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ECONOMIC DATA ANALYSIS - GEOPOLITICS TO TRUMP UK RATE DEBATE?

ECONOMIC DATA ANALYSIS  FRIDAY 18 JULY 2014

GEOPOLITICS TO TRUMP UK RATE DEBATE? 

  • Geopolitical risk puts financial markets back on the defensive
  • MPC minutes, retail sales and first sight of Q2 GDP dominate busy UK calendar
  • Internationally, focus will be on US CPI, home sales and euro area ‘flash’ PMIs

Heightened geopolitical tensions in Eastern Europe and the Middle East have dominated market headlines over the past couple of days. The shooting down of a Malaysian airliner over the Ukraine, coupled with reports that Israel have started a ground offensive in Gaza, have  prompted a sharp flight to safety.  Since hitting an intra-week high on Wednesday, the FTSE 100 has fallen around 50 points to 6750 while the 10-yr gilt yield has dropped 7bp, back below 2.60%. In the currency markets, sterling is holding its own against the US dollar, above $1.70, but has hit a fresh 2-yr high against the euro just shy of 1.27. Against this background, the coming week’s economic data could play second fiddle. Still, it is  an important week for  UK releases. The minutes of the July MPC meeting and the preliminary estimate of Q2 GDP dominate an otherwise quiet week for global economic data.

The MPC had sight of the surprise jump in  June CPI to 1.9% at this month's policy meeting, but not the latest drop in wage growth. We suspect the MPC largely dismissed the rise in June inflation as temporary - due to the better weather and delayed discounting.  Still, with the economy continuing to expand at a robust pace, support on the Committee for policy tightening appears to be building. There is an outside chance that one or two members of the MPC, including Martin Weale, may have voted for an immediate rate hike this month. But on balance, we expect the vote to keep policy unchanged was unanimous.

Those MPC members inclined to vote for a rate rise are more likely to do so next month when the August Inflation Report is published. The case for a rate rise, however, is far from clear cut. The strength of sterling’s exchange rate and the prevailing weakness of  wage growth pose a significant constraint on the inflation outlook. Moreover, June retail sales (Thurs.) and Q2 GDP (Fri.) data are unlikely to particularly strengthen the case. Given the drop in May industrial production and construction output there is a downside risk to our 0.8% q/q Q2 GDP growth forecast. Similarly, the weakness of last month’s BRC and CBI Distributive Trades reports adds to the downside risks to June retail sales although, after the drop in May, sales should post some bounce-back (forecast: +0.4%) - see back page.

Elsewhere, the focus in the euro area will be on July business surveys, with the German IFO and ‘flash’ PMIs due.  We expect the tone of these to be weaker: the German IFO is predicted to post its third consecutive monthly decline, to 109.4; while the euro area manufacturing and services ‘flash’ PMIs are forecast to edge down to 51.5 and 52.5, respectively. Euro area M3 growth for June is also due. Given the stimulus announced by the ECB last month, we expect broad money growth to have picked up a little last month, although only enough to lift the three month annual rate from 0.9% to 1.0% - still well below the rate required to instil hopes of a sustained recovery.

In the US, data over the past week have been decidedly mixed. While the Empire State and Philadelphia Fed surveys posted strong improvements, the surprise (10%) drop in May housing starts served to underscore the fragility of the recovery in this sector. In the coming week, the focus in the US will remain on the housing market, with June new and existing home sales due. Our international team expect these to confirm that performance remains mixed. June US CPI is also released. In sharp contrast to Europe, US inflation has risen steadily since February, reaching a  2-yr high of 2.1% in May. We expect it to have remained at this rate in June, although the core rate is predicted to have eased 0.1ppt to 1.9%. June durable goods orders are also due (Fri.). We predict  these to rebound after the aircraft-related weakness in May. The accompanying shipments figures (ex aircraft and defence) will also attract interest as they form part of the calculation of Q2 GDP.

 

DIsclaimer

 

This document, its contents and any related communication (altogether, the 'Communication') does not constitute or form part of any offer to sell or an invitation to subscribe for, hold or purchase any securities or any other investment. This Communication shall not form the basis of or be relied on in connection with any contract or commitment whatsoever. This Communication is not intended to form, and should not form, the basis of any investment decision. This Communication is not and should not be treated as investment research, a research recommendation, an opinion or advice. Recipients should conduct their own independent enquiries and obtain their own professional legal, regulatory, tax or accounting advice as appropriate. Any transaction which a recipient of this Communication may subsequently enter into may only be on the basis of such enquiries and advice, and that recipient’s own knowledge and experience. This Communication has been prepared by, and is subject to the copyright of, Lloyds. This Communication may not, in whole or in part, be reproduced, transmitted, stored in a retrieval system or translated in any other language in any form, by any means without the prior written consent of Lloyds. This Communication is provided for information purposes only, and is confidential and may not be referred to, disclosed, reproduced or redistributed, in whole or in part, to any other person. This Communication is based on current public information.

 

 Whilst Lloyds TSB ank plc (“Lloyds TSB”) and Bank of Scotland plc ("Bank of Scotland") have exercised reasonable care in preparing this material and any views or information expressed or presented are based on sources it believes to be accurate and reliable, no representation or warranty, express or implied, is made as to the accuracy, reliability or completeness of the facts and data contained herein.

 

This material has been prepared for information purposes only and Lloyds TSB, Bank of Scotland, their directors, officers and employees are not responsible for any consequences arising from any reliance upon such information. Under no circumstances should this material be treated as an offer or solicitation to offer, to buy or sell any product or enter into any transaction. If you receive information from us which is inconsistent with other information which you have received from us, you should refer this to your Lloyds TSB or Bank of Scotland Relationship Manager for clarification.

 

Lloyds Bank Corporate Markets, Lloyds TSB Corporate Markets and Lloyds TSB are trading names of Lloyds TSB Bank plc, Lloyds TSB Scotland plc and Bank of Scotland plc. Lloyds TSB Bank plc. Registered Office: 25 Gresham Street, London EC2V 7HN. Registered in England and Wales no. 2065. Lloyds TSB Scotland plc. Registered Office: Henry Duncan House, 120 George Street, Edinburgh EH2 4LH. Registered in Scotland no. 95237. Bank of Scotland plc. Registered Office: The Mound, Edinburgh EH1 1YZ. Registered in Scotland no. SC32700. Authorised and regulated by the Financial Services Authority under registration numbers 119278, 191240 and 169628 respectively.

 

 

 

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Amazing Trader EVENT RISK Calendar:


Tue 21 Nov
15:00 US- Existing Homes Sales
23:00 US- Yellen Speech
Wed 22 Nov
13:30 US- Weekly Jobless
13:30 US- Durable Goods
15:00 US- final University of Michigan Survey
15:30 US- EIA Crude
19:00 US- FOMC Minutes
Thu 23 Nov
US/JP- Holiday
All Day flash PMIs
13:30 CA- Retail Sales
Fri 24 Nov
All Day flash PMIs
09:00 DE- IFO Survey
US- Early Closes

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  • POTENTIAL PRICE RISK: HIGH Mon -- 14:00 GMT EZ- Draghi speaks in Brussels. Looking for any policy hints or bias


  • POTENTIAL PRICE RISK: HIGH Tue -- 13:30 GMT US- Existing Homes Sales. Top Housing Statistic

  • POTENTIAL PRICE RISK: HIGH Tue -- 23:30 GMT US- Yellen Speech. Early evening. Looking for anything on policy


  • POTENTIAL PRICE RISK: Medium Wed -- 13:30 GMT US- Weekly Jobless, Durable Goods
  • POTENTIAL PRICE RISK: Medium Wed -- 15:00 GMT US- final University of Michigan Survey
  • POTENTIAL PRICE RISK: Medium Wed -- 15:30 GMT US- EIA Crude
  • POTENTIAL PRICE RISK: HIGH Wed -- 19:00 GMT US- FOMC Policy Minutes. Key policy release


John M. Bland, MBA
co-founding Partner, Global-View.com

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