- UK Industrial Production
- ECB Announces Interest Rates
- Bank of England's Monetary Policy Committee Meeting
- US Trade Balance
- Canada International Merchandise Trade
- Euro-Zone GDP
UK Industrial Production (MoM)(NOV) (9:30 GMT, 4:30 EST)
Consensus: 0.60%
Previous: -1.00%
Outlook: Expectation is that industrial production for the UK will increase to 0.60 percent from a decline of 1 percent. In contrast to the expectations have been the largest declines in several of UK's largest industrial companies. The world's largest mining company, BHP, lost 2.6 percent while the number two mining company in the world, Anglo American dropped 2.9 percent in the FTSE 100 Index after recently reaching all time highs. Furthermore, manufacturing PMI remained stagnant while the PMI construction index fell sharply to 52.6 from 54.2 in November. Economic growth in the UK has slowed with forecasts of real GDP at 1.7 percent, lower than the trend for 2006. However, lower petrol prices eased some pressures off industrial production. If figures come out as expected or higher, this may alleviate the risk of the Bank of England lowering interest rates from 4.5 during their meeting on Thursday. On the other hand, should industrial production not meet expectations, this will further suggest continual weakness in the UK economy.
Previous: In October UK industrial production fell to *1.0, the most in seven months after increasing 0.5 percent in September. Compared to other European countries, Britain has underperformed growing at 0.4 percent in contrast to the Eurozone economies growing at 0.6 percent. As a result, growth forecasts for 2006 were cut in half to 1.75 percent, compared with 1.3 percent growth in the Eurozone countries and 3.5 percent growth in the US this year. The drop in industrial production along with poor consumer spending and a 37 percent increase in crude oil prices only add to the evidence that Britain's economy is in the works of experiencing the slowest annual expansion in 13 years.
ECB Announces Interest Rates (NOV) (12:45 GMT, 7:45 EST)
Consensus: 2.25%
Previous: 2.25%
Outlook: Notoriously dovish, the ECB is likely to keep rates at 2.25 percent after their announcement on Wednesday. However, after the recent series of positive Eurozone data, it is speculated that interest rates will rise by 50 basis points by year-end. Across the board, economic data for the Eurozone has consistently come in better than expected. Eurozone's PMI index rose 1.3 to 56.4, the highest it has been for five years. France recorded increases in both industrial and manufacturing production, while year over year BRC retail sales were up 1.6 percent. Moreover, Germany, the Eurozone's largest economy has emerged stronger than ever. Along with German unemployment dropping to 11.2 percent from 11.4, Germany's ZEW survey, which measures investor expectations, jumped approximately 30 points from November confirming consumer confidence is at all time highs suggesting an increase in spending is ahead. Meanwhile, real GDP grew 1.5 percent in 2005 and is expected to increase to 1.8 percent in 2006. The amount of economic expansion clearly occurring in the Eurozone puts pressure on ECB President Trichet to be more hawkish in the next meeting on January 11 in order to combat inflation.
Previous: In December, the ECB raised interest rates 25 basis points for the first time in five years. After keeping rates historically low, among other things, energy prices have lifted inflation rates. As the Euro fell 13 percent against the US dollar, the Eurozone, especially Germany, experienced a surge in exports gaining 7 percent over 2005. Making it clear in November that the ECB was going to raise interest rates, Trichet was under much scrutiny concerning whether he was more interested in combating inflation than fostering growth. In a November interview, Trichet stated that the ECB's main goal was to achieve price stability that was necessary to sustain growth. If economic data persist on beating expectations, Eurozone interest rate hikes in the future could be probable.
Bank of England's Monetary Policy Committee Meeting (Jan 11/12)
Consensus: 4.5%
Previous: 4.5%
Outlook: The Bank of England's Monetary Policy Committee meets again tomorrow, with policy makers widely expected to leave the benchmark lending rate unchanged. The MPC has kept interest rates neutral at 4.5% for the last five months, after cutting rates by 25 basis points back in August in an effort to spur domestic consumption. Lackluster consumer spending has been sapping the second-largest economy in Europe, leading many speculators to assume that the MPC will cut interest rates sometime soon. However, given the recent slew of economic data, it seems apparent that the MPC can afford to wait. The CBI retail sales index recovered sharply in December, from a *35% to 0%. In addition to this, yesterday's BRC retail index came in at 2.6% for December * the largest increase in 18-months. This unexpected pickup in spending helps quell any fears of an immediate interest rate cut. Subsequently, on the housing forefront, the most recent price index offers bullish news for the region, increasing for the 4th consecutive month in a row to 0.5%. Mortgage approvals also increased at a healthy rate of 115,000, the highest in 18-months. Given all of the positive economic news in the U.K., and interest rate futures pricing in an implied rate of 4.52%, it appears painstakingly obvious that the Bank of England will leave rates unchanged.
Previous: The Bank of England met on December 7th and 8th last month to discuss future interest rate policies, only to leave the target benchmark lending rate unchanged at 4.5%. Interest rates have remained neutral for the last four months, but many critics are anticipating a possible rate cut in the foreseeable future. The last time the Bank of England cut rates was in August, when policy makers all agreed that something needed to be done to spark the economy. Traders as a whole are primarily concerned with Stephen Nickell, who surprisingly voted for a quarter-point rate cut at the December meeting. Being the only person to vote this way, he defended his position by claiming that the 2.5% economic growth projection in 2006 appeared to be "too optimistic." This comment weighed heavily on the British pound, as lower interest rate differentials with other countries result in a weaker currency. Regardless, next month's economic reports will help the MPC determine which accommodative strategy they will take.
US Trade Balance (NOV) (13:30 GMT, 8:30 EST)
Consensus: -$65.9B
Previous: -$68.9B
Outlook: With expectations of interest rate hikes coming to a close, the United States trade balance emerges as one of the new topics of choice. The large negative sentiment following the previous month's record deficit has led expectations of a contraction to $65.9 billion to rally against the Euro and Yen prior to the actual indicator's release. Market participants and economist alike will closely monitor the November's trade balance as Thursday's report will present a clearer picture of the economy's health and how the Fed will set monetary policy in the future. Even if crude prices decline and improve the deficit for the period; an expected 0.1 percent rise in imports, following October's 1.7 percent drop, could indicate deeper woes. Major outflows of dollars to trade partners like China and the European Union could easily fill the gap reprieved by energy products. As a result, monetary policy makers could take a more dovish policy stance in the near future in an attempt depreciate the currency relative to others and attempt to repair the balance where fiscal policy has failed.
Previous: In October the US trade deficit unexpectedly ballooned to a record $69.9 billion exceeding expectations of a more reserved $66 billion. Exports for the period only grew 1.7 percent whereas imports rose to 2.7 percent with the highest imports coming from crude oil, automobiles, and televisions. Although the deficit indicates strong demand from Americans, the increase in imports eats away at GDP with US dollars flowing to foreign producers. Meanwhile, the deficit with China, the largest the US has with any individual country, continues to spark heated debates. As China keeps its Yuan artificially low by pegging it to a basket of currencies largely denominated in US dollars, it gives China an unfair advantage by making Chinese goods cheaper on the global market. Nevertheless, the US imports approximately 50 percent more goods and services abroad than it sells. Consequently, the deficit is likely to subsist well into the future.
Canada International Merchandise Trade (NOV) (13:30 GMT, 8:30 EST)
Consensus: C$6.8 billion
Previous: C$7.2 billion
Outlook: Canada's trade balance is expected to show another monthly surplus, with estimates touting C$6.8 billion following October's surprise reading of C$7.2 billion. With energy accounting for 23 percent of Canada's total exports, the easing prices of natural gas and crude oil in the month of November will most likely bring the export figures slightly lower. While total exports are expected to increase, imports are likely to increase as well, driven by the demand for machines and car parts abroad. The headline trade number will be closely watched by traders, as Canada's trade surplus accounts for nearly 40 percent of their entire economy. Roughly one month ago, analysts had been expecting the Bank of Canada to raise interest rates very early in 2006 * helping to prop the Canadian currency. However, the recent spate of bearish economic news has called future interest rate hikes into serious question. If the trade data comes in much less than expected, this could open the floodgates for greenback bulls as it would certainly kill any beliefs that the Bank of Canada would raise rates in the first quarter 2006.
Previous: Canada ran a C$7.2 billion trade surplus in October, handily beating market expectations of C$6.8 billion. Exports rose nearly 1 percent, reaching a record setting C$40.2 billion for the eight largest economy in the world. A bulk of the surge in exports was directly attributable to a swell in natural gas prices, which bulged 10 percent in the month of October. Energy is now considered Canada's largest export sector, with C$9.2 billion in energy accounting for 23 percent of all exports. Imports were also up in October, rising 1.2 percent to C$33 billion, driven primarily by purchases of machines and car parts abroad. Trade surplus with the US - Canada's number one trading partner - also rose in October, advancing 5 percent to C$11.1 billion. Bullish economic news out of Canada and numerous statements from the nation's central bank indicating future interest rate hikes are driving the Loonie to record highs against the greenback. With the current benchmark lending rate standing at 3.25 percent, next month's data is sure to bring speculation as to whether or not the Bank of Canada will continue to raise rates in the first quarter of 2006.
Euro-Zone GDP (QoQ) (3Q2) (10:00 GMT, 5:00 EST)
Consensus: 0.6%
Previous: 0.4%
Outlook: A second evaluation of the Euro-zone GDP is expecting a revised growth of 0.6 percent, slightly over the previous estimate of 0.5 percent. If realized, this would mark the fastest pace of expansion since March of last year. The major economic power in the Euro-zone, Germany, is probably once again the driving factor behind this third quarter surge. Although consumer spending in Germany remains weak, a pickup of exports to Eastern Europe and Asia has resulted in strong overall growth for the member country for the same period. Overall the Euro-zone's most prominent support for the high expecatations is the trade balance. Exports in the Euro-Zone increased by 3.4 percent, while imports increased by only 2.6 percent. This is illustrated by a September's end trade surplus of 3.1 billion. The abnormally large trade surplus came in above expectations and could be attributed to a drop in the value of the euro which lost 5 percent against the dollar in September. The depreciation in the Euro has caught the eye of global markets looking for cheap alternatives to similar North American-produced goods. Another factor that seems to have increased growth in the Euro-zone is a significant easing in crude oil prices. Oil futures lost about 12 percent of their value during the third quarter, allowing European businesses to decrease costs, and drive profits. Overall the ongoing growth in the Euro-zone is an indication of inflation, which may lead to interest rate hikes. Since the size of the overall economy continues to grow, it may represent exaggerated economic investment, or inflation. It is likely that if GDP growth continues, the ECB will consider raising its rates to curb further growth.
Previous: European growth accelerated in the second quarter to 0.4 percent from a 0.3 pace in the first three months of 2005. This increase was largely due to an increase in exports, which grew from the rate of -0.8 percent in the first quarter, to a whopping 2.2 percent growth in the second quarter. Also, investments in the second quarter picked up 0.8 percent from a meager 0.2 percent in the previous quarter. The second quarter featured impressive growths from smaller members: Italy; Spain; and the Netherlands posting 0.7 percent, 0.9 percent, and 1.3 percent growths respectively. Lagging behind was the first quarter all- star, Germany, which posted minimal GDP gains in the second quarter. While Germany's exports remained strong over the quarter, they were offset by a rebound in imports driven by increased domestic demand. Since Germany boasts the largest economy of the Euro-Zone community, it is possible that Germany's weak result dragged down the overall second quarter result. Other underlying themes stunting Europe's overall growth was the persistence of high oil prices which spiked to historical highs in late August. Over the year Europe has gained a total of 1.2 percent in its overall GDP.
New Zealand Building Permits (NOV)(21:45 GMT, 16:45 EST)
Consensus: n/a
Previous: -6.7%
Outlook: After poor trade deficit results, consuming 8 percent of overall gross domestic product, New Zealand has been the victim of a slowing economy. Already, October showed a second consecutive decline in housing permit, dropping by 6.7 percent. Should housing permits in November drop again, this could provide additional proof that the housing boom that accelerated the New Zealand economy in 2004 is officially over. Signs of economic slowdown have been evident. Gross domestic product is predicted to slow to 2.4 percent in 2006 and even more so to 1.5 percent in 2007 from the 2.8 percent GDP growth in 2005. With the highest interest rate in the major countries at 7.75 percent, inflation is predicted to hover around 3 percent, the top of the 1 to 3 percent inflation band Reserve Bank Governor Alan Bollard is charged to maintain. Nevertheless, with the high interest rates, New Zealand unexpectedly saw the jobless rate drop to 3.4 percent in the third quarter resulting in higher wages and spurring more consumer spending. Continued housing permits drops may reinforce negative economic sentiment and slow consumer consumption, which could in turn slow inflation itself.
Previous: In October, New Zealand housing permits dropped 3.7 percent from 3.0 percent in September. Keep in mind, high crude oil prices may have accounted for the burden manufacturers contributing to the drop in housing permits. With worse than expected data for GDP and trade balance in New Zealand's, more negative news in the future will only put pressure on weakening the kiwi to spur domestic consumption. Although reevaluation on interest rates are due in July, another drop in housing permits may encourage Bollard to make decisions sooner to reconsider how the 7.75 interest rate is affecting New Zealand consumers.
Richard Lee is a Currency Strategist at FXCM.
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