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The Marketplace - 27th January 2015
27/01/2015
Good Morning
Today’s preliminary estimate of Q4 UK GDP will provide the earliest official gauge of the economy's overall recent momentum. While the PMIs on their headline measures have softened markedly in Q4 relative to Q3, the PMI components are considered most informative, and other business surveys such as those from the BCC point to little change in the pace of activity. Hard data for the quarter so far have also been uneven, with notable weakness in measured construction output for October and November. But with the first estimate based on data that covers only about 40% of the economy's output in the quarter, the reported gain in GDP overall will hinge crucially on ONS assumptions for the pace of growth in December.
The slew of data this afternoon will be assessed for confirmation that the US economy continued to grow strongly in Q4. The December durable goods release will provide one of the final key reports ahead of the Q4 GDP print on Friday. Following November’s 0.9% decline, orders are expected to have stabilised last month and are now forecast a 0.6% rise. The ongoing recovery in the US housing market is likely to have been re-established in December, with new home sales forecast to have risen by 3.5%. January consumer confidence is forecast to tick up from 92.6 to 95.7 a seven-year high.
BoE hints Rates May Rise Sooner Than Expected
Bank of England Rate setter Kristin Forbes said she is optimistic about the global economy’s prospects given robust growth in the US and the potential for cheap oil to boost consumption and investment in the UK and further afield. That could trigger the need for interest-rate increases in the UK from their current historic lows of 0.5% sooner than market expectations of the middle of next year.
The world’s major central banks are taking increasingly divergent courses. The BOE and the Federal Reserve in the US are inching toward raising rates; the Fed is expected to move later this year. In Europe, the European Central Bank has embarked on a huge program of asset purchases to juice the region’s crisis-hit economy and stave off the threat of deflation. The Bank of Japan recently stepped its stimulus efforts in an ambitious attempt to end years of falling prices.
Forbes suggested that if the risks that were focused on in the last forecasts come through, there is a chance that inflation will pick up faster than people had been expecting in the medium term, which then would most likely merit an increase in interest rates sooner than people are currently expecting. The BoE’s exit strategy involves raising rates slowly and incrementally. Even so, Forbes said the economy may respond in unexpected ways. Sterling held its ground during trading yesterday despite pressure on the EUR that could push GBPUSD lower.
German IFO Business Climate Index Improves
The Ifo Business Climate Index for industry and trade in Germany rose to 106.7 points in January from 105.5 points last month, marking its third successive increase. Companies were far more satisfied with their current business situation and the majority was also optimistic about the business outlook. The German economy makes a good start to the year. In manufacturing the business climate indicator rose for the third month in succession. Assessments of the current business situation were better and manufacturers also expressed greater confidence in short-term business developments. Stronger impulses are expected from exports thanks to the falling euro exchange rate.
In wholesaling the business climate continued to improve. This was largely due to far better assessments of the current business situation, while wholesalers expressed greater caution about their business outlook. In retailing the business climate turned positive for the first time since July 2014. Assessments of the current business situation improved considerably and retailers’ expectations also brightened. In construction the business climate deteriorated slightly. Contractors were somewhat less satisfied with their current business situation, but the 6 month business outlook brightened marginally.
Today’s Key Data:
GBP – Preliminary GDP: UK economic growth weakened in the third quarter, amid sluggish economic activity in the euro-area. Gross domestic product increased 0.7% in the three months through September, following 0.9% rise in the second quarter. The reading was in line with market forecast. On an annualized basis, the U.K. economy expanded 2.8% in the third quarter. Worrying signs of renewed stagnation in the euro zone may have a negative effect on UK’s. UK growth is predicted to be 0.6% in the fourth quarter of 2014.
GBP – BBA Mortgage Approvals: This is an important gauge of demand in the UK housing sector. The indicator has been on a downtrend for five months, dropping to 36,700 in December. This was slightly below the forecast of 37,300. No change is expected in the upcoming reading.
USD – Durable Goods Orders: Durables orders plunged 0.7% in November after gaining 0.3% in October, while analysts expected a 3.0% jump. Likewise, core orders dropped 0.4% in November after contracting 1.0% in the prior month. Analysts predicted a 1.2% rise. Transportation declined 1.2% a 3.3% jump in October. The rise in autos and non-defence aircraft was overshadowed by a sharp drop in defence aircraft orders. Both Durable orders and Core orders are expected to gain 0.6%
USD – CB Consumer Confidence: American consumers were more positive in December amid strong economic data releases. Consumer sentiment climbed to 92.6 in December from a revised 91 in the previous month. 17.1% of responders noted a rise in job availability from 16.2% in November. 19.6% claimed business conditions were worse compared to 21.8 in November. The rise in confidence goes hand in hand with GDP growth and the constant improvement in the job market. A further increase to 95.7 is expected now.
USD – New Home Sales: Sales of new US homes contracted 1.6% in November to a seasonally adjusted annual rate of 438,000 units, indicating the housing sector still hasn’t benefited from the recent improvements in the job market. The reading was worse than the 461,000 rate forecast by analysts and lower than October’s downwardly revised rate of 445,000. New-home sales remain far below the annual rate of 700,000 seen during the 1990s, as many Americans lack solid credit records to enable obtaining mortgages. Sales of new US homes is expected to reach 452,000 in December.
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