Monday, March 28, 2011

The start of any new month brings with it the first slug of major economic data in the US and this week Friday 1st April will contain the major data announcement of the month with the Non Farm Payroll data for March as well as the ISM Manufacturing Index for March. The employment data always takes the lion’s share of the news headlines and this month will be particularly important with the market desperate to see a continuation or even improvement on the trends reported last month. What it won’t want to see is another weak gain suggesting that whilst employment is improving it is not improving anywhere near enough to make a material difference to the recovery. The headline number for February increased by +192,000 and within that private payrolls increased by a strong +222,000. This month the consensus is expecting a headline number of +200,000, but the range of estimates varies considerably with some expecting a number close to +300,000 and the worst published number is around +160,000. The ISM manufacturing index is at its highest level since May 2004 with the last reported number of 61.4 for February and estimates for March are expecting a modest dip with the consensus expecting 61.2. The US manufacturing sector remains a bright spot within the US economy and the recent regional reports suggest on balance that the momentum is being maintained and we could even see a slight improvement on the last month, although it does seem likely that the ISM is now close to its peak.


In the UK this week all eyes will be on the final estimate for 2010 Q4 GDP growth which is expected to remain at the previous estimate of -0.6% when it is published tomorrow. The preliminary reading for this was -0.5% and the downgrade did come as something of a shock last time given that most were expecting a modest revision upwards after the shock contraction during Q4. It remains to be seen if the final estimate will change but the market focus will now be on what Q1 brings especially given the ongoing debate over where monetary policy is headed over the coming months.

Today in the US we have had pending home sales data for February which was a little better than expected at +2.1% month on month although this does follow on from a -2.8% decline over the previous month. Overall there is no sign yet of any real improvement in the US housing market.

There has been no major data today in the UK and Europe.

Tomorrow in the US brings the Conference Board’s latest consumer confidence reading for March. This is likely to reflect the worries over Japan and developments in the Middle East and North Africa as well as the ensuing dip in world equity markets. The consensus is expecting a decline to 64.0 from the last reported reading of 70.4. In Germany tomorrow the CPI for March is due for publication and we also get the latest German Gfk Consumer Confidence survey.

Friday, March 25, 2011

World equity markets are continuing to recover the ground lost as a result of fears over Japan and the ongoing situation in the Middle East and North Africa. It is difficult to say if the rally will be sustained but at present there does not appear to be any imminent negative news flow to upset the balance. However, there are still a good number of hurdles to be overcome over the coming weeks and months. The possibility of a bail out for Portugal has come a step closer with the resignation of their prime minister, although a bail out is now widely anticipated and is unlikely to have the shock factor as previous rescues have had. It will not be long before uncertainty over the expiry of QE2 in the US starts to grab the attention of world markets and that is likely to be the next major market event.


In the US today the final revision to Q4 2010 GDP has been announced and it has been revised upwards to 3.1% annualised from the last reported number of +2.8% and the first estimate which was +3.2%. The upward move was predominantly due to higher inventory replacement than what was initially estimated. It remains to be seen if Q1 delivers a similar result with consensus estimates somewhere between +2.5% and +3.0%.

The University of Michigan Consumer Sentiment index due out today is likely to have an impact on how markets trade this afternoon. After the drop from 77.5 to 68.2 at the last reading the market is looking for the index to have stabilised around 68.0. The situation in Japan and the ensuing drop in equity markets may well have had an impact on the latest reading.

The Ifo Business Climate Index for Germany has been published this morning and it has declined to 111.1 from 111.3 which is the first decline in this index since May 2010. It is a very modest fall and is probably attributable to the recent events in Japan and the drop in world equity markets, and as a result the decline is not that significant and the index remains well into growth territory.

Thursday, March 24, 2011

The UK Budget was as expected met with relative indifference by the market yesterday. With concerns over the nuclear situation in Japan now subsiding and the ongoing military action in Libya seemingly discounted in the oil price (which is relatively static at present albeit at near recent highs), the market focus may again be brought back to the economic data. European markets are currently showing gains of around 1% on the day with the Dow futures currently up around 50 points.


In the US yesterday new home sales data for February was substantially below expectations with a decline to an annualised rate of 250,000 which compared to consensus expectations of 290,000 and the last reported number of 284,000. The US housing market goes from bad to worse and is going to take years to recover.

On the agenda in the US today are durable goods orders for February which is expected to show a +1.5% month on month gain after a +2.7% gain last month. Durable goods data is notoriously volatile and the estimates for the current month are quite broad with some expecting a negative number. Also due for publication this afternoon is the weekly initial jobless claims which according to the consensus is expected to remain at 385,000.

The minutes from the latest Bank of England MPC meeting published yesterday revealed no change in the voting pattern with three member supporting a higher base rate (one for a +0.5% increase and two at +0.25%). Five members voted for no change with Adam Posen in favour of more quantitative easing. The debate over monetary policy in the UK continues to rage but with a weak consumer outlook the argument for maintaining a relaxed policy is very strong. However, inflation continues to dominate the headlines and the pressure is undoubtedly building for action.

UK retail sales data published this morning for February was disappointing with a -0.8% month on month drop. The consensus was expecting a -0.6% decline after the +1.9% increase in January. The retail sector is one area that is likely to remain under pressure for many months to come. After the January increase it looks likely that consumer spending has slowed significantly. This will place further pressure on the GDP number for Q1 which is likely to show a very modest increase at best with an outside chance of another quarter of contraction.

In Europe this morning the Purchasing Managers Index for Services and manufacturing for the Euro zone and Germany has been published. The services index for both increased on the last reported number with a particularly strong performance from Germany whilst manufacturing is showing some signs of slowdown across the region although it remains well into growth territory.

Tuesday, March 22, 2011

The main news of the day has to be the latest reading for the UK CPI which increased yet further to 4.4% on an annualised basis compared to consensus expectations of +4.2% and the previous reported level of +4.0%. The main driver for the headline rate was a record increase in the price of clothing and footwear. Even the core rate which excludes the impact of food and energy rose to a heady +3.4% annualised compared to expectations of +3.1% and the last reported rate of +2.9%.. Today’s news undoubtedly places more pressure on the Bank of England’s MPC which judging by the last vote is now very close to the first interest rate hike. The news today may well tip the balance at the next meeting. The minutes from the last meeting which are due for publication tomorrow will make for very interesting reading. If we see a fourth member voting for an increase at the last meeting the probability of a decision in favour of a +0.25% next time will increase significantly. However, it also has to be borne in mind that the recent data for UK plc is not particularly encouraging, especially GDP growth which looks likely to be muted at best during Q1 and the Bank of England MPC faces a very difficult situation at the next meeting.


In the US yesterday the existing home sales data for February was disastrous with a month on month decline of -9.6% to 4.88m units on an annualised basis. The consensus was looking for 5.15m units annualised. In addition, US house prices fell by 1.1% during February bringing the 12 month decline to -5.2%. Without a healthy housing market it is very difficult to see how US consumer spending is sustainable and the more recent decline in the confidence indicators may well in part be a reflection of the dire housing market.

The debate over whether QE3 is a real possibility is now starting to gather momentum given that the end of QE2 is now a matter of 3 months or so away. It is interesting to see some commentators already suggesting that QE3 is highly likely. At this stage it is impossible to say what will happen as much will depend on what the economic data is telling the Fed nearer to the time. What is clear is that as we approach the end of QE2 market nerves are likely to increase significantly and we can expect some significant market volatility yet again as the decision time looms.

In Europe, tomorrow looks likely to be a crucial day for Portugal. A parliamentary vote on a new austerity package is due to take place and according to current reports the minority socialist government is heading for defeat. The end result looks likely to be the resignation of the prime minister which will bring a bail out that much closer. We can expect some headline on this tomorrow which may well unsettle the market.
The main news of the day has to be the latest reading for the UK CPI which increased yet further to 4.4% on an annualised basis compared to consensus expectations of +4.2% and the previous reported level of +4.0%. The main driver for the headline rate was a record increase in the price of clothing and footwear. Even the core rate which excludes the impact of food and energy rose to a heady +3.4% annualised compared to expectations of +3.1% and the last reported rate of +2.9%.. Today’s news undoubtedly places more pressure on the Bank of England’s MPC which judging by the last vote is now very close to the first interest rate hike. The news today may well tip the balance at the next meeting. The minutes from the last meeting which are due for publication tomorrow will make for very interesting reading. If we see a fourth member voting for an increase at the last meeting the probability of a decision in favour of a +0.25% next time will increase significantly. However, it also has to be borne in mind that the recent data for UK plc is not particularly encouraging, especially GDP growth which looks likely to be muted at best during Q1 and the Bank of England MPC faces a very difficult situation at the next meeting.


In the US yesterday the existing home sales data for February was disastrous with a month on month decline of -9.6% to 4.88m units on an annualised basis. The consensus was looking for 5.15m units annualised. In addition, US house prices fell by 1.1% during February bringing the 12 month decline to -5.2%. Without a healthy housing market it is very difficult to see how US consumer spending is sustainable and the more recent decline in the confidence indicators may well in part be a reflection of the dire housing market.

The debate over whether QE3 is a real possibility is now starting to gather momentum given that the end of QE2 is now a matter of 3 months or so away. It is interesting to see some commentators already suggesting that QE3 is highly likely. At this stage it is impossible to say what will happen as much will depend on what the economic data is telling the Fed nearer to the time. What is clear is that as we approach the end of QE2 market nerves are likely to increase significantly and we can expect some significant market volatility yet again as the decision time looms.

In Europe, tomorrow looks likely to be a crucial day for Portugal. A parliamentary vote on a new austerity package is due to take place and according to current reports the minority socialist government is heading for defeat. The end result looks likely to be the resignation of the prime minister which will bring a bail out that much closer. We can expect some headline on this tomorrow which may well unsettle the market.

Thursday, March 17, 2011

All eyes remain focused on Japan at present and after yet another significant sell off in the US and Europe yesterday, European markets have opened in positive territory this morning. The Nikkei recovered most of its early losses last night and hope that the situation will be brought under control soon appears to be the driving force behind the better performance this morning. The situation in Libya and the more recent events in Bahrain are also a real concern for markets and may well impact on sentiment, although the oil price has given up some of its recent gains which does provide some short term comfort.


With everything that is going on around the world at present the economic data is taking something of a back seat. Starting with the UK yesterday we had the latest unemployment data for February. The claimant count fell by 10,200 but the unemployment measure provided by the ILO which is a broader measure actually increased by 27,000 between November and January to 2.53 million. This led to a slight rise in the overall rate of unemployment to 8.0% from 7.9% which is its highest level since 1996. The actual number of people in employment rose by 32,000 but the number of jobs being created is simply not keeping up with the growth in the labour force. Overall the trends in UK employment remain weak which is likely to hold back consumer spending and this is a factor that is also likely to weigh on the UK housing market.

The OECD published their forecasts for UK growth yesterday. They are expecting sluggish growth for the next two years with growth of 1.5% in 2011 and 2% in 2012. This compares to the forecast from the Office for Budget Responsibility which is expecting growth of 2.1% in 2011 and 2.6% in 2012. Given current trends the OECD forecasts look to be more realistic. The OECD argues that interest rates should remain lower than what the market is expecting and the first interest rate hike should come in the second half of the year at the earliest.

In Europe yesterday the final Euro zone CPI estimate for February was published and it came in at 2.4% from the previous estimate of 2.3%. As in the UK the Euro zone headline rate of CPI is above the targeted ECB level which is just under 2% but unlike the UK it is still within a comfortable distance of target. The UK rate is double the target of 2%. The core Euro CPI rate which excludes food and energy fell from 1.1% to 1% which remains relatively low and suggests that firms are absorbing the more recent rise in input prices rather than pass it on to the consumer. The ECB has been indicating that with the recent inflationary pressures the Euro interest rate will increase next month. However, there has to be some uncertainty over this given the hit sentiment has taken from the Japan disaster and the ongoing problems in North Africa and the Middle East.

The terrible state of the US housing market was again demonstrated yesterday with the housing starts data for February which fell to 479,000 on an annualised basis compared to the January number of 618,000. The consensus was expecting 560,000. This is certainly a reflection of low housing demand at present in the US although some of the movement may be due to bad weather conditions preventing construction work from being started. Either way the US housing market remains in a very sorry state.

The other significant data announcement in the US yesterday was the Producer Price Index for February which increased by a very significant +1.6% month on month. This was against consensus expectations of a +0.7% increase. The boost to the PPI has come from the impact of higher energy and food prices. Clearly there will be short term inflationary pressures moving through the system as a result of higher input prices but this is still expected to be only a temporary situation and is unlikely to result in any change in Fed policy.

Today in the US look out for the weekly initial jobless claims which are expected to fall to 385,000 from the previous reported level of 397,000. We also get the CPI data for February with the headline rate expected to show a month on month gain of +0.4% whilst the core rate is expected to remain at a very subdued +0.1%. The Philadelphia Fed Manufacturing survey is due for publication this afternoon and is expected to show a modest decline to 32.0 from the February level of 35.9. Finally, Industrial Production for February will be published with the consensus expecting a +0.6% month on month gain.

There is no major data due for publication in the UK and Europe today.

Tuesday, March 15, 2011

The fear factor has gripped world markets today after the 10.5% decline in the Nikkei index overnight. With so much uncertainty over the nuclear crisis that Japan is dealing with markets are likely to remain under considerable pressure until the situation is brought under control. Japan is the world’s third largest economy and the disruption it already faces will have an impact on world growth and any further deterioration in the nuclear situation would be taken very badly by the market. If the situation is brought under control soon that will help to bring calm to world equity markets and we may well see a relief rally. For the time being with so much uncertainty we can expect a considerable degree of volatility in trading.


Elsewhere the geopolitical situation in the Middle East is deteriorating with Saudi troops entering Bahrain. The risks of escalation remain and this is yet another factor that is likely to weigh on world equity markets over the coming days.

With so much focus on Japan any economic data announcements at present are likely to be overlooked. The US Empire Manufacturing Index for New York State has just been published for March and that came in above expectations at 17.5 compared to the consensus which was looking for +16.0. Looking at the constituent parts new orders, unfilled orders, shipments, and inventories did slow from the previous month. This may well mean that activity has now peaked and it would not be unrealistic to expect the next ISM Manufacturing Index reading to slip back a little from the recent highs. The remaining regional reports should make for interesting reading and the next March report is for Philadelphia which is due out on Thursday. This evening the in the US the FOMC will be releasing their interest rate decision and whilst no change is expected the market focus will as always be on the accompanying statement and in particular their views on the inflation outlook.

In Europe today the German ZEW Economic Sentiment survey for March has been published and not unexpectedly it fell a little to 14.1 from 15.7 reflecting concerns over the expected rise in the Euro interest rate and more recently the situation in Japan. The equivalent number for the Euro zone has also been published today and that also declined from the previous reported level.

Monday, March 14, 2011

World equity markets are still coming to terms with the aftermath of the earthquake in Japan and sentiment is likely to remain nervous over the coming days especially given the worries over the perilous state of their nuclear reactors. The events have very much overshadowed the situation in North Africa and the Middle East which remains very difficult and the risks of further supply disruption to oil is still very high. The oil price has come off its highs during the last couple of days due to the situation in Japan with expectations of lower short term demand. However, this may only prove to be a short term respite.


The economic data in the US that was published on Friday was somewhat mixed. The retail sales data for February was broadly in line with expectations with a +1.0% month on month increase whilst the number net of auto and gasoline sales was also as expected at +0.7%. The latest reading for the University of Michigan Consumer sentiment index was disappointing and contained some ominous signs. The headline number declined to 68.2 from the latest reported number of 75.1. Looking at the constituent parts, the current conditions component declined from 86.9 to 83.6 but more worrisome was the forward expectations component which fell from 71.6 to 58.3 which is its lowest level since March 2009. The decline in the index so far this month is likely to be due to the recent decline in the equity market and higher gasoline prices. If both of these situations do not reverse in the short term it may well impact on consumer spending behaviour over the coming months.

This week in the US the main event will be the FOMC interest rate meeting. With increasing concerns over the impact on inflation of a high oil price the Fed members will undoubtedly be focusing on the inflation outlook. It is widely expected that the interest rate will be left unchanged and QE2 will also be left to run its course until the end of June. The language of the accompanying statement will be the focus of market attention and it may be that the statement becomes slightly more hawkish in nature as a means of reigning in inflation expectations.

With the end of QE2 in the US only three months away we can expect the market to start fretting over the sustainability of the US economic recovery, as happened last year with the demise of the first round of fiscal stimulus. Whilst QE3 currently looks unlikely the situation may change quickly if GDP growth starts to falter once again.

There is no major data due for publication in the US today and apart from the FOMC meeting tomorrow the other main economic event scheduled for Tuesday is the publication of the Empire State Manufacturing Index which basically gives a snap shot of the health of the manufacturing sector in New York State. After a healthy rise over the last three months to 15.43, the consensus expects a further improvement to +16.0. There are however some downside risks to this number in our view especially given that the forward looking component last time fell and the more recent decline in the equity market and the latest geo political developments may again weigh on the forward expectations component.

There is little economic data due for publication today in Europe apart from January industrial production for the Euro zone which increased by +0.3% month on month, which was a little weaker than the expected +0.4%. The January rise matches the upwardly revised December growth rate.

Thursday, March 10, 2011

The main economic news for today has been the Bank of England’s decision on the interest rate which has been left unchanged at +0.5%. With inflation sitting at double the MPS’s inflation target the debate will continue to rage as to whether or not the interest rate should now rise. With GDP growth in the UK likely to be very modest for Q1 and following on from a contraction in Q4 2010 there is a significant argument for no change in monetary policy. The recent rise in the oil price is going to be yet another headwind to growth with the added problem of yet more inflationary pressure. The minutes of today’s meeting will make for interesting reading when they are published in a few weeks time. After the ECB effectively preannounced its first interest rate hike for next month the market has quickly moved to assume the same result for the UK. This is by no means a certainty at present given just how fragile the UK economic recovery is.


In the US today there is again very little on the economic agenda. As always we have the weekly initial jobless claims due for release today and after yet another improvement last week down to 368,000 the consensus is expecting claims to rise to 385,000. A further improvement would be welcome news and a sign that perhaps the jobless numbers in the US are going to start showing more consistent signs of improvement.

The sovereign debt crisis rumbles on with the cost of borrowing in Portugal, Ireland and Greece hitting new highs. Moody’s has today cut Spain's sovereign debt rating one notch and has warned of the possibility of further cuts as it believes the eventual cost of bank restructuring is likely to be double what the Spanish government expects.

China has today reported a trade deficit for February of $7.3bn. Exports were just +2.4% higher whilst imports rose by +19.4%. The deficit was unexpected by the market although in part it is attributable to the impact of the Chinese New Year and the fact that import prices have risen considerably rather than any sudden drop in Chinese demand.

The oil price is very much in charge at present and daily movements in world equity markets are very much dependent on the geo political situation in North Africa and the Middle East. We are unlikely to see any change in this pattern until there is concrete evidence that the situation is starting to calm down. For the time being we can expect some volatile trading sessions until the oil price starts to move back to more comfortable levels. In the event that the situation starts to deteriorate further the downside risks to world equity markets are likely to rise markedly.

Monday, March 07, 2011

The Non Farm Payroll data announcement in the US on Friday was overshadowed by further gains in the oil price which once again raised fears over the potential impact on global growth. At the time of writing the price of Brent Crude is close to $118. With the price of petrol now hitting a new high in some areas of the UK the rising oil price will begin to start reducing consumer spending power which will have an inevitable impact on sentiment. The real issue is for how long the oil price remains at these elevated levels and whether it continues to rise. The downside risks for the world economy with a high oil price are high and in particular the US consumer is very sensitive to rising gasoline prices. We can expect world markets to remain very nervous over the coming days.


Looking at the all important Non Farm Payroll data in the US which was announced on Friday, the headline number for February was +192,000 with the previous month’s number revised up to +63,000 from +36,000. Looking at the private payroll number, the month on month gain was +222,000 whilst the previous month was revised up to +68,000 from +50,000. Despite the strength there was a distinct lack of market reaction to the strong headline number. This may in part be due to the number being broadly in line with expectations when some forecasters were expecting something considerably larger after the poor January number which had been depressed by the bad weather. Looking at the combined gains over the last two months the total is little different to the run rate at the end of last year and the conclusion has to be that whilst the jobs market is improving, we are some way yet from a point of rapid improvement. To see real improvement the headline rate should be showing consistent monthly gains of 250,000+ and if next month we see a similar number to that of February there will be grounds for feeling slightly more enthusiastic about the US jobs market. The reported unemployment rate did again decline, this time to 8.9% but this is more a reflection of job seekers giving up looking for work and leaving the work force. We may well in due course see a reversal in this number as people once again decide to start looking for work.

The only other major data announced on Friday was US factory orders for January which grew month on month by +3.1% compared to consensus expectations of +2.0%. The better than expected number was primarily due to a boost from aircraft orders. If you strip out the transportation element the gain in factory orders for January was a more modest +0.7%.

The main economic event in the US this week will be retail sales which are due for publication on Friday. The only data announcement due for release today is consumer credit for January.

In the UK on Friday the only data release of note was the Halifax house price index for February which fell by -0.9% month on month. We continue to expect a gradual decline in prices over the course of 2011. Worries over UK growth are most certainly starting to increase especially after the recently downgraded Q4 GDP data. The prospect of a declining housing market will on its own dampen consumer sentiment but tied in with rising inflation and fears over what damage a high oil price will have on global growth is likely to leave the UK in a particularly difficult situation. The Bank of England MPC meet on Thursday of this week to decide on interest rate policy and whilst a rate hike still looks unlikely we appear to be moving closer to the point of the first base rate increase, perhaps as early as next month. The market is pricing in three +0.25% increases before the end of the year which would apply yet another brake to economic activity. However, the market is not always the best predictor of interest rate movements but even one base rate increase will change consumer expectations and that alone could impact on consumer spending behaviour.

There is no major data due for publication in the UK or Europe today.

Thursday, March 03, 2011

The weekly initial jobless claims reported in the US today have fallen to 368,000 from the last reported level of 388,000. This is the lowest reading since May 2008 and is a sign that perhaps the US jobs market is starting to gain some traction. After a strong ADP private payroll number yesterday the market will be looking for a good Non Farm Payroll number tomorrow.


The US ISM Non manufacturing Index for February has been released today and that showed a modest improvement to 59.7 from the last reported level of 59.4. The consensus was expecting a modest drop to 59.0.

The European Central Bank has met today for its usual monthly meeting to decide on monetary policy. Whilst rates were kept on hold, in the clearest message yet from ECB President Jean-Claude Trichet, he said that the ECB may well raise the interest rate next month in the fight against inflation. It is not inconceivable that the ECB and the Bank of England may well both raise rates next month.

In Europe today German retail sales for January have been published and were up +1.4% month on month leaving the annualised growth rate at +2.6%.We have also had Euro zone retail sales for January which were up +0.4% month on month. The German and Euro zone services purchasing managers index for February have been released today and both were a little lower than the last reported number and consensus expectations, but still well within growth territory.

The UK services purchasing managers index for February has also been published today but this fell more than expected to 52.6 from the last reported number of 54.5. There has been a general slowdown in UK service sector activity and it is clear that UK GDP is on course for very modest growth during Q1.