Tight ranges hold for another week, as UK growth surprises to the upside
29/Oct/2012 • Currency Updates•
Currencies continue to oscillate within very tight bands. The low volatility last week was exacerbated by the dearth of significant macroeconomic news or policy developments worldwide. Risk assets ended the week mostly down, giving up their gains from the previous weeks by comfortably trading within the ranges of the past eight weeks. The conspicuous exception to this patter was Sterling, which uncharacteristically rose against both the Euro and the Dollar on the back of much stronger than expected third-quarter GDP growth. Investors must now brace themselves for an exceptionally busy two weeks, where major data and policy decisions are due out in all major economies worldwide.
Third-quarter GDP in the UK resulted in a notable upward surprise. Growth clocked in at 4.1% saar. Excluding the effects from the second-quarter bank holidays and the temporary boost from the Olympics, growth was still healthily in the mid 2%. This seems to indicate that the gap between employment numbers and output figures is starting to close. After this positive surprise, we are now pencilling in an increase of just GBP 25 billion at next week’s meeting of the Bank of England, rather than GBP 50 billion. The sectoral picture of the GDP numbers showed an upside surprise in the employment-intensive service sector, offset partly by poor growth in industrial production and construction. This breakdown fits in well with the story told by the employment numbers, which have increased in this recovery well ahead of output. Sterling responded to the positive numbers, rising strongly against both the Euro and the dollar.
The key business sentiment indicators (PMI) out of the Eurozone dropped again last week, proving conclusively that the better tone in financial markets engineered by the ECB over the last two months has failed to improve the outlook of European business managers. The composite PMI number is now down to 45.8, clearly before 50 and consistent with continued economic contraction. The October downturn was most pronounced in Germany, with figures driven down by an exceptionally weak number for new export orders. The German economy is at best stagnating, and now France appears to be joining the periphery in its double dip recession. With this gloomy backdrop, the Euro treaded water all week, closing down 1% against the dollar and 1.5%b against sterling.
GDP growth in the third quarter came right in the middle of our forecast range for 2012, at exactly 2.0%. The report confirmed the two opposite trends driving the US economy. A buoyant housing sector (up 14.4% saar in 3Q) is just compensating for weakening business expenditures, while consumption expenditures grow a steady 2% in real terms. We expect this trend to continue into the fourth quarter. Housing starts in the US are not yet sufficient to keep up with population growth and the scrapping of old and misplaced housing stock. On the other hand, lack luster earnings from US corporations this quarter are consistent with a continuation of investment weakness. We expect the Fourth quarter to be much like the third, and think that the greenback will continue to behave as “the best of a bad bunch” among major currencies and rally as a result.