Eurozone Finally Out Of Recession, Dissent In MPC

The French economy is out of recession according to figures released yesterday, expanding by 0.5% in Q2 of this year, with stronger domestic consumption the key driver. We have seen 2 consecutive negative quarters through the end of 2012 and the beginning of 2013 and, unfortunately, business indicators for Q3 have not started well. Much like the UK economy a couple of years ago, we expect to see French economic performance oscillate around the zero-bound for the next couple of quarters as it struggles to make growth more sustainable.

Alongside stronger growth from Germany, growth in the Eurozone has been reported at 0.3% against 0.2% expected and a 0.3% contraction in Q1. This does mean that the Eurozone has broken out of a 7 quarter recession. Unfortunately, while the core continues to grow, the more indebted periphery nations (Spain, Italy, Greece) remain in the depths of recession and are nowhere near the growth levels needed to reduce debt levels. The chronic issues of Eurozone are still there.

In the UK, the minutes of the Bank of England’s latest meeting were published. Mark Carney would have been keen to get a unanimous vote for his forward guidance plans to stimulate the UK economy but it was not to be. Martin Weale decided that, while forward guidance is a plan he is happy with, the inflation caveat needed to be more short-termist, i.e. if pressures were seen sooner than the 18-24 months that we have eventually been given. This is a nod to the Bank’s mandate as an inflation controller – not that it means much at the moment, given they’ve not been anywhere near target for a long time.

This strengthened GBP and pushed yields on UK debt higher as markets increased bets that rates will rise in the UK sooner rather than later as a result of further, faster economic growth. The UK reported the largest increase in employment on record in the three months to June as 69,000 workers took on jobs.

Despite weaker than expected inflation numbers yesterday from the US, the chatter around a September tapering of Fed asset purchases continues to grow. Although James Bullard, president of the St. Louis Fed, said that the rate of tapering should be slow so as to avoid the possibility of deflation, we expect him – as one of the most hawkish members of the FOMC – to be voting for a slight withdrawal of QE at the bank’s September meeting. He told reporters that he “would be happy to claim that there has been substantial improvement in labour markets. I think the bigger question marks are on growth and on inflation”.

Further US inflation data is due today – CPI is expected to improve to 2.0% from 1.8% – alongside the typical Thursday look at the jobs market in the form of Initial Jobless Claims.

UK data remains on an absolute tear at the moment and one would expect that UK retail sales today at 09.30 should continue that trend, as a result of the persistent good weather this month and a reported pick up in tourist arrivals. The one caveat to this is department store sales; nobody wants to be trudging around a department store looking at drapes when the suns beating down outside. Maybe it’s just me? The market is looking for an increase of 0.6% on the month.