US Retail Sales has EM currencies holding their breath!

Week commencing Monday 9th June 2014

This week in Short

  • In the UK we have the manufacturing production rate, the claimant count and the unemployment rate. This should be a decent week for the UK as we expect either flat or expansion in all of these indicators.

  • In the US we have a relatively busy week with retail sales headlining on Thursday. We expect retail sales to rise to 0.5% while core retail sales should push up to 0.4%. Unemployment claims are expected to drop marginally to 306k while the UoM should continue to push north to 83.2.

  • We have a very quiet week ahead for Europe with France and Germany enjoying a bank holiday on Monday. With little in the way of data releases (apart from French and EZ IP) we expect the Euro to be driven by US Dollar sentiment.

Overriding Market Themes

Starting with the UK this week, the trade deficit widened for the UK in April due to weaker chemical and manufacturing exports according to the ONS. The goods trade deficit grew to an estimated GBP 8.92 billion from GBP 8.29 billion in March. However, this figure was   offset by a GBP 7.1 billion trade surplus in the dominant services sector, leaving the net deficit at GBP 2.5 billion. Also what did not help the figures was an omission by the ONS of some sizable oil exports to Europe, namely a GBP 700 million chunk of North Sea oil export. The ONS said the omission was not spotted in time by tax officials to be included in a detailed breakdown of the trade figures. Goods exports in April fell by 1.5 % to GBP 24.1 billion, when the oil omission was taken into account, while imports rose 0.8% to just over GBP 33 billion.

Sticking with the UK, the dominant services sector grew at a faster rate than expected in May, while employment in the sector stayed at a 17-year high recorded in April, the latest PMI survey has shown. The survey’s measure of overall activity, where a score over 50 signals growth, edged lower to 58.6 from April’s 58.7 but remains at historically high levels. With services accounting for around three-quarters of all economic output from the UK, the upbeat survey (alongside similar signs from manufacturers and builders) puts the country on course for growth of at least 0.8% in the current quarter. That would equal the strong growth seen in the first quarter and finally push the economy past its pre-recession peak in 2008.

Moving to a rather busy previous week in Europe, The European Central Bank has introduced a whole new range of measures aimed at stimulating the Eurozone economy, including negative interest rates and a new historical interest rate low. The central bank cut its deposit rate for banks from zero to -0.1%, a move which should encourage banks to lend to businesses rather than hold money on deposit. Mario Draghi also cut the ECB’s benchmark interest rate to 0.15% from 0.25%, pushing the region to the kind of interest rate lows enjoyed by the Japanese for the last decade. The ECB stopped short of introducing a Bank of England style Quantitative Easing program, but Draghi said the bank would "intensify preparatory work" should it prove necessary, and left the door open to further stimulus if needed. Action was widely predicted by analysts and markets amid a mounting threat that persistently low inflation could lead to outright deflation, however the announcement still has a profound impact on markets. GBP/EUR pushed towards a new yearly high of 1.24 while EUR/USD dropped to 1.35.

Finally moving state-side, news jobs data has found that Non-farm payrolls rose 217,000 last month, in line with expectations and the fourth successive 200,000-plus reading, while the jobless rate held steady at 6.3%. Emerging market currencies seemed to be the biggest winners however, as traders bet improvement in the labour market in May wasn't strong enough to push the Federal Reserve to an earlier increase in interest rates than expected. The newly created jobs in May now means that in the five years since the financial crisis, the United States has regained all the 8.7 million jobs it lost during the recession, a headline which will no doubt bolster the Democrats as we head towards the next bout of elections. It does seem that the US economy is showing signs of a sturdy recovery. Recent announcements ranging from manufacturing activity to car sales suggest the economy could grow at an annualised rate of 3% during this quarter.

GBP This Week

We have a moderately busy week for the Pound, with manufacturing production kick starting the data round on Tuesday. This indicator tends to take a back seat when compared to the PMI releases seen last week, but despite this it is still worth a watch and can impact Sterling crosses to some degree. We expect the MP figure to show a 0.4% growth rate for the month, which should bode well for the Sterling bulls out there.

We then shift our focus to the claimant count and unemployment rate, all due to be released on Wednesday. The unemployment rate is expected to improve in April, dropping to 6.7% from 6.8% previously. This would be the lowest rate of unemployment in more than five years, giving markets even more good news on which to feast. Wages however continue to remain a problem and despite the average rising to 1.7% in March, they are expected to fall back to 1.2% in April release.

Finally, we will be watching the NIESR GDP estimate for the three months to the end of May, which hopefully should give us some clues as to what the actual GDP figure is likely to be for the second quarter. The numbers have generally been on an upward trajectory, and should we see a continued improvement in the second quarter than this will only serve to boost confidence further.

USD This Week

We have a slow start to the week for the US with the majority of releases set to come out on either Thursday or Friday. We start the week off with Retail Sales, where we are expecting a fourth consecutive positive number for April on Wednesday, with sales seen rising 0.5%. This is obviously good news for the US economy, but also the emerging market too. With this in mind, expect minors to react positively to the news, as well as some of the more mainstream currencies like the Nords and Sterling.

Weekly jobless claims are also worth a watch, where most analysts expect a slight downside shift in the numbers with a posting of 306,000. Despite the decline, this would still be a very decent print, indicating that fewer firms are downsizing and the unemployed are finding it easier to secure employment. This obviously bodes well for the economic health of the economy, as well and increasing the prospects of a strong rebound in quarterly growth.

Finally, we have the preliminary University of Michigan consumer sentiment reading, which is expected to rise from 81.9 to 83.2 in June. This pickup in sentiment should also help risk on trades continue to push EM currencies north as economic improvement in the US seems to be sustaining.

EUR This Week

We have very little in the way of data releases from Europe this week, with a bank holiday in France and Germany on Monday impacting liquidity during the European session. The only releases of note come in the form of French and EZ industrial production, both of which are expected to return to positive territory. We doubt however that these releases will have much impact on markets however, to expect a Sterling and US Dollar driven Euro market this week.  


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