USD on the march as Fed beings program of "normalizing" Fed Funds!
Week Commencing Monday 13th April 2015
This Week in Brief
In the UK we will be watching CPI and a swathe of Labour releases, as well as the general direction of the election. CPI should continue to post flat, while Labour news should be broadly positive, with the exception of real wage inflation.
In the US we have a busy week, with the highlight retail sales, Industrial Production and CPI. All of the releases should be reasonably positive, pointing to the continued robustness of the US Dollar.
In Europe we have the all-important ECB press conference. We expect nothing new from Mario Draghi, with no shift in policy stance. Expect Draghi to concentrate on how successfully they view the first month of QE.
Overriding Market Themes
We start this week off with news that the UK’s trade deficit has widened in February, with the indicator increasing from GBP 1.54 billion to GBP 2.86 billion. It was the result of a GBP 1 billion drop in exports to GBP 41.3 billion and a GBP 300 million climb in imports to GBP 44.2 billion. The decline in exports reflects a fall in goods sent to non-EU countries, with the trade to the US particularly effected by the weakness of the Pound. Meanwhile, the deficit between the UK and member states of the EU increased by GBP 1.5 billion to GBP 21.1 billion in the three months to February, owing to a 5.6 percent decline in exports. This decline however was mainly down to a decline in North Sea oil exports to the continent. It is therefore clear that the UK economy remains relatively reliant on domestic demand and sales of goods to the Euro area, however these too will face further pressure from the strength in Sterling. This is a situation that is likely to remain unchanged until the UK economy makes sufficient progress in rebalancing the economy towards net exports. Wouldn’t it be nice if some of the parties were to start concentrating on that, instead of inheritance tax!
Sticking with the UK, and in some good news, UK unemployment has fallen by 102,000 to 1.86 million according to official figures for the first quarter. We also learned that the claimant count measure, which tracks the amount of people claiming job-seekers, was pushed down by 31,000 in January to 791,200. All round these figures sound encouraging, if it were not for the ever present average earnings figures! The ONS said average earnings, excluding bonuses, grew at an annual rate of 1.6 percent in the three months to January, slightly weaker than the 1.7 percent in the last quarter of 2014. The problem is that real wages, when adjusted for inflation, has risen in recent months. This is only due, however, to the rock bottom rate of inflation, which hit just 0.3 percent in January as the global oil price declined, not because of any substantial rise in pay levels.
Moving to the US, members of the Federal Reserve’s Open Market’s Committee were divided at the mid-March meetings over whether to raise interest rates this June, or to continue to wait to see a more sustained recovery. According to the minutes of the meeting, several members estimated that economic data would justify a modest increase in rates by June, but others mentioned that low oil prices and a strong US Dollar would maintain low inflation, thereby allowing the Fed more breathing room to act. Regardless of the date however, most Fed members expect to raise the rate gradually as unemployment continues to ebb and inflation remains modest. This runs in stark contrast to the general attitude during the last quarter, when most Fed members lowered their expectations for the speed at which they would raise the Fed Funds rate. All things being equal, the US has certainly overtaken the UK as the darling child of the advanced world when it comes to growth and general robustness. Expect even more pressure from the US Dollar on the back of this, with Sterling and the Euro likely to be the worst hit.
GBP This Week
We have a reasonably quiet week on the economic data front for the UK, with CPI and the Claimant Count headlining. Starting with inflation on Tuesday, we expect a further month of flat CPI in line with market forecasts. The labour market indicators on Friday are likely to show a small drop in the unemployment rate to 5.6 percent in February, from 5.7 percent in January. Average weekly earnings growth should remain at 1.8 percent for the quarter, while the ex-bonus figure should increase slightly higher to 1.7 percent. These remain well below their 15 year average of about 3.0 percent.
We expect further GBP weakness this week as price and labour market data should confirm the current low inflation environment and investors likely sharpen their focus on the highly uncertain general election which is now less than four weeks away.
USD This Week
In the US, we look for the headline retail sales indicators to have risen by 1.1 percent on the month, and expect core retail sales to have increased by 0.5 percent, suggesting better momentum after the previously disappointing results from the last three months. We will also be concentrating on Industrial Production on Wednesday, Housing Starts on Thursday and CPI on Friday. We expect March IP to fall by 0.5 percent while headline CPI should increase by 0.2 percent.
In general, our forecasts remain relatively USD bullish as we start the week, with potential for further gains against both the Euro and Sterling.
EUR This Week
The Euro should remain under considerable pressure this week as we draw closer to the ECB press conference on Wednesday. The ECB Governing Council will likely leave policy unchanged as widely expected, and focus on the impact of its past policy decisions after one month of the expanded QE program.
We continue to believe that the Euro has further to go, despite its momentous declines over the past 6 months. With some commentators pointing to rates as low as 0.95 on EUR/USD, coupled with low expected returns of capital and the ECB’s commitment to a long period of low or negative interest rates, there is still considerable room for the Euro to decline.