August 29 2014

August 29, 2014 (ATFX Currency Management) – The September meetings of the European Central Bank and the Bank of England, coupled with the U.S. Nonfarm Payrolls report will take the center stage in the week ahead. Here is what to expect and the outlook from the strategy team at ATFX Currency Management.

BoE

We now know that there were two MPC members at the Bank of England who voted for a rate hike in August and they will probably cast the same vote in September. Of course, the majority of the nine MPC members are still not in a hurry to raise rates, but if the two “hawks” are joined by one or two more, the market will begin to price expectations of a shift in the policy makers’ views which could lead to a rate hike in the early part of next year. Naturally, such expectations should be supportive of the GBP. However, we will probably not see significant GBP strength until the Scottish independence vote on September 18 is behind us. Provided that the vote is not a “yes” (which will really complicate things for the U.K. and its currency) the GBP would be able to clear a major obstacle to its future appreciation.

ECB

The drop in eurozone inflation and the stagnation of the economy in Q2 have increased the odds of more easing by the European Central Bank. The ECB President Draghi has also been very clear in recent speeches that the door is wide open to easing monetary policy further. In fact the ECB has announced recently that it is looking to hire consultants to advise the central bank on QE strategies. With the ECB one step closer to launching a QE program, the divergence in the monetary policies between the ECB and other central banks is becoming bigger and even more visible, which should keep the EUR under pressure.

NFP

We expect the U.S. economy to deliver another, seventh consecutive month of job creation above 200k. Our forecast is for up to 230K new jobs in August from 209k in July, while the unemployment rate inches lower to 6.1% from 6.2%. Another positive nonfarm payrolls report should keep the Fed on track with the pace of tapering, leading to the eventual end of its QE program by the end of 2014. The USD will be likely to continue to attract bids with the trend accelerating when we get within a 6-month range from the Fed’s first rate hike.

ATFX is an alternative investment manager specializing in currency investment strategies and portfolio diversification through exposure in the FX market. The firm is registered as a Commodity Trading Advisor and is an approved member of the National Futures Association (ID# 0466436). Clients are individuals and institutions, including pension funds, charities, foundations, endowments, as well as corporations and family offices. For more information, visit www.atfx.co.


USA 

In the trading room today: EUR and GBP Outlook ahead of ECB and BOE Meetings. With the European Central Bank and the Bank of England meetings, as well as the U.S. Non-farm Payrolls on the horizon, we explain the importance of these important economic events and explore their potential impact on the EUR, GBP and USD, we list the Top 10 spotlight economic events that will move the markets in the week ahead, we examine the consensus forecasts for the upcoming economic data, we analyze the pressure in the EUR/USD currency pair, we keep an eye on the GBP/USD pair, we note the correction in the USD/JPY pair, we highlight the market’s reaction to the Euro-zone HICP and Unemployment Rate, and the U.S. GDP, we discuss new forecasts from Bank of Tokyo-Mitsubishi and Barclays, and prepare for the trading session ahead.

Eurozone inflation falls to 0.3% y/y with most of the decline continuing to be driven by volatile energy and food prices. Euro-area unemployment rate unchanged, but consumer confidence increases. UK house prices rise 0.8% in the month of August…

 


Powered by Guardian.co.ukThis article titled “Eurozone inflation falls to 0.3%; unemployment stable at 11.5% – business live” was written by Angela Monaghan, for theguardian.com on Friday 29th August 2014 12.01 UTC

The Guardian’s Sarah Butler and Julia Kollewe have put together a handy timeline on Tesco here.

Back to the big corporate story of the day – Tesco’s surprise profit warning.

Tesco’s shares have recovered some of the earlier losses but are still down 4%. Retail analysts have been busy cutting their price targets for the supermarket chain.

Outgoing chief executive Philip Clarke is still getting a lot of stick over Tesco’s dwindling fortunes, and his replacement David Lewis has got a massive job on his hands when he starts on Monday (a month early).

Here is some of the reaction to today’s gloomy update.

Darren Shirley, analyst at Shore Capital Stockbrokers, is not amused.

We have now lost count of the number of times that we have downgraded our forecasts for Tesco over the last three years. Whilst so, we have another announcement today (29th August 2014) that represents the inverse of whatever the icing on the cake stands for.

It is very disappointing to see this update, which fundamentally raises questions in our minds about the capability of the management under Mr. Clarke at this once great company. As such, we expect, as part of a range of measures, there to be considerable senior management change under Mr. Lewis in time, as Tesco needs a world class top team to take it forward.

Phil Dorrell, director of Retail Remedy, says there is a silver lining for incoming chief executive David Lewis.

A dividend cut of this degree underlines the extent of the problems Tesco is facing. Throw in the fact that Dave Lewis is being parachuted in a month early and you have a grocer that is truly on the rack.

Dave Lewis has his work cut out, and then some, when he joins next week. Dave Lewis will probably be delighted that such bad news precedes his start. It highlights the continuing saga of profit leak that clearly runs deeper than most feared.

For Tesco, right now, it will be feeling like Autumn metaphorically, not just literally. What’s certain is that we won’t be seeing a rapid turnaround. Tesco is an oil tanker and any material change of direction will not happen quickly.

In the weeks and months ahead, Dave Lewis and his team will need to rethink the entire Tesco model.”

More reaction here.

Updated

Ukraine’s prime minister Arseny Yatseniuk has urged the IMF to release the next tranche of a $17bn loan as fighting with pro-Russian rebels continues.

The heavily industrialised areas of Donetsk and Luhansk contributed almost 17% of Ukranian GDP in 2013 and have been plagued with fighting.

The PM said:

The [revenue] that we haven’t been receiving from Donetsk and Luhansk is miniscule compared with the billions we are spending on war.

For us it is critically important to get a positive decision from the IMF and we’ve done everythin [to achieve] this.

The IMF’s board is meeting later today to decide whether or not to release a second $1.4bn tranche of funding.

Martin van Vliet of ING says the pressure is on Mario Draghi and the ECB as the eurozone heads closer towards deflation.

The very low eurozone inflation reading for August reinforces pressure on the ECB to consider further monetary stimulus on top of what is already in the pipeline.

The ECB may argue that the latest down-leg in eurozone inflation is driven by the volatile energy component and therefore does not warrant a reassessment of the medium-term inflation outlook. But to the extent that it further dampens inflation expectations, the latest inflation drop is of significance. Moreover, with inflation inching towards zero, the cushion against deflation is getting smaller and smaller.

To be sure, based on current oil and food prices, headline inflation should start to pick up from October onwards. But it will likely continue to significantly undershoot the ECB’s medium-term target. As such, there remains a compelling case for a more expansionary macroeconomic policy stance in the eurozone.

James Ashley, chief European economist at RBC Capital Markets, says the ECB’s inflation forecasts are looking hopelessly out of date.

This latest inflation reading is surely the demise for the ECB staff’s existing forecasts. Since the moment those projections were published in June we have been arguing that the ECB’s baseline profile contained more than a tincture of rose-tinted optimism: the belief that inflation this year would manage to average 0.7%, and would subsequently eke out an ‘improvement’ to 1.1% in 2015, seemed fanciful to us from the very outset.

And in light of subsequent outturns, our more grim prognostication has been largely vindicated (our own forecasts are annual averages of 0.5% and 0.8% respectively). As a consequence, it is now highly likely (in our view) that those staff projections will be cut down to size next week.

That said, weaker projections do not necessarily correspond to ECB policy action. We think that while there is a risk of a small interest rate reduction next week from the ECB, the market is getting too far ahead of itself in talking about large-scale asset purchase programmes.

Reaction is coming in on this morning’s eurozone data.

Christian Schulz, senior economist at Berenberg on inflation:

What looks like good news for many Eurozone consumers is mixed news for the ECB. Eurozone headline inflation edged down further in August, reaching only 0.3% yoy. That strengthens households’ real spending power, but for the ECB, the distance of actual inflation to the 2% target keeps growing. That is likely to feed into more discussions in Frankfurt about further policy easing.

However, most of the decline continues to be driven by volatile energy and food prices. Core inflation actually increased slightly from 0.8% to 0.9% in August. The ECB will look through the monthly volatility in inflation at its forthcoming meetings.

Much more important than inflation rates now is the economic rough patch caused by the crisis in Eastern Ukraine. Forward-looking indicators continue to fall, raising the risk that the Eurozone recovery may be interrupted for longer. That could delay any reversion in inflation trends and mean lower inflation for longer. As that risks de-anchoring inflation expectations, the ECB is likely to step up its response by December at the latest.

And on unemployment:

The eurozone’s labour market is not showing any impact from the Ukraine crisis yet. Unemployment was virtually unchanged in July and the rate stayed at 11.5%.

The trends at the country level were unchanged: unemployment fell in Germany and the reform countries on the periphery.

By contrast, unemployment rose in the reform-laggards France (+0.1ppt to 10.3%) and Italy (+0.3ppt to 12.6%). The labour market usually lags the economy, so that latest economic slowdown may take some time to affect statistics.

However, with much of the periphery relatively unaffected by the crisis in Ukraine, chances are that the improvement there will continue. Germany is strong enough to weather temporary setbacks. France and Italy seriously need structural reforms that would make it more attractive for firm to hire. Only then will they benefit more quickly once the next upswing begins.

The Eurostat figures on eurozone unemployment show the number of people out of work in the region was roughly stable in August at 18.4m.

Germany and Austria had the lowest unemployment rate at 4.9%.

Greece had the highest rate, at 27.2% (in May), followed by Spain, at 24.5%.

Youth unemployment fell in the eurozone, but remains high. The jobless rate among the region’s under 25s fell to 23.2% in July, from 24% in June. It was the lowest rate since June 2012.

The number of young people without a job fell to 3.3m, down 226,000.

Again, there are still big variations between countries. Spain had the highest rate in July at 53.8%, while Germany had the lowest at 7.8%.

Updated

Breaking: eurozone inflation falls; unemployment unchanged

Eurozone annual inflation fell to 0.3% in August from 0.4% in July, as expected.

Economists also got it right on the region’s unemployment rate, which was unchanged at 11.5% in July.

This (slightly) takes the heat off ECB president Mario Draghi. A bigger dip in inflation would have raised calls for the central bank to announce quantitative easing at next week’s policy meeting.

Updated

UK bonuses rise 4.9% to £40.5bn in year to April

The Office for National Statistics has published bonuses data for the period May 2013 to April 2014.

The bonus pot increased by 4.9% to £40.5bn. Bonuses amounted to 6% of total pay during the year, the higest since before the financial crisis.

£14.4bn of bonuses were paid in the finance and insurance industry, which increased by 2.9% over the year, and £26.1bn was paid out in the rest of the economy, up 6.1%.

Malaysia Airlines is cutting 6,000 jobs – a third of the workforce – in the wake of the disappearance of flight MH370 over the southern Indian Ocean in March and the shooting down of flight MH17 over Ukraine last month.

Press Association reports:

The job losses, announced in Kuala Lumpur, are part of a major restructuring of the airline which will see a new chief executive in place next year, as well as the carrier being completely taken over by the Malaysian government.

There will also be a restructuring of routes flown, although the twice-daily service between Heathrow airport in west London and Kuala Lumpur, on which the world’s largest passenger plane the Airbus A380 superjumbo operates, is set to continue.

A London-based Malaysia Airlines spokesman said: “The London-Kuala Lumpur route is highly successful and will carry on.

“Today’s announcement is all about rebuilding the airline after these two awful incidents. The airline is being reshaped and the aim is to return it to profitability.”

Overnight we had GfK’s latest snapshot of the UK consumer’s mood. The headline confidence index increased three points in August to 1.

It might not sound too impressive, but it is only the second time since March 2005 that the index has made it into positive territory.

GfK’s Nick Moon said confidence had been fairly stable over recent months.

It looks as if we might be in a new period of relative stability for the Index. After several months of almost constant increase, the last four months have all seen the Index within a range of 0 (plus or minus 2). And indeed the last five months have all been within a range of -1 (plus or minus 2).

There is no guarantee how long this stable position will last – a rush of good or bad economic news could set off a marked rise or fall, but things could stay like this for a while – in 2011/12 there was more than a year when the index stayed in the range of -31 (plus or minus 2).

It is worth noting that the score for the two questions concerning the last 12 months rose by more than the two concerning the next 12 months, suggesting that people are reassessing the past more than feeling more hopeful about the future.

Updated

The International Monetary Fund’s board will meet today to review Ukraine’s programme and decide on a $1.4bn (£844m) tranche of funding.

At a regular press briefing on Thursday, Gerry Rice, IMF communications director, had this to say on Ukraine:

If the situation was exacerbated, the programme would have to be significantly recalibrated, including the financing. The degree of uncertainty is large.

Updated

European markets shrug off escalating crisis in Ukraine

Investors in Europe do not appear overly concerned this morning by the news that there are more than 1,000 Russian soldiers fighting in Ukraine.

FTSE 100: +0.3% at 6,827.34

CAC 40: +0.6% at 4,393.6

FTSE MIB: +1% at 20,538

DAX: +0.5% at 9,508.42

IBEX 35: +0.4% at 10,764.30

Michael Hewson, chief market analyst at CMC Markets UK, thinks investors should be thinking ahead on Ukraine.

For all President Putin’s denials that Russian troops aren’t operating in Ukraine, we get new evidence every day to pretty much confirm that they are, and yesterday’s reports of Russian backed separatists moving into Ukraine further south appears to have raised the stakes further in the ongoing conflict between the Ukrainian army and separatist forces.

There had been some optimism earlier this week that the meeting between President Putin and Ukraine President Poroshenko could well be a catalyst for a reduction in tensions, while in fact it turns out the opposite could well be the case, as once again President Putin’s conciliatory words are not matched by his deeds, or more to the point to the actions of his forces.

One thing is certain, the escalation in the last 24 hours would suggest that more sanctions are likely to be in the offing, as the tension goes up a notch, and investors would do well to take note of this.

Updated

Later this morning we will be bringing you the latest news from the eurozone:

Annual inflation is expected to slow to 0.3% in August from 0.4% in July. A bigger fall will pile some serious action on Mario Draghi and his colleagues at the European Central Bank to take action next week at its September policy meeting.

The region’s unemployment rate is expected to remain unchanged at 11.5%.

Tesco shares are down 7.5% at 227.6. It is the FTSE’s biggest faller in early trading and has dragged its fellow supermarkets down with it.

J Sainsbury: -5% at 288

WM Morrison: -3.75% at 179.8

Marks and Spencer: -3.45% at 423.2

Read our full story on Tesco here.

Updated

Tesco has issued another profit warning

Another day, another gloomy statement from Tesco.

The supermarket chain has published a surprise trading update this morning, warning trading profit is likely to be between £2.4bn-£2.5bn in 2014/15. Previously it was guiding £2.8bn.

Tesco attributes the profit downgrade to “challenging trading conditions and ongoing investment in our customer offer”.

The bad news doesn’t end there. Tesco is slashing its interim dividend by 75% to 1.16p a share.

It is also scaling back investment to no more than £2.1bn in the current financial year – £400m less than originally planned and £600m less than the previous year. IT and store refurbishments will take the hit.

New chief executive Dave Lewis will start his job on Monday, a month earlier than planned. Lots to be getting on with.

Tesco’s chairman, Sir Richard Broadbent, said:

The board’s priority is to improve the performance of the group. We have taken prudent and decisive action solely to that end. Our new chief executive, Dave Lewis, will now be joining the business on Monday and will be reviewing every aspect of the group’s operations. This will include consideration of all options that create value for customers and shareholders.

The actions announced today regarding capital expenditure and, in particular, dividends have not been taken lightly. They are considered steps which enable us to retain a strong financial position and strategic optionality.

Further details on trading performance will be provided as usual in our Interim results announcement, scheduled for release on 1 October.

Updated

Annual house price inflation over the past couple of years looks like this according to Nationwide

Annual UK house price growth rises to 11% in August

Good morning, and welcome to our rolling coverage of the financial markets, the world economy, business and finance.

There are no signs of a cooling UK housing market according to the headline data from Nationwide this morning.

House prices rose 0.8% in August, a bigger increase than the 0.1% forecast by economists. It pushed annual house price inflation up to 11%, again stronger than the 10.1% predicted by the City. The average price of a UK home is now £189,306.

Here is what Robert Gardner, Nationwide’s chief economist had to say about the figures:

UK house prices edged up by 0.8% in August, marking the sixteenth successive monthly price rise. As a result, the annual pace of house price growth is up to 11% from 10.6% in July.

While this is still below the 11.8% recorded in June, house price growth continues to outpace earnings by a wide margin, with average wage growth running at less than 1% in recent months.

Surveyors report that new buyer enquiries have moderated somewhat in recent months, and the prospect of interest rate increases together with subdued wage growth may temper demand in the quarters ahead.

However, the brightening economic outlook is likely to provide ongoing support for housing demand. Consumer sentiment remains buoyant thanks to declining inflation and sustained increases in employment.

Updated

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