Weekly wrap: Eurozone elation? Will the region finally emerge from recession – 13.08.2013

Source:Henderson Global Investors

Global equities ended the week lower with the MSCI World Total Return Index losing 0.4% in US dollar terms. While initial trading was generally directionless, with thin volumes on Wall Street the markets later took on a more positive tone, driven by upbeat July Chinese data releases. Exports were up 5.1% year-on-year (yoy), imports grew by more than 10%, and industrial output rose 9.7%, all exceeding market expectations. Inflation softened, rising 2.7% yoy, suggesting the authorities have room to loosen monetary policy if required. In the US investors mulled over hints by several US reserve banks that the time is nigh for a withdrawal of stimulus. An improving June trade deficit, and accelerating growth in the services sector also lent support to the worries. However, the Institute for Supply Management exports index fell from 49.5 to 47.5, as overseas demand remained weak.

Continuing the recent run of more positive UK economic data, June manufacturing output grew by 1.9%. This means the sector grew by 0.7% in the second quarter compared with a contraction previously. The Bank of England (BoE) revealed its forward guidance for future rate changes. Governor Mark Carney said the benchmark rate would not be raised until unemployment falls below 7%, which is not anticipated to happen until Q3 2016 at the earliest. The guidance is subject to knock-out clauses should there be threats to financial stability or inflation worries. The BoE also revised up its 2013 gross domestic product (GDP) forecast to 1.4% and for next year to 2.5%. In Australia, the reserve bank cut its main interest rate by 25bps to a low of 2.5%, and the 2013 GDP forecast was cut from 2.50% to 2.25%. The lowering of expectations for the economy comes as Australia’s mining investment boom is waning and other sectors such as consumer spending and construction have been slow to respond to lower interest rates. During the week, Japanese 10-year government bond prices rose and yields fell as the Bank of Japan announced it will buy over US$7 bn of Japanese government bonds in support of its monetary stimulus programme.

In the limelight this week are the initial estimates of Q2 GDP for Japan and the eurozone, Germany and France. Japan has disappointed, with slower annualised quarterly growth of 2.6%, while the Q1 reading was cut from 4.1% to 3.8%. In the eurozone, June data showed that German industrial production recovered at a faster pace than expected, while the pace of contraction in France, Italy and Spain slowed. This has led to rising confidence in the region and hopes for an end to seven consecutive quarters of contraction. The consensus is for a modest 0.2% quarter-on-quarter expansion on Wednesday. Also in store for the eurozone are June industrial production (Tuesday), where a more upbeat 1.0% rise is expected by analysts and the July inflation print (Friday). Germany’s August ZEW economic sentiment survey (Wednesday) is forecast to improve. We will see if the recent run of stronger UK data continues with the release of July inflation, unemployment and retail sales data this week.

Over in the US, the week starts off with the release of July retail sales. Following a flat June, retail ex auto sales are expected to grow by 0.4% month-on-month (mom) in July owing to stronger retail and food services sales. Thursday reveals July inflation, where the market forecast is for a slower rise of 0.2% mom, compared with 0.5% previously, as well as industrial production data. This is followed by the University of Michigan August consumer confidence survey and gauges of the health of the housing sector. Both building permits and housing starts are expected to provide a strong reading in July.