FRIDAY 9 MARCH 2012
FED IN THE SPOTLIGHT, AS GREECE CONCERNS STEADILY SUBSIDE
Support for Greek debt restructuring paves way for release of bailout fundsNo change expected from the US Fed, as markets gauge recovery momentum
Weak UK labour market report to provide a further reality check on the pace of recovery
It has been another topsy turvy week for markets as conflicting forces have impacted sentiment. A resurfacing of euro debt concerns, rising oil prices and signs of a fading in global growth led to a general sense of caution in the early part of the week, with equities falling prey to profit-taking and bond yields making an assault on new lows. Sentiment, however, recovered following the Greek PSI announcement and another strong US payroll.
The announcement that Greece managed to secure 95.7% participation in its debt restructuring, albeit after much arm-twisting and the activation of CACs, was cautiously welcomed. Thus, the last major obstacle preventing Greece receiving 130bn of bail-out funds has been removed. The debt exchange is due to take place on Monday, while final sign-off for the bailout and IMF involvement should follow shortly thereafter. However, as as expected, ISDA confirms the use of CACs as a credit event, it would trigger CDS payments. Thus, the biggest sovereign default in history would ensue.
Elsewhere, following this week's decisions by the ECB and MPC to leave policy unchanged, financial markets will turn their attention to the US Federal Reserve decision on Tuesday. Like their international counterparts, the Fed is actively engaged in providing ongoing stimulus to the US economy through "Operation Twist". We see little chance of the Fed changing policy this time. However, markets zeroed in on the guarded acknowledgement of some improvement in US labour market made by Chairman Bernanke in his recent semiannual testimony to Congress. Markets will look for any reflection of this in the accompanying statement. We suspect, however, that Bernanke will remain guarded in his comments, with the Fed wary of interest rate markets reacting prematurely to early signs of economic improvement.
Aside from the Fed, the markets will be seeking guidance from the upcoming data about the pace of economic recovery. Recent data has been more mixed. In the US, the drop in the ISM in February came as a surprise after the strength in some of the regional indicators. The latest US Employment report, however, was more buoyant, with payrolls posting their third consecutive rise above 200k last month.
The coming week brings the Empire and Philadelphia regional surveys. The latest Beige Book noted that Philadelphia activity seemed to be growing "at a somewhat faster pace" than in other US districts, while New York was "somewhat slower". This could see the week's surveys moving in different directions, thus questioning either's role as a barometer for the wider economy.
European activity will be scrutinised with the German ZEW survey the first of March's indicators. While the German IfO continues to bear testimony to the strength of the German economy, the drop in the PMIs in other countries suggests recession and a likely contraction across 2012 for the euro area as a whole.
Domestically, the focus will be on the labour market. Our own Employment Confidence Survey is due on Monday and the official labour market statistics on Wednesday. Recent survey evidence has improved, with RECS raising the prospect of a "spring revival" in the labour market. But we are yet to be convinced. While the Bank's preferred ILO measure should show a slower rise in unemployment over the past three months (to 25k from 49k) we think this is lagging developments in the more timely claimant count. This rose by a faster 6.9k last month and we forecast a faster 7.5k increase in February. Moreover, we expect claimant unemployment to continue to rise into the spring, a lagged response to the economic weakness towards the end of 2011. By the end of 2012, however, we are hopeful that conditions should start to improve. The labour market statistics will be on a number of economic statistics that the MPC will be scrutinising closely as it gauges whether to follow up with further QE in the spring.
UK DATA PREVIEW FRIDAY 9 MARCH 2012
Lloyds Employment Confidence Survey (Feb) The Lloyds Consumer Barometer continues to suggest that domestic employment conditions have little improved since the height of the financial crisis in 2008/9. The balance for job prospects in January rose 2 points but remains very negative at -73% and well below the -50% level registered last June prior to the intensification of the euro area crisis. In terms of job security among those in work, sentiment also improved in January to -24. However, this was from Decembers all-time low reading of -33. This marked the weakest reading since the survey began in 2004 and, at current levels, is consistent with that witnessed during the 2008/9 recession. The job prospects index leads headline employment by around 3 months, and points to employment continuing its recent downward trend over coming months.
Unemployment (Feb/Jan) Jobless claims rose by 6.9k in January. The fastest pace in four months. However, at these levels, is still relatively modest and is seemingly out of step with an economy that has only expanded by 0.8% over the past year. However, changes in the labour market tend to lag activity in the wider economy. This suggests that unemployment should rise further over coming months as the labour market adjusts to Q4's contraction in output, the weakness in the economic outlook and public sector spending cuts. We forecast a small pick-up in the pace of the claimant count to 7.5k in February, but expect increases to accelerate in coming months. The wider ILO measure of unemployment rose by 48k in Q4 and we look for a further 30k rise in unemployment in the three months to January.
Average earnings (Jan) Anecdotal evidence has pointed to a firming in pay settlements in the three months to January, with IDS recording median pay growth of 3.0% from 2.5% to December. This likely reflects seasonal factors, the larger concentration of manufacturing awards at this time of year and the relative dearth of public sector awards. Median growth was recorded rising to 2.8% from 2.2% last year, only to fall back thereafter. Nevertheless, this should boost the official ex-bonus measure to 2.1%. Of more interest could be the bonus effect, where competing base effects could result in a small boost. We forecast total earnings rising by 2.1% (3m yoy). Wages are still growing at half the pace of inflation (4.2% 3m yoy) and while the pressure on real incomes is likely to ease over the coming quarters, it still presents a challenge to the consumer outlook for now.
Trade (Jan) The UK goods deficit narrowed sharply in December to its smallest in nearly two years. Exports rose sharply in the final months of 2011, while imports barely registered growth. Yet the start of 2012 may see some reversal. Imports had been restrained by contracting household spending and soft export growth. These factors reversed in Q4 and January specifically may unwind the unusually sharp drop in Decembers import volumes. This should see the goods deficit rise back to 7.7bn in January from 7.1bn. Yet the total trade deficit - including services - posted its smallest shortfall in December in nearly a decade. We see a rise in January to 1.7bn, but a narrowing trade deficit is likely to be a longer-term feature of economic rebalancing, with sterling remaining competitive and household spending subdued.
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