EU Morning Report- Euro retreats, eyes on EU summit
The euro opened lower against most of its major counterparts as the EU summit on Sunday, provided no solid indication of any agreement among the eurozone members. A number of officials, including Merkel and Sarcozy, pointed to Wednesday as the – next – key date for the ongoing debt crisis. Versus the US dollar, the single currency, opened at 1.3842 from the 1.3895, Friday’s close. Against the Swiss Franc, the euro dropped to 1.2215 from 1.2261. Against the Japanese yen, the euro remained almost unchanged opening at 105.93 from 105.99.
The US dollar rose against a basket of currencies as headlines from Europe left investors wondering for yet another market opening. Against the Swiss franc, the US dollar advanced to 0.8837, from 0.8805. Against the Japanese yen, the greenback dropped to 76.22 from 76.28. On Friday, the yen momentarily plunged to a record low at 75.82. A sequential triggering of stop losses was held responsible, in the absence of any fundamental reason. This development forced the Japanese Minister of Finance, to repeat their pledge in weakening the yen, to protect their economy’s post-earthquake recovery.
The Australian dollar opened lower at 1.0320 from 1.0375 against the US dollar. The British pound dropped to 1.5917 from 1.5752 against the US dollar. Investors are expected to focus on the speech of Bank of England Deputy Governor, Paul Tucker.
Oil prices advanced to 88.39 dollars a barrel from 87.48. Gold also rose higher to 1650.91 dollars an ounce from 1641.90. Silver almost unchanged, opened at 31.33 dollars an ounce from 31.3475.
UK PMI Data
The January PMI surveys for services, manufacturing, and construction will provide significant indications as to whether the UK economy showed any signs of improvement at the start of 2012 after GDP contracted modestly in Q4. Just as important as the output, indicators contained in the surveys will be developments in new domestic and export orders as they hold the key to near-term growth prospects.
The GfK/NOP consumer confidence index (out overnight Monday/Tuesday) is forecast to show that sentiment rose marginally in January from a 34-month low in December. Specifically, we expect the GfK NOP consumer confidence index (which is carried out on behalf of the European Commission) to have edged up to -32 in January after dipping to -33 in December from -31 in November. In fact, the index has been mired in a -30 to -33 range since July 2011, which are among the lowest readings in the 38-year history of the survey and substantially below its long-term average of -8. We expect consumer confidence may have received a ‘small’ lift in January from retreating inflation and news that utility bills will be trimmed in February. Consumer confidence will likely have remained under serious concerns over the current state of the economy, the outlook, rising unemployment, and personal finances.
The Bank of England is expected to report on Tuesday that mortgage approvals for house purchases rose modestly further to a 2-year high of 54,000 in December from 52,854 in November. While mortgage approvals have been creeping up overall in recent months, they remain extremely low compared to long-term norms and there is still little evidence that housing market activity is shifting up significantly. Mortgage approvals continue to be substantially below the average monthly level of around 88,000 seen since 1993, while a level of 70,000-80,000 has in the past been considered consistent with stable house prices. Meanwhile, the Nationwide lender is expected to report during the week that house prices fell 0.2% m/m in January, as they did in December. This would still leave house prices up 1.2% y/y in January.
We expect house prices to fall 5.0% in 2012. We believe that there are serious downside risks to this forecast. Despite the recent modest rise in mortgage approvals, housing market activity remains very low compared to long-term norms, and it is likely to be increasingly pressurized in the early months of 2012, at least by weakened economic activity, rising unemployment, muted wage growth, and very low consumer confidence. In addition, credit conditions may well tighten, making it harder to get a mortgage. These factors are seen countering the support to the housing market coming from extended very low interest rates.
The manufacturing purchasing managers’ survey (PMI – out on Thursday) is expected to show that overall activity in the sector contracted at a reduced rate and only marginally in January. Specifically, we forecast the PMI to have edged up to a 4-month high of 49.8 in January from 49.6 in December and 47.7 in both November and October (which was the lowest level since June 2009). The CBI has already released its industrial trends survey for January, which showed total orders picking up appreciably from a 14-month low in December and near-term production expectations improving. The CBI survey suggested that, at the very least, manufacturing activity will not be such a drag on the economy in the first quarter of 2012 as it was in the fourth quarter of 2011.
Nevertheless, it is evident that manufacturers are facing a hugely challenging environment early in 2012. Domestic demand for manufactured goods is being pressurized by the current still serious squeeze on consumers’ purchasing power, reduced public spending and less favourable inventory developments. On top of this, muted global economic activity particularly in the Eurozone – is limiting manufacturers’ export orders, while the Eurozone crisis is additionally causing major uncertainty for manufacturers and weighing down on confidence. One area of relief for manufacturers is that input prices are now softer after surging earlier in 2011. We forecast the construction PMI (out on Thursday) to have eased back to 52.5 in January from 53.2 in December. This would be modestly below the Q4 average of 53.2, but still above the 50.0 level that is taken to indicate flat activity. While the PMI average of 53.2 in the fourth quarter indicates clear overall expansion in the construction sector, the preliminary national accounts data indicate that construction output contracted 0.5% q/q as GDP fell 0.2%. This followed construction output growth of 0.3% q/q in Q3 and 3.1% q/q in Q2.
There is conflicting evidence as to whether the construction sector is currently growing or contracting modestly. What is evident though is that the sector currently faces an extremely challenging environment, which threatens to seriously limit activity over the coming months. In particular, the government’s public spending cuts are limiting overall expenditure on public buildings, schools, and hospitals. On top of this, house building activity is likely to be constrained by persistently weak housing market activity, soft prices, and a worrisome outlook. If the economy continues to struggle markedly over the coming months, there is the likelihood that construction activity will suffer increasingly from projects being put on hold or cancelled altogether. There is some good news for the construction sector as it stands to benefit from the government’s measures to boost infrastructure that were outlined in last November’s autumn statement. It remains to be seen just how much of a boost these measures provide and how soon they ‘kick in’.
In addition, the government is looking to boost house building through instructing government departments to release state-owned land to be built on under a “Build Now, Pay Later” scheme. The government has also announced a £400m ”Get Britain Building” investment fund aimed at reviving stalled house building projects. The performance of the dominant service sector is absolutely critical to hopes that the UK economy can return to growth in Q1. The business activity index of the service sector purchasing managers’ survey (out on Friday) is expected to indicate that the sector is growing but only modestly. Specifically, we forecast the business activity index to have retreated to 52.7 in January, after spiking up to a 5-month high of 54.0 in December from 52.1 in November.
It must be kept in mind that the survey evidence from the PMIs has recently been healthier than the hard data. Specifically, the preliminary national accounts data for the Q4 indicate that services output was flat quarter-on-quarter as GDP contracted by 0.2%. The business activity index of the purchasing managers’ survey averaged 52.5 in the fourth quarter, which was clearly above the critical 50.0 level that is meant to indicate unchanged activity.
There are indications that activity in professional, business and financial services is being ‘limited’ by difficult conditions in the private sector, as well as by the cutbacks in government spending. Meanwhile, consumer-facing services companies are being hit by the serious squeeze on consumer’s purchasing power and their need/desire to limit their discretionary spending. Significantly, the Bank of England’s regional agents reported in their January summary of business conditions that “the growth rate of turnover in business services continued to ease, due to slowing demand growth and downward pressure on price inflation,