WISE MONEY

Strong service sector economic data provided a strong boost to the UK’s recovery yesterday showing the sectors output expanded at its fastest pace since early 2010. The official figures from Markit now look certain to confirm the UK will avoid slipping back into recession (defined as two consecutive quarterly falls in GDP).

The main Business Activity Index registered at 55.3 in March up from 53.8 in February and above the 53.4 market forecast (above 50 indicates growth).

Markit said that service companies maintained their increased workloads in March by adding to payrolls at a modest rate at the same time as creating new jobs for future growth.

This could be seen in the latest job numbers from Reed who claim vacancies were up 9% against the same period last year.

As for the rest of today we have Bank of England rate and Quantitative Easing decision later, both are expected to remain at 0.5% and £325bln respectively.

This afternoon we have the NIESR GDP estimate which is highly respected and are posted one month before the official figure.

These numbers are ahead of tomorrows Non-Farm Payrolls in the US where we are expecting further positive strides in the job market where they are expecting 205,000 new jobs and the unemployment rate to remain at 8.3%.

The European Central Bank usually meets on the first Thursday of each month but the Easter weekend coming up means today is the day. Expectations are for the ECB to leave rates on hold and no change to the non standard liquidity measures.

The upcoming holiday will also see some liquidation of risk positions so expect static or slight declines in equity markets and riskier currencies.

The Dollar is benefitting not only from the reduction in risk sentiment but also last nights FED minutes.

The tone was one of cautious optimism over the US economy and the markets interpreted that as a reduction in probability of another round of quantitative easing which is USD positive.

UK services PMI made it three in a row better-than-forecast data releases, following on from manufacturing and construction earlier in the week.

The data paints the UK economy in a positive light, but it is important no to get carried away.

The OECD thinks the UK has already re-entered a double dip recession and we need to wait for the Q1 GDP figure later this month before we get a clear picture of the UK economy.

Sterling certainly likes the data, rising against both the euro and Dollar in recent trade.

Markets will be winding down over the coming days, but the remaining things to watch for are the Bank of England meeting tomorrow and the Non-farm payrolls on Friday.

As Wise Money blogged yesterday the official figures from the Office for National statistics indicated that the UK economy fell more quickly towards the end of last year than initially thought. GDP fell by 0.3% in Q4 last year as opposed to the 0.2% reported. This fall shows a change from the 0.6% in the previous quarter and takes the overall growth figure to 0.7% down from 0.8% estimation.

One of the main drivers behind this fall is the 0.7% drop in manufacturing followed by 0.2% construction and services at 0.1%.

So far today Nationwide have revealed that house prices were pushed lower than a year ago for the first time in six months following a 1% fall in March.

Nationwide are attributing the slow down to changed in the stamp duty rules causing a “headwind” in an already difficult environment.

Since the budget first time buyers must now pay 1% on properties worth more than £125,000 following a two year holiday and there’s a new super stamp duty for properties sold over £2 million where a 7% payment is now due.

The figures were based on Nationwide mortgage data and indicated falls in all but three regions which were London, North England and Scotland.

The combination of these stories has put Sterling under pressure so far this morning with cable dropping off from the mid 1.59s yesterday to 1.5891 at present but up slightly against the Euro at 1.1971.

With the relative calm in the markets investors are becoming increasingly comfortable with the lack of movement in currencies.

This in line with the fall in risk aversion as market concerns over US growth and Eurozone debt problems retreat.

In the short term there is little catalyst to shake markets out of their trance and we could see euro/US Dollar continue to drift higher.

Certainly, firmer risk appetite, is a positive driver for the euro while the pull back in US bond yields has restricted the Greenback.

The UK’s Q4 final GDP has come in at -0.3% which is lower than the expected -0.2% and is a disappointing number for the Pound which has faded lower this morning against the euro and the US Dollar.  The number is not a great surprise but more of a disappointment and will heap pressure on the Q1 2012 GDP to come.

The US Dollar remains somewhat on the back foot following Fed chairman Ben Bernanke’s dovish tone earlier in the week with rhetoric suggesting more QE could be required and the loose monetary policy stance is here to stay despite a sustained run of positive economic data.

The USD has managed to claw back a little overnight against the EUR and the GBP- this corresponds to a move out of risk on weaker Chinese data.

Elsewhere risk currencies such as the Australian Dollar have come under pressure overnight as further concerns of a slowdown in China have dampened demand for risk currencies.

February’s industrial sector profit fell 5.2% year to date, the markets will be closely watching the situation in China.

Essentially China and the US are the key drivers behind global growth and any signs of slowing growth will turn the markets into risk off mode benefitting the safe haven shores of the USD, JPY and CHF and weakening risk on commodity based currencies such as the AUD & South African Rand.

Yesterdays appealing comments by Fed Chairman Bernanke, in addition to better than expected results for German IFO business confidence last month, have boosted risk assets whilst weakening the Greenback against Sterling and the euro. Markets appear to have shaken off, at least for now, growth worries stemming from weaker manufacturing confidence surveys in China and Europe last week.

The S&P 500 climbed 1.4% to 1,416.51, its highest close since May 2008.

The Dow Jones rose 1.2%, while the Nasdaq gained 1.8% to close at 3,122.57, its best finish since November 2000.

Ben Bernanke continued his stance that supportive monetary policy is still necessary particularly given worries about the jobs market and additional QE may still be needed.

Today markets will focus on US and French consumer confidence coupled with bill auctions in Spain and Italy. US consumer confidence is likely to slip slightly while the bill auctions are likely to be well received.

Sterling has failed to maintain gains above 1.59 against the Greenback over recent weeks let alone manage to test the key psychologically level of 1.60.

Therefore the current move above 1.59 could be a short one.

For the break above it will require an improved downtrend in the Greenback motivated by a sharp enhancement in risk appetite and/or a drop in US bond yields for Sterling to move much higher.

Both are unlikely.

Sterling will be susceptible to a general stronger Dollar for the rest of this year but could outperform against the euro.

Another expectation beating employment report from the US on Friday has the markets in buoyant mood this morning. The headline number was 227K jobs created in February against a forecast of 210K, with strong upward revisions to both December and January numbers.

This marks the third straight month of strong jobs growth with gains spread across different sectors of the economy.

One negative was that construction jobs showed flat growth for the first time in a couple of months.

Interestingly we have again seen the Dollar strengthen on the back of positive US developments, which flies in the face of the risk-on, risk-off paradigm that has dominated FX trading in the US Dollar over the last few years.

Commodity currencies initially surged on the news but have cooled off as we start the week.

Looking ahead this week we have several big ticket releases to look forward to.

Tomorrow German economic sentiment is followed by US advanced retail sales and the Fed interest rate decision.

The market expects a strong increase in retail sales from last month and Friday’s employment report is fuelling further optimism of a stellar number.

The risk therefore is to the downside in terms of the Dollar if we get a disappointing figure.

The FED meeting should be a non-event, but talk about sterilized QE over recent days by the Fed Chairman will keep market interest high.

Also worth watching is the Swiss Interest rate decision, not for interest rates directly but for chatter over an increase in the Swiss Franc peg which, if undertaken, would cause significant movements across the FX markets.

Greek Politicians are applying increasing amounts of pressure to bond holders in a last ditch attempt to obtain the necessary 75 per cent to agree to the terms of the looming bond swap tomorrow.  The Hellenic Republic is threatening to invoke Collective Action Clauses (CACs), agreed by Greek politicians last month, to force through the deal which if used would almost certainly constitute the first sovereign default in Eurozone history.

Any default would trigger credit default swaps on the bonds, a type of insurance that could lead to be very lucrative to those investors refusing to participate in the deal but might also lead to renewed uncertainty in the market.

CDS contracts are traded over the counter and are fairly opaque in nature and it is unclear exactly how many contracts might be triggered and who might be on the other (losing) side of the bet.

The uncertainty is naturally translating into risk-off, with equity markets declining along with the Risk-on currencies such as the euro and Sterling.

The US is once again the big winner, rising across the board over the last few days on a run that can be expected to continue until full details of the bond swap are announced.

It is fortunate given the levels of volatility in the market that both the ECB and Bank of England are unlikely to make any changes to monetary policy at their respective meetings this week.

In Europe interest rates will stay at 1%.  Mario Draghi will hopefully talk in detail about the success of the LTRO but is unlikely to be drawn to talk about Greece, much to the markets disappointment.

The Bank of England is also likely to keep monetary policy on hold; another boost to the asset purchase scheme would be seen as the Bank panicking and would probably do more harm that good at this stage.

Greece has a potentially difficult week ahead as a group of private investors consider the terms and conditions of an arrangement that’s intend to cut €107 billion from the Greek’s €340 billion debt burden.The whole deal hinges on whether the creditors are willing to take a hit of 75% on their holdings in return for a combination of long term Greek bonds and debt issued from the bailout fund.

Due to terms of the second bailout if over a third of the bond holders reject the deal the overall bailout could collapse as per terms put through Government last week.

The reaction from the rest of Europe specifically Austria is now sceptical about the overall viability of the package.

Chancellor Werner Faymann said yesterday that the second bailout is not the end of the matter.

“I would not trust anyone who says that for Greece is enough,” Faymann told Austrian media.

“For Greece it depends on whether they can stick to these measures over several elections.”

Greece will begin voting at the end of this month with a general election in the offing.

In the interim, Greek officials are required to gain the backing of a minimum of 2/3 of its private holders by Friday to employ the debt swap and comply with the requirement terms of its second bailout.

Worst case scenario Greece could run out of funds in less than a fortnight and could prompt an unruly and possibly catastrophic default.

As you would expect the news is weighing heavily on the euro right now and has seen EUR/USD slip to 1.3191 from 1.3440 at the same point last week and Sterling is approaching the key psychological figure of 1.20 at 1.1981 against the single European currency.

Money markets will keep a close eye on developments in the med and this will provide the impetus for sentiment this week.

Elsewhere the week is largely dominated by Central Bank interest rate decisions with announcements in Australia, New Zealand UK, Europe and Canada all expecting no change in the overall rate.

Any variance from these expected figures, with any turbulence from Greece and Friday afternoons US Non-farm payroll data could lead to a volatile week for the markets.

Sentiment remains the primary driver of the euro as the single currency sold off sharply in afternoon trading yesterday after Eurozone members decided to delay more than half of the €130bn Greek bail-out funds.  A decision that was supposed to finally put to bed the Greek issue, at least for a couple of months, has managed to calm volatile markets for less than two weeks.

Thirty eight different measures need to be implemented by the Greek government before the remaining €71.5bn is handed over.

This may be as early as next week. But slicing the payment in two allows hardliners in the Netherlands and Germany a foot in the door and the potential for further delays.

It is this uncertainty which is hurting euro sentiment and pushing the Sterling pair back towards the 1.20 level.

Sterling remains stuck in recent trading ranges and as expected this week’s construction and manufacturing PMIs have not moved the Pound at all.

The manufacturing number was lower than expected and was cancelled out by better than expected construction figure this morning.

Next week is huge for big ticket data with the ECB and Bank of England rate decisions and the US non-farm payrolls the highlights.

The Bank of England voted as expected to keep interest rates on hold and this decision was achieved with a unanimous 9-0 decision implying that the base interest rates will not be rising anytime in the near future. A slight weakening factor for Sterling as an increase to the interest rate would add to the underlying value of the currency.

This hardly came as a surprise as an increase in the rate would cripple growth in what are troubled times.

The more interesting vote was the 7-2 result over quantitative easing.

Seven members voted in favour of the £50 billion extra that has been pumped in while 2 members (David Miles and Adam Posen) wanted £75 billion to be added.

This caused most of this morning’s weakness in Sterling as there is potential that more QE could be pushed into the UK economy.

The BoE also sees credit remaining tight and looks for global growth to weaken.

Wise Money had to mention the Greek saga which seems to be coming to a close, but the main talking point will be if problems re-open looking ahead to the rest of the year.

It is thought the new loan of €130 billion will cover Greece in the short term, but what will happen when that starts to run out.

Various countries that form the IMF are looking for officials from the European Union, ECB and IMF to monitor the Greek government from Athens and make sure the cuts actually take place.