US GDP set to post massively discounted figure ... welcome to the job Mrs Yellen!

Week commencing Monday 24th February 2014

This week in Short

  • We have a quiet week ahead for the UK with the second estimate of GDP the only release of note. We expect no change from the previous release of 0.7 percent.

  • We also have a quiet week in the US with consumer confidence and GDP the only releases of note. We expect confidence to decline slightly month on month, while GDP could seriously disappoint markets with a heavily discounted 2.7 percent versus 3.2 percent expected.

  • A busy week lies ahead for the Eurozone with the release of German Ifo, flash CPI and the Eurozone Unemployment Rate all dominating news wires. We expect a flat reading on the Ifo while CPI may well continue to push down. If this is the case, expect Mario Draghi’s next press conference to be very interesting indeed. Unemployment is likely to hold steady at the 12.0 percent level.

Overriding Market Themes

Starting in the UK, lower income and corporation tax receipts dragged Britain's public finances to a much smaller than usual seasonal surplus in January, but the government still looks on track to meet borrowing targets ahead of its annual budget. Friday's official borrowing figures showed January's seasonal surplus was little more than half that expected by economists, with income tax and corporation tax receipts both more than 5 percent lower than the same month a year ago. Strong performance previously however means Osborne should still meet his borrowing target for the 2013-14 fiscal year, barring a sudden break from trend in the remaining two months. January is usually a key month for the Treasury’s public finances as a disproportionate share of annual income tax and corporation tax is due, causing the budget to usually run a significant surplus.

Sticking with the land of hope and glory, last week’s UK retail sales were somewhat on the disappointing side, failing to live up to expectations with growth of 4.8 percent versus the forecast 5 percent. The Christmas period will have given a boost to December’s numbers, while January had to cope with poor weather and the traditional post-Christmas time of domestic austerity. Nonetheless, the picture looks better for the UK economy at the moment, with growth still looking reasonable and weaker inflation helping to make life easier for consumers. Diving into the release, retail outlets saw the largest increase with household goods recorded growth of 9.8 percent from a year earlier, the strongest rate since July 2007, although the ONS said the figure may have been boosted by weak sales in January 2013 when heavy snowfall affected trading. It is important to put these factors into perspective therefore, as now a poor UK retail sales figure still remains a good 5 – 6 percent higher than its European peers.

Moving to Eastern Europe where Standard & Poors has downgraded Ukraine in light of political uncertainty and violent clashes in the capital Kiev. It downgraded the economy by one notch, from CCC+ to CCC while also putting Ukraine on a “negative outlook”, suggesting further downgrades could be possible. This comes as protests which began in November last year after President Viktor Yanukovych's government rejected a far-reaching accord with the European Union in November 2013 in favour of stronger ties with Russia, appear to be coming to an end. A European Union-brokered peace deal between the government and opposition envisages snap presidential elections by December and a national unity government within 10 days. Lawmakers backed a return to the 2004 constitution, a step that would curb Yanukovych’s powers. On the back of the news, currencies across developing Europe rallied, reversing losses after deadly clashes in Ukraine this week sparked a rout in regional assets.

Moving to the Eurozone, the flash estimate of the Eurozone’s purchasing managers index indicated growth slowed, but only fractionally, in February with the index slipping from 52.9 in January to 52.7. diving into the release,  Germany and France are trending in opposite directions, with Germany posting the strongest expansion level and the most robust reading for new orders since June 2011, while job creation continues to sit at the highest level since January 2012. In France, firms are reporting a contraction that has picked up speed for the fourth consecutive month. This release came as last week’s official figures showed that the Eurozone’s economy grew by 0.3 percent in the final three months of 2013, up from 0.1 percent growth in the previous quarter.

Finally, The US Federal Reserve intends to continue reducing economic stimulus measures, minutes of the central bank's January meeting have confirmed. Minutes of its January meeting show that only a couple of officials had concerns about slowing asset purchases, suggesting the Fed is likely to taper its asset purchases by another $10bn to $55bn in March despite a run of weaker data on the economy. This was the last meeting helmed by outgoing chairman Ben Bernanke, therefore the current Federal Reserve chair Janet Yellen is set to lead her first meeting when the FOMC next meets in March. Will she change the direction or speed of this taper? Unlikely, however there is speculation that short-term interest rate, also known as the federal funds rate, could be increased sooner than expected, as the unemployment rate is expected to fall below 6.5 percent. The next policy meeting is set to be held next month and all eyes (especially those domiciled in EM) will be on Janet Yellen to see if a March taper is in hand.

GBP This Week

We have a relatively quiet week for the UK with the second estimate of the Q413 GDP numbers the only release of note. We doubt that we will see a revision to the 0.7 percent growth we encountered in the first estimate, therefore we expect the release to hardly stoke up any volatility in international currency markets. It should still be an interesting watch however as GDP growth is typically seen as the strongest, all-encompassing measure of economic health, therefore any change in this figure will have a profound effect on Sterling.  

USD This Week

We have a surprisingly slow week ahead for the US with the only releases of note coming in the form of consumer confidence and the second GDP estimate for the fourth quarter of 2013. We start with consumer confidence, where market estimates point towards a pullback to 80.1 from last month’s figure of 80.9. Should this happen we do expect disappointment to become the key theme throughout the trading day, especially as the measure has been steadily improving and showing signs of moving towards the previous 5 year high of 81.8. That said, given that the past two releases have majority overshot market expectations, there may well be enough room in this indicator to post another improved figure this month.

Moving to GDP, forecasters are pointing to a heavily discounted GDP rate of 2.7 percent from an initial estimate of 3.2 percent. Should this happen it would suggest that economic output within the US during 2013 was substantially lower than previously thought and therefore could cause quite considerable currency shifts. Much of this decline will be attributed to a decline in retail sales numbers, which fell by -0.4 percent in January on a seasonally adjusted basis. This will definitely be the release of the week as far as NU Currencies is concerned and will no doubt dictate currency movements for the beginning of March.

EUR This Week

In a surprisingly busy week for Europe, we look forward to the German Ifo business climate survey, CPI figures and the unemployment rate. We start therefore with the German Ifo, where we are not forecasting any change from last month’s 110.6 figure. Interestingly, this figure has a high correlation with German GDP and therefore is certainly worth watching out for as a leading indicator, especially as the German economy remains the driving force behind the EZ recovery.

Moving to Friday we await the latest flash CPI figure for February, which is likely to be the key release of the week for the zone and the one Mario Draghi is most likely to watch. He recently speculated that inflation rates will remain low for some time to come, yet any further reductions in this figure would certainly pile continued pressure on the ECB to act. One thing they could introduce would be negative interest rates, or perhaps the LTRO and asset purchases. Either way, should this CPI measure fall any further it would undoubtly push us closer to monetary loosening regardless of what he has previously said.

Finally we expect the Eurozone unemployment numbers to also be released on Friday. Despite recent reductions to the headline number, the rate has failed to break through the 12.0 percent barrier for 11 months now, and unfortunately for the Eurocrats in Brussels it seems unlikely it will do this time. Market estimates continue to point to the rate remaining at 12.0 percent following last month’s 0.1 percent reduction. 



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