August 14th, 2013, Daily Market Bite from Ishaq Siddiqi Market Strategist
German and French growth figures ahead of the European market enthuse investors Wednesday morning. Q2 GDP figures out of Germany were much stronger than anticipated by the market, in at 0.7% on the quarter versus expectations of 0.6%. France's Q2 GDP figure comes in at 0.5% on the quarter, much stronger than the 0.2% figure expected by the market.
Both economies showing a solid upswing, particularly France [given how markets have worried about the government's slow implementation of budget reforms] bodes well for a robust reading for the euro area as a whole, due at 0900 GMT. The euro zone GDP figure is expected to show the region exiting a recession, posting growth of 0.1% on the quarter but after today's German and French readings, some in the market are reconsidering their forecasts in the event of a stronger turnout.
Germany's figure certainly suggests that the worse of the economic turmoil in the country is over and the region's powerhouse is back on its feet. Music to the ears of Chancellor Angela Merkel who is fighting for her job at next month's national elections. French President Francois Hollande will also welcome the French GDP figure as this outcome is the strongest quarterly expansion since the start of his Presidential term. With the full euro area reading due in the next few hours, attention shifts to how the periphery has performed during the quarter. Both Spanish and Italian GDP figures for the period are expected to show a contraction between 0.1% to 0.2%, an outcome that investors will still welcome given that economic conditions have deteriorated further.
Onto other data due Wednesday, we have reports out of the UK labour market and the BOE's meeting minutes. On jobs data, the labour market in the UK will now for the next 3 or so years take centre stage in the economic data line up as the BOE have linked the unemployment rate to accommodative monetary policies currently in place. UK unemployment rate, currently at 7.8%, must fall below 7% before BOE hikes rates and cuts/ends QE, but the BOE itself does not see that happening until 2016. Investors will keep a close eye on the unemployment rate today and any moderation will of course be welcome news.
The BOE's meeting minutes could prove to be a non-event in light of recent forward guidance and Inflation Report which provides the market with enough insight into the Bank's current thinking. Likely that we will see another unanimous vote by the MPC against adding more liquidity and adjusting interest rates. Outside of the minutes, a point worth noting is that UK borrowing costs have rose to the highest level in two years as investors are unconvinced that BOE's head Mark Carney can keep interest rates at record lows until 2016, as detailed by the Bank's forward guidance. The strong UK economic data of late has left many in the market to believe that the UK economy may grow stronger and faster than the BOE expects, warranting a hike in interest rates. UK 10-year borrowing costs moved above the 2.6% mark, the highest level since October 2011.
Elsewhere, we have had more Fedspeak overnight which may influence price-action but this time, it's QE-friendly. Well, sort of. Atlanta Fed head Dennis Lockhart said the Fed should approach tapering of QE cautiously and although the central bank could make the first reduction to QE any time before the end of 2013, it's not locked into doing it in September. In the US later, eyes will also be on PPI data.
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