- Delay to tapering expectations hammers USD
- UK retail sales move higher
- Sideways movement expected in to the weekend
While most may think that the fact that the largest economy in the world is now ‘back in play’ means that the world’s markets are now exciting, the opposite is ringing true. Apart from wholesale USD weakness the markets have not really changed despite the deal in Washington DC.
The USD has fallen and American stocks have risen as the internal market discussion has once again shifted from the thoughts of politicians to the thoughts of monetary policy makers. The market now believes that the combination of the hit to output caused by the shutdown of the federal government, alongside the temporary salve that Congress patched upon the USA’s debt ceiling debate, has resulted in a substantive hit on the US economy. As we told you yesterday, the ratings agency Standard & Poor’s estimate that the shutdown has taken 0.6% off annualised GDP, roughly equivalent to $25bn. Combined with the currently unknown hit to consumer and business confidence there is the very real chance that the recovery in the US has been dealt a severe blow.
Dollar slumped primarily on the belief that the Federal Reserve will now have to maintain its current stance of buying $85bn worth of bonds and mortgage backed securities for a lot longer than had been expected. Those analysts who had expected a tapering of asset purchases at the Fed’s September meeting mainly switched their bets to December. With the recent shenanigans in Washington combined with the change at the head of the Federal Reserve when Bernanke cedes his Chairmanship to Janet Yellen, there is very little, stable reason why a central bank would find it optimal and indeed prudent to relax its support on the US economy. Tapering of asset purchases will occur in March at the very earliest and that means a dollar sitting the back foot.
As for the data that was held hostage by the government shutdown, we expect a large amount of it to be released in the early part of next week. The one thing that we would say is that the more ‘stale’ the data, the less the market is likely to react to it. The more headline/grandstand numbers – retail sales, payrolls, unemployment rate – will obviously garner attention but the rest will be largely ignored. Think of the shutdown like a big reset button; now the government is open again, the market will focus on just how much the shutdown has hurt the economy and make decisions from there.
Sterling took advantage of the weak dollar and powered back above the 1.61 level with EURUSD charging towards 1.37. Better than expected retail sales numbers from the UK were the backer of GBP pairs in the absence of strong euro data. UK retail sales rose by 0.6% fulfilling the hope that last month’s 1% slump would be clawed back this month. It was, driven by a 3% increase in household goods. A quarter on quarter rise of 1.5% is also the highest since March 2008, when the economy was fully hitting its straps, and this continues a real trend of growth in retail sales – one of the key hallmarks of a consumer-driven recovery.
Risks to this, moving forward, are fairly numerous. Nominal falls in real wages will remain the main pressure on consumer confidence while wage negotiations remain limited, whereas more forward looking indicators – this month’s services PMIs – stated that consumer facing companies are not progressing at the same rate as the banks and business to business services, which are benefitting from housing market and corporate activity improvements respectively.
China’s GDP expanded by 7.8% in Q3 according to overnight figures, fuelling gains in Asian markets. This is an obvious bounce back from Q2’s disappointing 7.5% expansion number, a figure that left bulls in the China shop thoroughly disappointed. Unfortunately, accompanying data in the form of industrial activity numbers and retail sales showed a slowing picture; the situation in China remains one of slowing overall output. Regional growth will continue to be shackled by the albatross that is a struggling China.
As for today, the data calendar is lacklustre at best with only Canadian inflation numbers to worry about at 13.30. The markets have had what my grandma would have called “a bit of a week” and will be glad for the respite that today and the weekend provides. We anticipate a continuation of trend and relatively sideways movements with an emphasis on a weaker USD.
Have a great weekend.