Economy & markets: global roundup

Today, we will likely be advised of weak Industrial output in Euroland, with the consensus expectation that production fell 2.3% month on month in September, and some Houses looking far rather worse news.

Against this backdrop the ECB’s Securities Markets Programme (SMP) will be in focus, with the ECB publishing its purchase of bonds and markets will likely look to see if the ECB starts to buy Italian bonds following the progress on Italian politics over the weekend. Our base-case expectation is that the ECB will buy in size today. This would likely spark across-the-board gains in risk-sensitive currencies against the USD and would also be supportive of EURUSD in the near term. Conversely, failure of the ECB to make a sizeable show of force today and any failure of Italian bond prices to rally, and yields to fall, would likely raise systemic stress and renewed selling pressures on risk.

Italy has a BTP auction scheduled today at 13:00 GMT but this is not likely to be as significant as some might expect, as the amount to be issued, €1.5-3.0bn, is significantly less than the average size of BTP auctions. We believe that domestic banks and investors will absorb the auction, and as such, expect a favourable auction.

Looking out this week, we are due Euroland Q3 GDP data on Tuesday, with commentators looking for a solid 0.5% quarter-on-quarter (qoq), up from 0.2%qoq in Q2, very much supported by Germany, expected to report 0.8%qoq progress. France, on the other hand, is expected to report 0.5%qoq and data in line with expectations would be a positive for confidence in Euroland, but practically markets will be much more interested in policy and therefore what lies ahead, rather than the backward looking GDP data.

For the US, we will get October retail sales and Industrial output numbers on Tuesday and Wednesday respectively, with the consensus expecting progress of 0.3% and 0.4% month-on-month (mom), but
forecasts are falling back and we should not be surprised if the data are reported as 0.2%mom and 0.3%mom. That said, US data has consistently come in better than expected over the past weeks. With financial markets having dramatically reduced pricing of a US recession, we think it would be more
difficult for US data to surprise expectations on the topside and support risk sentiment.

Turning to the UK, given the Monetary Policy Committee’s (MPC) decision to resume quantitative easing in November and continued disappointing economic data subsequently, the Bank of England’s Inflation Report can be expected to show inflation well below 2% at the two-year horizon. This should be a strong signal that – unless economic and financial conditions dramatically improve – the MPC is likely to expand its asset purchase program further when the current programme ends in February. Ahead of Wednesday’s Inflation Report, we get October inflation numbers on Tuesday, and the figure will likely be down from September’s 5.2% high, to c5.0%, mainly driven by the effects of aggressive discounting in the
supermarket sector.

The labour market statistics should show continued deterioration in job market dynamics, with unemployment rising by 125,000 in Q3 pushing the unemployment rate to a new high of 8.3%. This news would leave the pound vulnerable vs the euro, particularly given the extent of short euro positioning and pricing of downside euro risk in the options market. Indeed the euro could rally against the pound on any reduction in euro systemic fears and a relief risk rally.

As for very near term news, overnight, the dollar weakened slightly while Asian equity markets rallied. Asia equities rose 0.8% (Sensex) to 2.4% (Hang Seng) following the progress on Italian politics over the weekend. Italy’s lower house passed the amendments to the 2012 budget over the weekend, putting into law the reforms that the EU/IMF demanded. Ex-European Commissioner Mario Monti has been handed the task of forming an emergency government after Prime Minister Berlusconi resigned.

In Asia, the PBoC fixed USDCNY 16pips lower to 6.3301 today and it’s clear that the pace of CNY appreciation has slowed following the G20 summit. Meanwhile Japan’s Q3 GDP growth was reported
as up 6% qoq annualized, broadly in line with the consensus forecast of 5.9%. Growth is expected to contract again in Q4, however, as external demand slows. The Bank of Japan will meet later this week, but is not expected to adjust policy.

James Bevan is chief investment officer of CCLA, specialist fund manager for charities and the public sector. CCLA launched The Public Sector Deposit Fund in 2011 to meet the needs of local authorities and other public sector organisations. You can follow James on twitter @jamesbevan_ccla

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