghi’s speech in Brussels on Monday, as he is Due to testify about the economy at the quarterly hearing of the Committee on Economic and Monetary Affairs. I expect the inner hawk to erupt of him, potentially giving the Euro an even greater boost as we head towards Christmas. The Greek issue is moving along at a recognisable pace now and some positive German surveys seem set to support the currency. In general, the economic situation in Europe remains abysmal, but this will probably be reflected after a depressing festive shopping season.

In Other News

A tragedy occurred this weekend as twenty children and six women died in an assault on Sandy Hook school by a lone gunman, who later turned his weapon on himself. Bringing back terrible memories of the Columbine High School massacre in 1999, it is a poignant reminder of how lucky we are with the level of weapon control we have in the UK (although I accept that we also have had incidents). Of course, it is impossible to comprehend the motives of the killer, but it is humbling to read the stories of how these brave teachers tried to keep their students safe in the face of such brutality. On a considerably happier note, many i congratulate Bradley Wiggins on winning the BBC’s Sports Personality of the Year award. I had my money on Jessica Ennis, however Bradley is as deserved as anyone to hold that trophy after the Tour de France and Olympic success he enjoyed this year.


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