Markets trade in tight ranges in one of the quietest weeks of 2012 so far
22/Oct/2012 • Currency Updates•
Financial markets are not making life easier for commentators like us. The tight ranges that have been in place for the past eight weeks or so are holding, volatility is low, and there are few dramatic headlines. We expect the focus to switch now to three key events.
First, the so-called US fiscal cliff, i.e., the enactment of automatic tax hikes and expenditure cuts should Congress fail to reach an agreement on deficit reduction before year end. Second, the timing and format of the widely expect Spanish formal request for financial help. Third, whether or not the Bank of England increases the Gilt purchase target again in either of the two meetings remaining this year.
The dichotomy in the UK between weak business surveys and surprisingly strong labour data continued unresolved last week. The LFS household survey stayed strong, showing a 2.9% annualized rate of growth over the last three months. However, the business surveys are weak, and their employment components are consistent with flat or declining employment levels over the next few months. The minutes of the MPC spend considerable time puzzling over this issue as well. However, the overall dovish tone, together with continued drop in inflation levels (to 2.2% from 2.5% headline last month) lead us to maintain our call that the Bank of England will announce further QE at its November meeting. We think the impact on Sterling, however, will be limited.
Market moving news was few and far between last week in the Eurozone. The European summit was somewhat of a disappointment, as Germany imposed a longer-than-expected timetable towards unified banking supervision, without which there cannot be a single bank rescue mechanism that would ease fears on peripheral banks. Beyond that, the macroeconomic data was mostly second tier and did not impact our pessimistic assessment of the Eurozone prospects in either direction. All eyes are now on the publication next week for the critical PMI business sentiment indices for October. These provide the earliest accurate read on Eurozone economic conditions, and their failure to improve in spite of the easing of financial conditions in peripheral markets is one of the most worrisome signs we see in Europe.
Retail sales came out stronger than expected last week, confirming a recent pattern of stronger-than-expected numbers out of the US. More importantly, housing market numbers continue to strengthen sharply (albeit from low levels). The homebuilders’ sentiment survey has posted sharp gains over the past 4 months. Single-family starts surged again, and are now running 40% above 2011 average levels. We think the recovery in this key sector still has room to run, as we are nowhere near the 1.2 million new houses that the US population needs per year. Therefore, we are increasingly comfortable with our forecast of 1.5%-2.5% growth in the US, and in fact will revise it higher soon if the string of positive economic news continues.