WISE MONEY

UK Q1 GDP data is the big data release this morning and from Sterling’s perspective it is a very important number.

The Bank of England engineered a fairly swift revaluation after comments about the Pound being too strong against its major trading partners.

Since the move in the middle of March, Sterling has been steadily range trading waiting for this number, and bullish or bearish should mark the next leg and away from the current ranges. Estimates range from +0.1% to -0.3% for the first quarter and 0.2% to 0.3% for the year-on-year figure.

It is very likely that the unseasonable cold snap will act as a drag on the figures and the market seems positioned for either a very weak positive number or a return to recession for the UK.

Keeping with the theme of a grim outlook, the ECB is widely expected to cut rates at next week’s monthly meeting in the face of increasing poor economic data.

The worry is that the downturn is spreading from the periphery to the core which in tandem with tighter lending conditions and disinflationary conditions filtering through from lower oil prices, the ECB medium term inflation target will undershoot.

Dovish comments from several ECB board members add to the sense that the ECB is preparing for action. it is unlikely the ECB would be influenced by comments over the value of the Euro but a side effect of any rate cut will see the Euro weaken, making certain influential politicians very happy.

Tomorrow US GDP is due but with nothing like the hype attached to the UK number this morning. Estimates are for a colossal (in comparison to the UK that is!) 1.4% growth in Q1 and 3.1% year on year. At current growth rates we will witness a large divergence in economic outcomes compared to this side of the Atlantic. The US Dollar should benefit from this.

The wise money markets are concerned over the economy as global growth has slowed as figures revealed yesterday.
Growth in most economies namely America, China and Germany, came out much lower than expected.

The euro area factory output has slowed down for the 15th consecutive month in April bringing back fears to investors about the recovery of the crisis hit zone.

Purchasing managers Index figures came out at 44.2 in France and 48.8 in Germany, which was the lowest in the last 6 months.

Growth in China at 50.5 and America at 52 were above the 50 level that technically signifies growth, however these figures were much lower than anticipated and hence the slowdown.

The data has raised concerns that growth in America’s manufacturing sector is declining rapidly as consumers worry about the impact of spending cuts and tax hikes.

Business confidence is rapidly slowing in Germany as well, as the Euro zone as a whole remained in a recession overall. This saw the Euro fall by over a cent to levels of 1.2970 against the greenback as there is increased pressure on the European Central Bank to take further action to stimulate growth.

In terms of data, the only silver lining was home sales from the US which came out much better than expected for the month of March, providing evidence of an albeit meandering yet sustained recovery.

With weak figures coming out from global manufacturing and growth sectors, the Great British Pound also felt the pressure as the country is heavily reliant on trade. Chancellor George Osborne has something to hold onto as figures show that the UK is not the only country in a financial quandary, though investors still feel there is still much to be done in the UK to boost growth.

This comes after figures revealed that the government borrowed £120.6 billion in the last year, raising the national debt to 75.4% of GDP.

The Bank of England has also announced that they will extend their Funding for Lending scheme till January 2015, in order to provide cheaper loans to companies and consumers as they try and add further momentum to the economy, as the economy is close to an unprecedented triple-dip recession.

Growth fears have returned following the disappointing data from the US and China coupled with downward revision to global growth forecasts by the International Monetary Fund.

In Europe, PMI and the German IFO business sentiment assessments will expose some additional moderation, while the credit environments remain constrained representing a downbeat outlook over the rest of the year.

Therefore pressure for a policy rate cut from the European Central Bank is likely to strengthen, with a cut likely by the end of this quarter. EUR/USD continues to trade above its 1.3001 technical support level however, drive is fading. Weaker economic data this week will likely undermine the EUR further.

Data releases this week will not do much to dispel growth fears. Whilst the advance reading of Q1 US GDP is expected to show a firm 3% annualised result, the drive in the US economy clearly ran out of steam at the end of the quarter recent releases demonstrate.

The US and global economy is likely to recover throughout the year but undeniably recent data releases point to a similar pattern as recent years of firm Q1 activity followed by weakness later.

After last week’s volatility in commodity and gold prices, in particular some stability is likely over coming days, with gold retracing some of its losses and recovering the USD 1400 level.

Equity markets finished lower yesterday erasing early gains after U.S. Construction company Caterpillar cut its forecast, hurting UK engineering stocks but the plethora of US Q1 earnings scheduled over coming days will help to determine whether the stocks can recover.

Currencies were certainly the hot topic at the G20 meeting however the final upshot left the door open to further JPY weakness while the statement highlighted the “unintended negative side effects” for easier monetary policy.

While this was an indirect warning about potential build-up of asset price bubbles as central banks ease policy, it is questionable whether one can influence the Bank of Japan from accelerating its balance sheet expansion. Aside from a probable break of USD/JPY 100, there is unlikely to be much follow through from the G20 meeting this week.

The credit rating agency Fitch lowered the U.K.’s credit rating to AA+ from AAA in a further sign that the economy and reforms are struggling.This hit Sterling hard, after a strong surge during early London trade, it went from 1.1759 down to mid-1.1650’s, with GBP/USD moving below 1.53 and EUR/USD bouncing between mid-1.31’s and 1.3085.

As the G20 summit came to a close on Friday we saw the confirmation, again, that Japan is well within its rights to continue on it monetary easing to return the nation to growth and inflation by 2014.

The Italian election is back on the cards this week, after the country remains split over which party to elect with hopeful Pier Luigi Bersani deciding to step down from his party’s race over his failure to secure election or a coalition party.

This week will be relatively quiet but we kick the week off on Tuesday with Public Sector Borrowing figure expected to show another rise. Big ticket data will start on Wednesday when it is confirmed whether or not the U.K. has avoided a triple dip recession with conflicting reports ranging from marginal to no growth up to a triple dip recession.

After ECB member Jens Weidmann successfully weakened and strengthened the euro last week we have a quiet week coming up with notable data on Tuesday that will see Eurozone Manufacturing and Services PMI expected to show a deficit for the region with Germany’s Manufacturing expected to reveal another month of deficit but growth in Services.

Quite a busy week for the American money markets coming up starting with more positive data for Existing Home Sales and also Tuesday’s New Home Sales figure is expected to rise again in a bullish sign for the property market in America.

Durable Goods Orders on Wednesday are expected to have declined. Thursday, Initial and Continuing Jobless claims are expected to show a slight fall. Friday, is the big ticket data with the GDP release, expected to show a whopping 3% growth compared with 0.4% last quarter.

Recent comments from the IMF that Britain should rethink its austerity policies bring it into direct opposition to the Chancellor George Osborne’s current stance that fiscal tightening is here to stay.A high profile stand-off is on the cards. Fair play to the IMF for changing its mind in light of the evidence, data has shown forecasts to be far too optimistic and economic performance since the financial crisis woeful.

Output is still three per cent below its 2008 peak. Adding to the Chancellors woes is the widely publicised critique of the Reinhart-Rogoff work that was heavily cited by austerity advocates.

Researchers were unable to replicate their results and it emerged errors in excel and omission of certain countries from the sample is now throwing their conclusions into doubt.

At least it seems Mark Carney, the incoming Bank of England chief, is on Osborne’s side. In prepared remarks in Washington yesterday Mr Carney suggested all a central bank can do is provide the conditions for growth and it is up to the private sectors to deliver that growth.

Less welcoming will be Mr Carney’s description of the UK as a crisis economy along with the eurozone.

The sheer weight of news has done little for Sterling, which trades slightly higher against the Euro and Dollar in early trading this morning

Next week should be a busy one with the all-important 1st quarter GBP numbers due in the UK on Thursday.

Britain is expected to avoid a triple dip recession by the skin of its teeth after the recent cold snap depressed high street activity in March. US GDP is also due on Friday showing the divergence between both sides of the Atlantic underway.

It was a bad start to the day yesterday for the Pound after it was confirmed that UK unemployment edged higher to 7.9%.The Pound dropped against the US Dollar and the euro on the data which followed confirmation on Tuesday that inflation has remained stubbornly high, with higher unemployment and inflation providing a negative mix.

We also had confirmation of the Bank Of England minutes which once gain gleaned a divided committee with a vote of 6-3 to keep QE as it is. Today we have UK retail sales data which is also expected to disappoint and could spell further weakness for the pound.

The fall in the Pound yesterday set the tone for an extremely volatile day in the money markets.

Later in the day the euro was rocked by comments from ECB member Weidmann the Bundesbank president who stated that the ECB could cut rates if data suggested this was necessary.

Given that economic data has been weaker lately this set the precedent that a rate cut could be on the cards. The Euro fell sharply against the USD on the comments and has maintained its lows so far in today’s trading.

Economic data outside Europe has also started to turn negative such as in China and the US and this adds to the view of a rate cut at the next meeting.

The overall sentiment with weaker economic data of late has led to a risk off sentiment in the markets. Equities have fallen and the slide in EUR/USD emphasizes this trend which looks set to continue through today.

Focus for today will be on Europe and feedback from Italy which seems to have come to agreement on a presidential candidate with Franco Marini looking likely to get the nod.

In addition the markets will also be looking at any feedback from the G20 meeting which starts in Washington and in particular for any criticism of Japans recent policy actions.

The IMF has suggested the UK economy was ‘progressing slowly’ as consumers are being squeezed by high inflation, low wages and a subdued business confidence environment leading it to slash growth forecasts to 0.7% from the 1% forecast in January.Investors look forward to unemployment figures later today, though surveys forecast the figure to remain unchanged since last month as well as the Bank of England’s minutes of its most recent policy meeting.

After a fairly subdued performance against most of the currencies, Sterling has managed to rally against the majors to a high of 1.5370 against the US Dollar.

Unlike most other currencies which have gained considerably against the Greenback, Sterling was a bit flat after the short surge as inflation figures were published. Annual inflation was at 2.8% and the monthly figure came out at 0.3%, still way above target, revealing an increase for the 40th month in a row.

Markets are still with the view that inflation will only increase in the long term even though the Bank of England may well be close to the annual target of 2%, intermittently.

Worse than expected growth figures from China and a free fall in the gold market led markets yesterday to turn to risk aversion.

The Japanese Yen gained across most currencies and the greenback came under a bit of pressure against most currencies, as the DOW jumped up 150 points and gold gained back 2% of its recent losses.

The euro has managed to consolidate on these factors and pushed up to a high of 1.3189 against the dollar, almost 2 cents higher to a near 2 month high.

Furthermore, the ZEW economic sentiment surveys in Europe came out lower than expected, with German figures crashing from 48.5 in March to 36.3 this month and inflation was slightly above target at 1.7% for the year till March.

This has led to the IMF lowering global growth targets for most countries. European stock futures also advanced after the Stoxx Europe 600 Index posted losses for the third day in a row. US manufacturing output slipped further in March, however there was some positive news for the markets, as housing figures revealed a 7% increase as US consumer price inflation was also under control.

This has led markets to believe that the stimulus measures being taken by the Federal Reserve are working combined with inflation being kept under control.

A disappointing day for risk assets yesterday threatens to advance further.
Weaker than expected data from China and the US dragged on market sentiment supporting the theory that the worldwide economy is repeating the pattern of Q1 strength followed by weakness over the remainder of the year.

Growth fears aided to worsen the drop in gold prices with the valuable metal plummeting by 15.5% this month alone whilst weighing heavily on other commodity prices.

Data releases today include CPI inflation in the US, Eurozone and UK alongside the German ZEW investor confidence survey, US industrial production and housing starts.

The Eurogroup and Ecofin statement of an extension of Irish and Portuguese loans and the disclosure that Cyprus will need even more funds than previous estimates (EUR 23 billion compared to EUR 17.5 billion previously) has been taken in its stride by markets.

Given market sensitivity to weak data any discontent will strengthen the risk off tone but this appears doubtful as the data overall is expected to be somewhat healthier.

The Aussie was struck by weaker Chinese data releases and worsening in risk appetite.

While the drop has been sharp over recent days Australian Dollar is unlikely to fall much more, with an abundance and sufficient appetite for the currency around 1.0300. Nevertheless, AUD/USD has dropped below its 100 day moving average level 1.0414 – a breach of which threatens to mark a stronger downward move.

Finally, UK Inflation is expected to rise another 2.8% in March and persistent price growth may increase the demand for Sterling as it diminishes the Bank of England’s (BoE) space to expand on QE.

As the central bank expects a slow but sustainable recovery in Britain, above-target inflation should keep the MPC on the side-lines, and we may see a growing number of BoE officials adopt a more neutral to hawkish tone for monetary policy as the Funding for Lending Scheme continues to work its way through the real economy.

Sterling has recently underperformed against the euro and US Dollar however this could be short-lived given the force of negative influences building up for the single European currency.Furthermore Sterling rallied last week as positive data from the UK Manufacturing sector lured investors back into sterling.

Figures showed that manufacturing rose twice as much as forecast in February as compared to the previous month.

We also saw an improved reading for UK March house prices as shown in the RICS data while the BRC retail sales survey also came in better than expected with like-for-like sales rising by nearly 2% in March.

Think-tanks forecasted yesterday that the UK will narrowly miss a technical triple-dip recession, after a spate of positive data from industrial production and manufacturing.

At the beginning of last week, markets ended in a positive territory despite slimming price movements. US equities rose while the S&P 500 Index also posted gains consecutively in over three weeks as the US corporate earnings had a positive session.

On Friday US retail sales fell in March from February by the most in nine months, indicating higher taxes and weak hiring have made consumers more cautious about spending.

The Commerce Department says retail sales declined a seasonally adjusted 0.4% last month. That followed a 1% gain in February.

Both February and January’s figures were revised lower. Better than expected jobless claims report helped the dollar recover part losses. Economists were relieved that claims did not remain above 380,000 for the second week in a row.

First time jobless claims fell to 346,000 from 388,000, which was lower than the market’s 360,000 forecast.

Japanese monetary policy is also front and centre in the markets outlook at the moment. The Yen has declined significantly across the markets after the original QE decision was announced last week.

To recap, the announcement represents QE on a completely different scale to previous policy by the Bank of Japan.

Almost $1.5 trillion will be pumped into the Japanese economy within two years. In spite of the huge scale of asset purchase, the new BoJ governor Harauhiko Kuroda suggested yesterday that the 2% inflation target will be pursued flexibly.

In central bank tone that means they are willing to embark on more easing if necessary. We move further into the unknown. Risk sentiment remains buoyant following the aggressive easing by the Bank of Japan (BOJ) which the market is now pricing in as a move into risk.

When the highlight of the week is someone with a fat finger at the Fed accidentally releasing the latest minutes ahead of schedule, you know it’s been quiet.The main details of the minutes concerned the Fed’s continuing asset purchases, and in particular that the Fed is trying to get across to the market that it should expect asset purchase to vary depending how the outlook for the US economy develops.

This “taping off” guidance is a slightly tweak to existing policy guidance, the line before Wednesday’s minutes was that QE would come to an end when labour markets improved substantially.

By suggesting varying the $40 billion per month in agency MBS and $45 billion per month in Treasuries, policy is better defined than some vague notion of “substantial” improvement.

Japanese monetary policy is also front and centre in the markets outlook at the moment.

The Yen has declined significantly across the markets after the original QE decision was announced last week. To recap, the announcement represents QE on a completely different scale to previous policy by the Bank of Japan.

Almost $1.5 trillion Dollars will be pumped into the Japanese economy within two years. In spite of the huge scale of asset purchase, the new BoJ governor Harauhiko Kuroda suggested yesterday that the two per cent inflation target will be pursued flexibly.

In central bank parlance that means they are willing to embark on more easing if necessary. We move further into the unknown.