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GBP – Starting off the week in Washington, BoE Governor Carney warned that bankers’ behaviour needs to change. Senior bankers have been complaining with new rules that could make them criminally liable for “reckless misconduct” and could face jail time. Carney suggested that all senior bankers who felt these changes were too harsh should resign. Soft inflation data last Tuesday caused a Sterling sell off that continued through Wednesday leading to monthly lows in the GBP/EUR pairing of 1.2433. Although the pound has since gained against the euro and recovered mostof its losses, analysts still feel the pairing is undervalued. The CPI data in question was the lowestsince September 2009 and whilst Rob Wood of Berenberg Bank remained optimistic claiming “low inflation gives BoE room to wait before hiking rates”, news of further delays in the interest rate hikeonly increased sterling sell off. David Kern of the BCC said that an interest hike too soon could “put the recovery at risk”, he also foresaw a “possibility that CPI inflation will fall below 1% before the end of this year” and this would be due to falling oil and food prices. Mixed employment news on Wednesday was not able to stabilise the plummeting pound. Whilst the unemployment rate was not only the largest annual fall in unemployment on record but also the lowest amount since 2008, it was overshadowed by the claimant count change. Forecasted to be -34.2K, the claimant count change was actually registered at -18.6K. The UK calendar was empty after last Wednesday and this proved to be beneficial for the pound, which had become undervalued. Cable was left dependent on US data and although the majority of this was strong, it still allowed the pound to make some gains against the dollar. Meanwhile, the Eurozone policy makers continued to argue causing theEuro to weaken and the GBP/EUR pairing to recommence its climb. Key Events this week are the minutes for the MPC’s recent asset purchase facility and official bank rate meeting and the preliminary quarterly GDP data release. Both votes are forecast to be the same as the previous voting results and the GDP data is forecast to decrease by 0.2%.
USD – Last week started quietly for the greenback as the markets were closed for Columbus Day. However this quiet did not continue and the week was very data heavy for the dollar. Retail sales were released far below forecast causing a spike in Cable and monthly PPI fell for the first time in over a year, which is potentially a bad sign for the economy and could delay rate hikes even further; this data saw a 1.6049 spike in Cable from 1.591. Poor data continued as the Empire StateManufacturing Index fell from a multi-year high by 21 points, which shows that business activity is slowing down. Amidst weak data, the Fed’s predicting a 14% chance of rates at 0.5% or higher by mid-2015, which compares to 53% the month before. Charles Plosser, representing the Fed hawks, spoke last Thursday about the economic outlook. Plosser did not deny “risks in Europe” but felt that these were not enough to derail the US recovery as their exposure to the Eurozone is relatively small. Plosser made known his desires to “raise rates sooner rather than later” in the hopes that by doing this now, it would allow rates to be increase gradually as opposed to an abrupt increaselater in the future. His key message was that the US central banks must “prepare the markets” for an interest hike “sooner than previously anticipated”. Contrasting this hawkish speech, was Kocherlakota’s speech that was delivered later in the day. Kocherlakota stressed two points, firstlythat the US is “below maximum employment” and there is more they can do about it and secondly that rate hikes in 2015 would be “inappropriate”. Neither member affected the dollar in the manner unexpected,hawkish tones normally lead to strengthening within the currency,however Thursday saw a weakening in the dollar’s strength, which continued throughout the day. This is surprising as strong data emerged all day; unemployment claims fell to a 14-year low with payrolls in line for the biggest gain since 1999. Industrial output rose to the highest amount since November 2012 and utility production was the strongest since May 2012. Fed chair Janet Yellen spoke last Friday at aconference about ‘Inequality of Business Opportunity’. She said that she was “greatly” concerned about growing inequality and that this growth represents the most unrelenting rise since the 19th century. However, her moral message may have been missed as she failed to address whether the Fed has contributed to inequality. She also failed to address the controversial idea (which is gaining more followers) of whether the Fed is slowing economic growth. After a data heavy week it is easy to get absorbed in the world of numbers and ignore serious external influences. The past few weeks have seen rising concerns about the spreading of Ebola, conflict in Ukraine that has knockon effects throughout the world, and fears of an impending economic meltdown. However, the preliminary consumer sentiment that was released last Friday was the highest since July 2007 and the survey director Richard Curtin assessed that the data showed no signs of panic regarding thefactors above. Strong optimism surrounds the US and this should continue to grow as we approach the final Fed decision about rate hikes next week. Coming up this week, Wednesday will see Core CPI being released (forecast to increase by 0.2%), unemployment claims (forecast to decline) out onThursday and finally new home sales on Friday.
EUR – The week began with an unsurprising start as German ZEW economic sentiment came out far below forecast, below 0, which indicates pessimism. ZEW President Professor Clemens Fuest said “expect economic sentiment in Germany to decline further over the medium term” due to “geopolitical tensions and weak economic development in parts of Eurozone, which is falling short of previous expectations”. Germany slashed their growth forecasts, expecting a growth of 1.2% this year (down from 1.8%) and 1.3% in 2015 (down from 2%). Sigmar Gabriel, the economy minister, blamed geopolitical crises and ‘moderate’ global growth for holding back Germany’s economy, which is export-dependent. In Frankfurt, Draghi gave no new information regarding rate hikes, however he did stress his desire to integrate all existing information into a European information system and the effects of this remain to be seen. Good CPI figures at the end of last week wereexpected to reinforce the euro however all data was overshadowed by Spain and Greece and the euro plunged. The Spanish 10-year bond auction fell short of its sale target by €0.3Bn and Greek bond yields soared to the highest levels since January. The high bond yields reflect investor’s unease about Greece; worry surrounds Greece quitting the international bailout a year early and not being able to sustain itself. Greece quitting the bailout could lead to a backtrack of EU and IMF reforms and Greek leaders clashed with Eurozone finance ministers as no resolutions were made. Whilst Greece clashed with the EU, Merkel pointed her finger at France. France’s new 2015 budget would ignore all promises to bring their deficit to below the EU limit of 3% of GDP within two years. Merkel, without naming France, urged all countries to stick to budget rules and to continue with economic reforms to stay on course. Merkel said existing aid has been ‘under-used’ and that Germany has proven ‘growth and fiscal discipline’ work together. She believes that the private sector will return the region’s economy to strength and therefore all countries should continue with monetary stimulus and EU rules and not break them. Germany is currently in a worrying position. As the premier economy in the Eurozone and the current driver of their recovery, pessimism and lower confidence here will radiate throughout the entire Eurozone and have lasting effects. Looking ahead, in Riga last Friday Benoit Couere said that a program to purchase covered bonds will start within days, therefore volatility may be seen within euro pairings as the week progresses. French and German flash manufacturing PMI are forecast to decrease on Thursday and on the same day the Spanish unemployment rate is expected to improve. Friday will see the Germany consumer confidence being released, forecast to decrease by 0.2 it would not be surprising to see a more drastic drop.
AUD – A very quiet week for Australia saw the Aussie being dependent mainly on Chinese and American data. Last Tuesday saw the NAB Business confidence level registered at the lowest since elections. Business conditions are at 1, which indicates a slowing economy. The NAB revised theiroutlook for economic growth, forecasting a 2.8% growth for 2014/15 (down from 2.9%) and a 3.2% growth in 2015/16 (down from 3.4%). The NAB expects the RBA to lift the cash rate from 2.5% to 3% in 2015 and then to 4% in 2016. This all suggests unemployment will continue to rise and that the economy will only pick up once confidence is maintained and businesses invest more. On Wednesday, Westpac consumer sentiment and new motor vehicle sales both exceeded forecast however neither had an effect on the Aussie. We also saw poor data out of China, which could have contributed to the Aussie sell-off that occurred later in the week. The Chinese trade balance saw the results of the new iPhone 6 being sold alarmingly fast, as external demand spilled over to boost imports for processing and reshipment for goods. The trade surplus was registered at $31Bn. RBS’s Louis Kuijs warned that although export growth is holding well, import data is suggesting aweaker tone. Chinese CPI was registered at a 4-year low last Wednesday, this is likely to have been the trigger for the Aussie sell-off that begun on that day. As the week came to a close, Chinese credit growth rose to a 4-month high as 500Bn Yuan was injected into largest lenders last month, analysts’ consensus is that the Yuan is currently undervalued. Key events this week will be the monetary policy meeting minutes and RBA’s Lowe speaking on Tuesday, quarterly CPI and RBA’s Glenn Steven speaking on Wednesday and NAB quarterly business confidence on Thursday.
USD – Last week started quietly for the greenback as the markets were closed for Columbus Day. However this quiet did not continue and the week was very data heavy for the dollar. Retail sales were released far below forecast causing a spike in Cable and monthly PPI fell for the first time in over a year, which is potentially a bad sign for the economy and could delay rate hikes even further; this data saw a 1.6049 spike in Cable from 1.591. Poor data continued as the Empire StateManufacturing Index fell from a multi-year high by 21 points, which shows that business activity is slowing down. Amidst weak data, the Fed’s predicting a 14% chance of rates at 0.5% or higher by mid-2015, which compares to 53% the month before. Charles Plosser, representing the Fed hawks, spoke last Thursday about the economic outlook. Plosser did not deny “risks in Europe” but felt that these were not enough to derail the US recovery as their exposure to the Eurozone is relatively small. Plosser made known his desires to “raise rates sooner rather than later” in the hopes that by doing this now, it would allow rates to be increase gradually as opposed to an abrupt increaselater in the future. His key message was that the US central banks must “prepare the markets” for an interest hike “sooner than previously anticipated”. Contrasting this hawkish speech, was Kocherlakota’s speech that was delivered later in the day. Kocherlakota stressed two points, firstlythat the US is “below maximum employment” and there is more they can do about it and secondly that rate hikes in 2015 would be “inappropriate”. Neither member affected the dollar in the manner unexpected,hawkish tones normally lead to strengthening within the currency,however Thursday saw a weakening in the dollar’s strength, which continued throughout the day. This is surprising as strong data emerged all day; unemployment claims fell to a 14-year low with payrolls in line for the biggest gain since 1999. Industrial output rose to the highest amount since November 2012 and utility production was the strongest since May 2012. Fed chair Janet Yellen spoke last Friday at aconference about ‘Inequality of Business Opportunity’. She said that she was “greatly” concerned about growing inequality and that this growth represents the most unrelenting rise since the 19th century. However, her moral message may have been missed as she failed to address whether the Fed has contributed to inequality. She also failed to address the controversial idea (which is gaining more followers) of whether the Fed is slowing economic growth. After a data heavy week it is easy to get absorbed in the world of numbers and ignore serious external influences. The past few weeks have seen rising concerns about the spreading of Ebola, conflict in Ukraine that has knockon effects throughout the world, and fears of an impending economic meltdown. However, the preliminary consumer sentiment that was released last Friday was the highest since July 2007 and the survey director Richard Curtin assessed that the data showed no signs of panic regarding thefactors above. Strong optimism surrounds the US and this should continue to grow as we approach the final Fed decision about rate hikes next week. Coming up this week, Wednesday will see Core CPI being released (forecast to increase by 0.2%), unemployment claims (forecast to decline) out onThursday and finally new home sales on Friday.
EUR – The week began with an unsurprising start as German ZEW economic sentiment came out far below forecast, below 0, which indicates pessimism. ZEW President Professor Clemens Fuest said “expect economic sentiment in Germany to decline further over the medium term” due to “geopolitical tensions and weak economic development in parts of Eurozone, which is falling short of previous expectations”. Germany slashed their growth forecasts, expecting a growth of 1.2% this year (down from 1.8%) and 1.3% in 2015 (down from 2%). Sigmar Gabriel, the economy minister, blamed geopolitical crises and ‘moderate’ global growth for holding back Germany’s economy, which is export-dependent. In Frankfurt, Draghi gave no new information regarding rate hikes, however he did stress his desire to integrate all existing information into a European information system and the effects of this remain to be seen. Good CPI figures at the end of last week wereexpected to reinforce the euro however all data was overshadowed by Spain and Greece and the euro plunged. The Spanish 10-year bond auction fell short of its sale target by €0.3Bn and Greek bond yields soared to the highest levels since January. The high bond yields reflect investor’s unease about Greece; worry surrounds Greece quitting the international bailout a year early and not being able to sustain itself. Greece quitting the bailout could lead to a backtrack of EU and IMF reforms and Greek leaders clashed with Eurozone finance ministers as no resolutions were made. Whilst Greece clashed with the EU, Merkel pointed her finger at France. France’s new 2015 budget would ignore all promises to bring their deficit to below the EU limit of 3% of GDP within two years. Merkel, without naming France, urged all countries to stick to budget rules and to continue with economic reforms to stay on course. Merkel said existing aid has been ‘under-used’ and that Germany has proven ‘growth and fiscal discipline’ work together. She believes that the private sector will return the region’s economy to strength and therefore all countries should continue with monetary stimulus and EU rules and not break them. Germany is currently in a worrying position. As the premier economy in the Eurozone and the current driver of their recovery, pessimism and lower confidence here will radiate throughout the entire Eurozone and have lasting effects. Looking ahead, in Riga last Friday Benoit Couere said that a program to purchase covered bonds will start within days, therefore volatility may be seen within euro pairings as the week progresses. French and German flash manufacturing PMI are forecast to decrease on Thursday and on the same day the Spanish unemployment rate is expected to improve. Friday will see the Germany consumer confidence being released, forecast to decrease by 0.2 it would not be surprising to see a more drastic drop.
AUD – A very quiet week for Australia saw the Aussie being dependent mainly on Chinese and American data. Last Tuesday saw the NAB Business confidence level registered at the lowest since elections. Business conditions are at 1, which indicates a slowing economy. The NAB revised theiroutlook for economic growth, forecasting a 2.8% growth for 2014/15 (down from 2.9%) and a 3.2% growth in 2015/16 (down from 3.4%). The NAB expects the RBA to lift the cash rate from 2.5% to 3% in 2015 and then to 4% in 2016. This all suggests unemployment will continue to rise and that the economy will only pick up once confidence is maintained and businesses invest more. On Wednesday, Westpac consumer sentiment and new motor vehicle sales both exceeded forecast however neither had an effect on the Aussie. We also saw poor data out of China, which could have contributed to the Aussie sell-off that occurred later in the week. The Chinese trade balance saw the results of the new iPhone 6 being sold alarmingly fast, as external demand spilled over to boost imports for processing and reshipment for goods. The trade surplus was registered at $31Bn. RBS’s Louis Kuijs warned that although export growth is holding well, import data is suggesting aweaker tone. Chinese CPI was registered at a 4-year low last Wednesday, this is likely to have been the trigger for the Aussie sell-off that begun on that day. As the week came to a close, Chinese credit growth rose to a 4-month high as 500Bn Yuan was injected into largest lenders last month, analysts’ consensus is that the Yuan is currently undervalued. Key events this week will be the monetary policy meeting minutes and RBA’s Lowe speaking on Tuesday, quarterly CPI and RBA’s Glenn Steven speaking on Wednesday and NAB quarterly business confidence on Thursday.