Rational FX

Wednesday 16th December 2015 07:53 EST

UK manufacturing disappointed markets with a reported -0.4% decrease in November from a forecasted -0.1%. Industrial output rose 0.1% as expected but y/y it rose 1.7% which was above expectations.  The UK was expected to report no change in month on month industrial output and manufacturing production. The manufacturing sector is not the strongest in the UK, as seen by consistently low PMIs. The better than expected PMI for the services sector allowed the pound to recover after being hit by the other figures.

The British Chamber of Commerce downgraded the British growth forecasts for the next three years on the back of weaker trade and manufacturing, which has been dragged down by a slowdown in the global economy. Britain's economy is now expected to grow 2.4 percent in 2015, down from a previous estimate of 2.6 percent. According to the BCC, the UK economy will then expand 2.5 percent in 2016 and 2017, down from its previous forecast of 2.7 percent for each of those years. Slowing growth in the third quarter contributed to its downgrade, the BCC said, which also cut its outlook for the dominant services sector this year. Forecast for growth in the services sector, which makes up the bulk of Britain's private sector economy, has been cut to 2.7 percent this year from 2.8 percent previously. It left the 2016 and 2017 growth outlook steady at 2.9 percent. The manufacturing sector looks set to contract 0.2 percent in 2015 and then grow in 2016 and 2017.

The Bank of England voted eight to one to hold interest rates as they expect oil prices to weigh further on inflation in the coming months. The Bank maintained its view from last month that inflation would not exceed one per cent until the second half of next year. Over summer it said inflation would exceed one per cent early in 2016, but moved the prediction to spring a few months later. While the Bank warned oil prices could hinder the return of inflation to more normal levels over the next few months, it also said the market reaction to the US Federal Reserve lifting interest rates for the first time in nine years would be difficult to predict. It also warned: “The downside risks to growth in emerging market economies remained, however, with the risk of an acceleration of capital outflows in reaction to any increase in US interest rates.”
Ian McCafferty was the sole dissenter. He said the risks to domestic cost growth to the upside, and was sufficient to justify an immediate increase in Bank rate. The MPCs voting pattern has not changed since the summer. Sterling hit a three-week high against a broadly weaker dollar on Friday, recovering from a fall the previous day on Bank of England minutes that were more dovish than some had expected. Investors sold the pound on Thursday after the Bank warned of more barriers to growth next year, bolstering the view that UK interest rates would be kept at their record lows until at least the end of 2016.

The Euro had a quiet start to the week, in stark contrast to the rally it had last week after Draghi's announcement about his soft extension to QE, which saw one of the largest Euro advances against the USD in 5 years. The macroeconomic calendar was light, with Germany releasing its Industrial Production data for October, up by 0.2% compared to a month before, but flat on the year. Germany also released disappointing trade data which suggests Europe’s largest economy is suffering from weakening demand at home, and abroad. German exports fell by 1.2 % month-on-month to €99bn in October (on a seasonally adjusted basis), according to the Federal Statistics Office. Imports took a sharper hit - contracting by 3.4% during the month to €78.3bn. The data also suggests that the slowdown in emerging markets has been hurting Germany this year. Over the year, German exports outside the EU have shrunk by 0.9% while sales to other EU countries are up by 6.4%.

The German economy is continuing to expand thanks to private consumption, with refugees providing a limited additional boost, the economy ministry said in its monthly report. Europe's largest economy was facing a slight headwind from the tough global economic environment but rising employment and wages along with the low oil price and the weak euro were helping. It said construction, especially of homes, would probably increase in the coming months while the industrial sector was beginning to overcome the weak patch it went through in the third quarter. "Overall Germany's economic output has probably grown in the fourth quarter," the ministry said. The economy expanded by 0.3 percent in the third quarter.

Oil prices fell to the lowest level in more than six years amid speculation that a record global glut will be prolonged after OPEC effectively abandoned its long-time strategy of limiting output to control prices. Along with WTI and Brent both seeing significant softness yesterday to see Brent futures reach their lowest level of the year after OPEC failed to cut their output. This saw the likes of CAD, NOK and RUB all fall against the USD. American oil stocks dropped by more than 3.5m barrels to 485.9m last week, a bigger than expected decline which has helped support the crude price. Fears of oversupply and lack of demand have sent oil prices tumbling, with last week’s indecisive Opec meeting adding to the decline. But with US stocks down last week, demand appears to be higher than expected, so Brent crude has reacted by climbing 1.79% to $40.98.

The number of Americans filing for unemployment benefits rose to a five-month high last week which disappointed the markets. Analysts believe it does not signal deterioration in the labour market though as the underlying trend remained consistent with tightening conditions. A Labour Department analyst said there were no special factors influencing the data and only claims for Louisiana had been estimated as the state implements a new computer program.
The labour market resilience, despite slowing consumer spending and housing market activity, is likely to give the Federal Reserve confidence to raise interest rates next Wednesday for the first time in nearly a decade. The focus is not on whether the central bank will raise interest rates but how quickly it will try to normalise monetary policy. The focus is now on the path of interest rates going forward, not whether there will be a hike this week. Several of the major global investment banks expect a 25-basis-point rate hike this week, followed by three hikes next year, bringing the target range for the fed funds rate to 1.00-1.25 percent by end of 2016.

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