Economic Data Analysis
Cyclical Improvement Continues Outside Euro Area
- Muted reaction to Greek deal, but coming week's LTRO should be more positively received.
- Global PMIs to maintain improving trend, but Bernanke's testimony to down play gains.
- UK cyclical vs structural debate highlighted with soft lending figures, while PMI improves
After weeks of anticipation, Euro area officials agreed a second Greek bail-out package. This should pave the way for the Greek PSI offer being made later today. Markets have hardly greeted the news with euphoria, concentrating on the clauses and hurdles stil l to be cleared, specifically the take up in the PSI debt swap and rising social tensions evident in Greece. Nevertheless, progress to date makes it less likely that we will see a disorderly default and the tail risks to Euro area and global activity have receded somewhat.
The uncertainties surrounding the Greek bailout will continue to dominate sentiment over the coming weeks. This weekend sees the G20 Finance Ministers' meeting in Mexico, which is also likely to focus on European developments. The chief topic will be the expansion of IMF funding. However, a fundamental breakthrough seems unlikely with non-Euro area members demanding greater efforts from Euro area economies, namely an expansion of the contagion firewall ESM/EFSF, before bolstering IMF funds further. Germany appears the chief obstacle to such an expansion, but with the Bundestag to vote on the Greek package on Monday, we see little scope for a German climb down this weekend. Nevertheless, international pressure is likely to mount, which may ease the way for some policy shift at the Euro area summit later in the week.
Before that, the ECB's second 3-year LTRO is held in the week with results announced on Wednesday. The first 3-year LTRO marked a fundamental turning point in the crisis and appears to have averted a credit crunch developing in the Euro area, as well as providing much needed liquidity to sovereign bond markets. The key question surrounding the coming week's operation is one of size. Early estimates of €1trn have been scaled back to around €500bn. This would still represent a sizeable stimulus, around 5% of Euro area GDP. This should continue to tighten Euro area credit spreads (including peripheral sovereigns). A much lower allotment would likely disappoint markets (despite an interpretation that banks' funding needs may be less acute).
Against this background, we see Fed Chairman Bernanke's semi-annual testimony to Congress this week taking something of a back seat. This is also reflective of the Fed's recent efforts to increase transparency, meaning we have already seen a detailed account of individual FOMC members' votes, Bernanke's policy meeting press conference and his Budget testimony to Congress. The old Humphrey Hawkins testimony is no longer the rare insight into Fed thinking it once was. We see little chance of Bernanke changing the FOMC's message this week. But we do think the Fed is deliberately down playing nascent signs of recovery to avoid undoing its efforts to keep longer-term yields low.
PMI surveys over the coming week should provide further evidence of improving global sentiment. Markets were disappointed by the Euro area's soggy 'flash' estimates for February. These suggest that a technical recession across the Euro area as a whole will be a close call, with the big freeze that hit the Continent in February possibly pivotal. But we expect PMIs for the US, China and UK to be more upbeat, continuing the signs of cyclical strengthening. Admittedly, in the UK structural headwinds remain and we will watch developments in bank lending this week alongside broad money supply figures to provide a key insight into the short-term dynamic that will govern further QE stimulus or not. Yet more broadly, we expect the news in the coming week to remain supportive of risk sentiment, even while markets remain wary of Greek developments.
UK DATA PREVIEW
Maufacturing PMI (Feb)
The manufacturing PMI has picked up sharply since its low in October and the current headline reading of 52.1 is the highest in nine months. This improvement has been mirrored in a range of anecdotal evidence both in the UK and overseas and we think reflects a genuine firming in the outlook for the sector. For February we forecast a further rise to 52.7, a more modest increase this time reflecting the sharp gains in the previous two months. However, without a reversal in other indicators, the PMI looks set to continue to rise over the coming months. We would see this as consistent with a quarterly gain of around 0.5% in Q1. Although this implies only a weak monthly pattern, it would go a long way to supporting wider GDP growth and help avoid technical recession.
Personal lending (Jan)
January's lending figures should show a pick-up in mortgage approvals, foreshadowed in CML and BBA figures. We forecast approvals rising to 54.9k, the highest since end-2009. Yet this pick-up looks likely to be driven by the expiry of the Stamp Duty holiday in March and approvals could drop thereafter. Accordingly, mortgage lending should rise by £0.8bn. However, we are more concerned about the record contraction in consumer credit in December. Q4 saw barely any expansion of consumer credit and was the weakest quarter since Q3 2009. This seems odd given the rise in household spending. We will watch January's figure, alongside broader lending reported in the money supply release, for signs of weak credit creation. This is a concern for the MPC and will be a key determinant of any further QE.
GfK consumer confidence (Feb)
Notwithstanding last month's 4pt improvement, consumer confidence remains at levels normal ly associated with recession. Sentiment continues to be undermined by concerns over the domestic labour market and falling real incomes. However, the index currently stands at a 7-month high of -29 and remains well above the all-time low of -39 reached in mid 2008. The recent improvement has coincided with some moderation of the worst fears for the euro area and the sharp slowdown in inflation, factors that we expect to have driven the index higher to -27 in February. While we expect labour market weakness and public sector spending cuts to constrain any rise, a stabilisation of real incomes from slower inflation should support a pick-up in consumer confidence over the course of the year.
Nationwide house price index (Feb)
Anecdotal evidence suggests that the improvement in the housing market has been driven in part by the temporary part-removal of stamp duty for first-time buyers rather than an improvement in fundamentals. Moreover, with the deadline for completion fast approaching (March 2012), signs that this boost may prove temporary have begun to emerge. The decline in the forward-looking RICS new buyer enquiries balance suggests that demand from first-time buyers is beginning to fade. For now, the rise in activity should provide some support to house prices. We look for a 0.5% rise in February's Nationwide index which would reverse contraction in the previous two months. Nevertheless with rising unemployment and demand for credit still weak, the effects of the temporary boost may begin to fade over coming months.