Starting the working year in Europe

Whilst the consensus forecast for the UK Manufacturing PMI is 47.3 in December after November’s 47.6, some economists expect a modest rise to 48.0 in December from 47.6.

Meanwhile, the consensus expectation is for a modest improvement in the Swiss PMI to 45.4 in December from 44.8 in November, but the Norway PMI likely declined slightly to 48.4 in December from 48.6 in November.

As for the rest of the week, the UK Services PMI has been hovering around 51-52 over the past two months and is unlikely to break the recent range in December (data due on Thursday). The money supply data on Wednesday look likely to show a 0.5%mom rise in M4, and the pound has continued to benefit from EUR stress, with reserve managers having stepped up their diversification into sterling during periods of elevated concern on the outlook for Euroland. However, any significant deterioration in Euroland would likely stall the UK recovery and prompt further easing from the Bank of England, which would be expected to constrain the progress of the pound.

For Euroland itself, the key data focus this week will be Germany and following positive surprises from the last round of German business surveys, the gaze will shift to hard data, with German industrial orders in particular, due on Friday. Some economists expect that orders contracted 2.0%mom in November after a 5.2%mom rise in October and despite the volatility, momentum should remain poor. Within the report, we will focus on foreign orders, given that any strength in European data should come from the external sector. The consensus expectation is for a small 0.2%mom rise in German retail sales (Thursday) in November. Against this backcloth, we can expect the euro to remain under pressure in Q1.

Not that a strong currency is necessarily desirable: economists expect that Swiss inflation fell further into negative territory, with the Bloomberg forecast of -0.6%yoy (-0.1%mom), driven by the lagged effect of CHF strength. In the absence of a re-emergence of major new deflationary pressures, we can expect the SNB to keep the 1.20 floor unchanged well into 2012 and possibly longer. Setting an FX floor is a medium- to long-term policy, and credibility and consistency are crucial. Accordingly, we can expect delivered volatility on the EUR/CHF cross to remain low.

Turning to broader Europe, Hungary and the Czech Republic will post industrial production data for November (on Friday) and further weakness is likely. This leaves some commentators bearish on the CE3 currencies with the HUF seen as particularly vulnerable due to tensions with the IMF and the ECB over Hungary’s new central bank law.

The other focus for Euroland this week will be European sovereign bond supply line. Over the next five weeks, we can expect €87.3 billion of supply. On the face of it, this would be expected to cause indigestion, but there is €34.85 billion of coupon cash and €79.97 billion of redemption cash over the period so it may go better than pessimists assume, with the net result being negative net supply of €27.52 billion. Taking a broader view, European credit strategists expect a similar issuance pattern in 2012 as occurred in 2011, and this suggests that issuance will be skewed toward Q1 and will fall in August and in December. The total issuance in Q1 2011 was around €260bn.

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