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ECONOMIC DATA ANALYSISFRIDAY 2 MARCH 2012GLOBAL RECOVERY HOPES, BUT EVENT RISK STILL LOOMS LARGE. Deadline for PSI poses last main hurdle to secure Greek bail-out• MPC and ECB to meet amid mixed economic data and rising input price pressures• US ‘Super Tuesday’ and February Employment Report pose risk to bond marketsWhile one swallow doesn't make a summer, the recent pick-up in the economic data and the better sentiment in peripheral Europe raise the possibility that maybe, just maybe, the global upswing is starting to gain traction. The past week has been no exception. In the US, an upward revision to Q4 GDP, a sharp jump in the Chicago PMI, the downtrend in jobless claims and better pending home sales data continue to bolster recovery hopes. There was also positive developments across Europe, with Greece's second bailout on course and banks flush with cheap liquidity following the ECB’s ‚¬530bn LTRO2. In the UK, the February CBI distributive trades survey suggested retail conditions are improving, while the latest pick-up in broad money growth hinted that UK credit conditions may not be quite as tight as previously thought.But the data has not been all one way, with the weakness of the national manufacturing PMIs - both in the US and across Europe - providing something of a reality check over the last few days. More generally, implementation risk in Greece, the process of deleveraging and the ongoing need for fiscal restraint continue to pose major challenges for many economies. The recent rapid escalation in the oil prices also represents a formidable threat. If sustained it could put a major spoke in the wheel of global inflation and recovery hopes.For now, however, the markets appear to be giving the prospect of economic recovery the benefit of the doubt. Peripheral sovereign spreads have continued to fall sharply, equities have firmed and tensions in the wholesale funding markets have eased. Amid the rally in risk assets, UK, US and core Euro area government bond yields (and swap rates) have pushed higher, while the yen has hit a nine-month low and gold prices have dropped back. Over the coming week market sentiment could be tested, with two key event risks to negotiate - the deadline for the Greek PSI deal on 8th March and US ‘Super Tuesday’. The PSI deadline represents the last main hurdle for Greece to secure its bailout and avert default. In all likelihood, the debt-swap agreement will garner enough support, but this may require Collective Action Clauses (CACs) to be invoked. If so, this would likely constitute a credit event by ISDA, thus triggering CDS payouts. While on one level confirmation that Greece is set to receive its funds may be viewed positively by the markets, the triggering of CDS payments could lead to heightened volatility for those institutions that have short CDS exposures and set a precedent for the future.
In the US, it’s a key week for US primaries - ˜Super Tuesday’ - with 10 states due to select delegates for the Republican National Convention when the GOP presidential candidate is officially declared. A strong showing by Mitt Romney on Tuesday would effectively secure his presidential nomination. From a market perspective, this may serve to heighten the uncertainty about the presidential election outcome and, by extension, the uncertainty over the fiscal outlook - particularly given Romney’s support for lower business taxes and for making the Bush tax cut permanent. In terms of economic data, the US employment report will also be watched closely in the coming week for ongoing signs of recovery. We expect another solid outturn, with payrolls forecast to have risen by 200k+ for the third consecutive month. Non-manufacturing ISM and factory orders data are also due out in the week.
Elsewhere, the ECB and MPC are both due to meet. Following recent monetary stimulus, neither is expected to announce any fresh measures. At the ECB press conference, Draghi's comments have, as always, the potential to move markets. His comments are likely to come against the backdrop of some softening in the euro area services PMIs. Meanwhile, after recent strong gains, the coming week’s UK services and industrial production figures will be watched for signs that the pace of improvement may be starting to slow.
UK DATA PREVIEW
FRIDAY 2 MARCH 2012MPC announcement (Mar) The minutes of the February MPC meeting showed the Committee’s recent unanimity had fractured. Members Posen and Miles both voted for £75bn of QE, greater than the consensus £50bn. Moreover, of the remaining seven members, “some” thought “a case could be made for maintaining the stance of policy”. March’s meeting is less contentious. Having sanctioned £50bn of QE last month there is no need or expectation to alter policy this time, quite apart from March being the month with the fewest policy changes in the MPC’s history. Bank Rate should remain at 0.50% and the Asset Purchase target at £325bn. The decision following the expiry of this round of QE, in May, will be the next big call for the MPC. With trends in recent data uncertain, this could cause a deeper rift on the Committee.Services PMI (Feb) The improvement in the services PMI over the last five months has been impressive. The index reached a nonsnow distorted 28-month low in August of 51.1. Last month it rose to 56.0, its second highest reading in the last 22- months. However, the recent retracement in the manufacturing PMI cautions against excessive optimism and we forecast a modest fall in the services PMI to 55.3. Historically, this level of the PMI has marked a neutral territory for monetary policy, not weak enough for further stimulus, nor strong enough for tightening. However, the PMI excludes government and distribution, including retail, sub-sectors which are seeing a long-term structural adjustment. Hence total services output should be weaker than implied by the PMI andIndustrial production (Jan) The performance of industrial output in recent quarters has been disappointing. Having contracted in 3 out of the past 4 quarters, industrial production ended 2011, 1.3% lower than 2010. However, the recent improvement in surveys of production activity marks a turnaround in sentiment to levels that now point to modest gains in manufacturing output over the coming months. While we expect this to be the case as we move through Q1, we suspect that the momentum may not be strong enough to deliver a second consecutive rise in manufacturing output following last month’s strong 1.0% m/m rise and pencil in a small 0.1% monthly contraction. The wider industrial production measure is likely to have been boosted by a rebound in utilities and mining output following declines in Q4. As such we look for a modest 0.1% m/m increase in industrial output.Producer prices (Feb) Input price inflation has slowed sharply over recent months from a peak of 18.5% last July to 7.0% currently. However, this trend is likely to have been halted last month by a pickup in global commodity prices. Oil prices in sterling terms alone rose to a record high of £77.7/barrel and ended the month 5% higher than in January. We expect input prices to have risen by 1.0% m/m in February, pushing the annual rate up to 7.1%. Similarly for output prices we expect the annual rate to have held at 4.1%, with ‘core’ output price inflation expected to have picked up last month to 2.9% from 2.4%. While favourable base effects provide scope for the downward trend in producer price inflation to be resumed over coming months, geopolitical tensions and the pace of global activity will be key in the determining the pace and extent of any deceleration beyond spring.DIsclaimerThis document, its contents and any related communication (altogether, the 'Communication') does not constitute or form part of any offer to sell or an invitation to subscribe for, hold or purchase any securities or any other investment. This Communication shall not form the basis of or be relied on in connection with any contract or commitment whatsoever. This Communication is not intended to form, and should not form, the basis of any investment decision. This Communication is not and should not be treated as investment research, a research recommendation, an opinion or advice. Recipients should conduct their own independent enquiries and obtain their own professional legal, regulatory, tax or accounting advice as appropriate. Any transaction which a recipient of this Communication may subsequently enter into may only be on the basis of such enquiries and advice, and that recipient’s own knowledge and experience. This Communication has been prepared by, and is subject to the copyright of, Lloyds. This Communication may not, in whole or in part, be reproduced, transmitted, stored in a retrieval system or translated in any other language in any form, by any means without the prior written consent of Lloyds. This Communication is provided for information purposes only, and is confidential and may not be referred to, disclosed, reproduced or redistributed, in whole or in part, to any other person. This Communication is based on current public information. Whilst Lloyds TSB Bank plc (“Lloyds TSB”) and Bank of Scotland plc ("Bank of Scotland") have exercised reasonable care in preparing this material and any views or information expressed or presented are based on sources it believes to be accurate and reliable, no representation or warranty, express or implied, is made as to the accuracy, reliability or completeness of the facts and data contained herein. This material has been prepared for information purposes only and Lloyds TSB, Bank of Scotland, their directors, officers and employees are not responsible for any consequences arising from any reliance upon such information. Under no circumstances should this material be treated as an offer or solicitation to offer, to buy or sell any product or enter into any transaction. If you receive information from us which is inconsistent with other information which you have received from us, you should refer this to your Lloyds TSB or Bank of Scotland Relationship Manager for clarification. Lloyds Bank Corporate Markets, Lloyds TSB Corporate Markets and Lloyds TSB are trading names of Lloyds TSB Bank plc, Lloyds TSB Scotland plc and Bank of Scotland plc. Lloyds TSB Bank plc. Registered Office: 25 Gresham Street, London EC2V 7HN. Registered in England and Wales no. 2065. Lloyds TSB Scotland plc. Registered Office: Henry Duncan House, 120 George Street, Edinburgh EH2 4LH. Registered in Scotland no. 95237. Bank of Scotland plc. Registered Office: The Mound, Edinburgh EH1 1YZ. Registered in Scotland no. SC32700. Authorised and regulated by the Financial Services Authority under registration numbers 119278, 191240 and 169628 respectively.
ECONOMIC DATA ANALYSISFRIDAY 2 MARCH 2012GLOBAL RECOVERY HOPES, BUT EVENT RISK STILL LOOMS LARGE. Deadline for PSI poses last main hurdle to secure Greek bail-out• MPC and ECB to meet amid mixed economic data and rising input price pressures• US ‘Super Tuesday’ and February Employment Report pose risk to bond marketsWhile one swallow doesn't make a summer, the recent pick-up in the economic data and the better sentiment in peripheral Europe raise the possibility that maybe, just maybe, the global upswing is starting to gain traction. The past week has been no exception. In the US, an upward revision to Q4 GDP, a sharp jump in the Chicago PMI, the downtrend in jobless claims and better pending home sales data continue to bolster recovery hopes. There was also positive developments across Europe, with Greece's second bailout on course and banks flush with cheap liquidity following the ECB’s ‚¬530bn LTRO2. In the UK, the February CBI distributive trades survey suggested retail conditions are improving, while the latest pick-up in broad money growth hinted that UK credit conditions may not be quite as tight as previously thought.But the data has not been all one way, with the weakness of the national manufacturing PMIs - both in the US and across Europe - providing something of a reality check over the last few days. More generally, implementation risk in Greece, the process of deleveraging and the ongoing need for fiscal restraint continue to pose major challenges for many economies. The recent rapid escalation in the oil prices also represents a formidable threat. If sustained it could put a major spoke in the wheel of global inflation and recovery hopes.For now, however, the markets appear to be giving the prospect of economic recovery the benefit of the doubt. Peripheral sovereign spreads have continued to fall sharply, equities have firmed and tensions in the wholesale funding markets have eased. Amid the rally in risk assets, UK, US and core Euro area government bond yields (and swap rates) have pushed higher, while the yen has hit a nine-month low and gold prices have dropped back. Over the coming week market sentiment could be tested, with two key event risks to negotiate - the deadline for the Greek PSI deal on 8th March and US ‘Super Tuesday’. The PSI deadline represents the last main hurdle for Greece to secure its bailout and avert default. In all likelihood, the debt-swap agreement will garner enough support, but this may require Collective Action Clauses (CACs) to be invoked. If so, this would likely constitute a credit event by ISDA, thus triggering CDS payouts. While on one level confirmation that Greece is set to receive its funds may be viewed positively by the markets, the triggering of CDS payments could lead to heightened volatility for those institutions that have short CDS exposures and set a precedent for the future.
In the US, it’s a key week for US primaries - ˜Super Tuesday’ - with 10 states due to select delegates for the Republican National Convention when the GOP presidential candidate is officially declared. A strong showing by Mitt Romney on Tuesday would effectively secure his presidential nomination. From a market perspective, this may serve to heighten the uncertainty about the presidential election outcome and, by extension, the uncertainty over the fiscal outlook - particularly given Romney’s support for lower business taxes and for making the Bush tax cut permanent. In terms of economic data, the US employment report will also be watched closely in the coming week for ongoing signs of recovery. We expect another solid outturn, with payrolls forecast to have risen by 200k+ for the third consecutive month. Non-manufacturing ISM and factory orders data are also due out in the week.
Elsewhere, the ECB and MPC are both due to meet. Following recent monetary stimulus, neither is expected to announce any fresh measures. At the ECB press conference, Draghi's comments have, as always, the potential to move markets. His comments are likely to come against the backdrop of some softening in the euro area services PMIs. Meanwhile, after recent strong gains, the coming week’s UK services and industrial production figures will be watched for signs that the pace of improvement may be starting to slow.
UK DATA PREVIEW
FRIDAY 2 MARCH 2012MPC announcement (Mar) The minutes of the February MPC meeting showed the Committee’s recent unanimity had fractured. Members Posen and Miles both voted for £75bn of QE, greater than the consensus £50bn. Moreover, of the remaining seven members, “some” thought “a case could be made for maintaining the stance of policy”. March’s meeting is less contentious. Having sanctioned £50bn of QE last month there is no need or expectation to alter policy this time, quite apart from March being the month with the fewest policy changes in the MPC’s history. Bank Rate should remain at 0.50% and the Asset Purchase target at £325bn. The decision following the expiry of this round of QE, in May, will be the next big call for the MPC. With trends in recent data uncertain, this could cause a deeper rift on the Committee.Services PMI (Feb) The improvement in the services PMI over the last five months has been impressive. The index reached a nonsnow distorted 28-month low in August of 51.1. Last month it rose to 56.0, its second highest reading in the last 22- months. However, the recent retracement in the manufacturing PMI cautions against excessive optimism and we forecast a modest fall in the services PMI to 55.3. Historically, this level of the PMI has marked a neutral territory for monetary policy, not weak enough for further stimulus, nor strong enough for tightening. However, the PMI excludes government and distribution, including retail, sub-sectors which are seeing a long-term structural adjustment. Hence total services output should be weaker than implied by the PMI andIndustrial production (Jan) The performance of industrial output in recent quarters has been disappointing. Having contracted in 3 out of the past 4 quarters, industrial production ended 2011, 1.3% lower than 2010. However, the recent improvement in surveys of production activity marks a turnaround in sentiment to levels that now point to modest gains in manufacturing output over the coming months. While we expect this to be the case as we move through Q1, we suspect that the momentum may not be strong enough to deliver a second consecutive rise in manufacturing output following last month’s strong 1.0% m/m rise and pencil in a small 0.1% monthly contraction. The wider industrial production measure is likely to have been boosted by a rebound in utilities and mining output following declines in Q4. As such we look for a modest 0.1% m/m increase in industrial output.Producer prices (Feb) Input price inflation has slowed sharply over recent months from a peak of 18.5% last July to 7.0% currently. However, this trend is likely to have been halted last month by a pickup in global commodity prices. Oil prices in sterling terms alone rose to a record high of £77.7/barrel and ended the month 5% higher than in January. We expect input prices to have risen by 1.0% m/m in February, pushing the annual rate up to 7.1%. Similarly for output prices we expect the annual rate to have held at 4.1%, with ‘core’ output price inflation expected to have picked up last month to 2.9% from 2.4%. While favourable base effects provide scope for the downward trend in producer price inflation to be resumed over coming months, geopolitical tensions and the pace of global activity will be key in the determining the pace and extent of any deceleration beyond spring.DIsclaimerThis document, its contents and any related communication (altogether, the 'Communication') does not constitute or form part of any offer to sell or an invitation to subscribe for, hold or purchase any securities or any other investment. This Communication shall not form the basis of or be relied on in connection with any contract or commitment whatsoever. This Communication is not intended to form, and should not form, the basis of any investment decision. This Communication is not and should not be treated as investment research, a research recommendation, an opinion or advice. Recipients should conduct their own independent enquiries and obtain their own professional legal, regulatory, tax or accounting advice as appropriate. Any transaction which a recipient of this Communication may subsequently enter into may only be on the basis of such enquiries and advice, and that recipient’s own knowledge and experience. This Communication has been prepared by, and is subject to the copyright of, Lloyds. This Communication may not, in whole or in part, be reproduced, transmitted, stored in a retrieval system or translated in any other language in any form, by any means without the prior written consent of Lloyds. This Communication is provided for information purposes only, and is confidential and may not be referred to, disclosed, reproduced or redistributed, in whole or in part, to any other person. This Communication is based on current public information. Whilst Lloyds TSB Bank plc (“Lloyds TSB”) and Bank of Scotland plc ("Bank of Scotland") have exercised reasonable care in preparing this material and any views or information expressed or presented are based on sources it believes to be accurate and reliable, no representation or warranty, express or implied, is made as to the accuracy, reliability or completeness of the facts and data contained herein. This material has been prepared for information purposes only and Lloyds TSB, Bank of Scotland, their directors, officers and employees are not responsible for any consequences arising from any reliance upon such information. Under no circumstances should this material be treated as an offer or solicitation to offer, to buy or sell any product or enter into any transaction. If you receive information from us which is inconsistent with other information which you have received from us, you should refer this to your Lloyds TSB or Bank of Scotland Relationship Manager for clarification. Lloyds Bank Corporate Markets, Lloyds TSB Corporate Markets and Lloyds TSB are trading names of Lloyds TSB Bank plc, Lloyds TSB Scotland plc and Bank of Scotland plc. Lloyds TSB Bank plc. Registered Office: 25 Gresham Street, London EC2V 7HN. Registered in England and Wales no. 2065. Lloyds TSB Scotland plc. Registered Office: Henry Duncan House, 120 George Street, Edinburgh EH2 4LH. Registered in Scotland no. 95237. Bank of Scotland plc. Registered Office: The Mound, Edinburgh EH1 1YZ. Registered in Scotland no. SC32700. Authorised and regulated by the Financial Services Authority under registration numbers 119278, 191240 and 169628 respectively.
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