-        US industrial production probably shrugged off government shutdown (14.15 GMT)

-        Brazil’s economic recovery may have fizzled out in Q3

-        Widening in US trade deficit suggests Q3 growth may be revised down

 

Key Market Themes

We doubt that the very weak growth seen in the euro-zone in the third quarter (see below) was a one-off. Our below-consensus forecast is for the economy to grow by just 0.5% in 2014 and 1.0% in 2015 as different factors continue to dampen demand across various countries in the region (including ongoing fiscal austerity, weak banking systems, a lack of competitiveness, slow progress on structural reforms, and high debt levels).

 

Our expectation is that the US economy will fare much better, registering growth of 2.5% next year and 3.0% the year after. If we are right, then there is scope for the dollar to strengthen further against the euro, not least because persistently weaker growth in the euro-zone than in the US would cement expectations that the ECB – which has just cut its refinancing rate again – will keep policy looser for significantly longer than the Fed.

 

Admittedly, the US central bank is unlikely to raise its key interest rate for at least another year. And as long as it is buying at least some assets in the meantime, it will be providing additional unconventional stimulus. But we still expect a first rate hike sometime in early 2015.

 

The ECB is very unlikely to tighten the reins before then. Indeed, it may feel the need to do more to weaken the euro in order to kick-start the recovery and eliminate the risk of deflation. (See our European Economics Update, “ECB has more work to do to tackle the strong euro”, published on Tuesday.) 

 

We suspect that the dollar/euro exchange rate will react to the prospect of an earlier tightening of monetary policy in the US than in the euro-zone well before it actually transpires. This would not bode well for the euro given the strong relationship between the exchange rate and the expected US/euro-zone short-term interest rate differential. (See Chart 1.)

 

Finally, if the debt-laden countries of the euro-zone fail to grow their way out of trouble, concerns about their solvency may yet re-appear. If they do, there is plenty of scope for the euro to come under fire. After all, the credit spreads of sovereign peripheral euro-zone bonds have shrunk dramatically over the past year or so, and are now generally no higher than those of comparably-rated assets outside the region. (John Higgins)

 

What to watch for today: US

At the time of writing, Fed Chair nominee Janet Yellen was still testifying in front of the Senate Banking Committee. She stressed that it was important not to remove monetary policy support too early to promote the economic recovery. However, these comments were balanced by an acknowledgement that there are costs and risks associated with QE and that stimulus could not continue indefinitely. (Jessica Hinds)

 

The Empire State manufacturing index (13.30 GMT) fell sharply last month, as the government shutdown hit business confidence. With the shutdown now over and the economy recovering, we expect the index to rebound to +8.0 in November, from +1.5 in October. Last month’s decline in the regional index further opened the gap with the national ISM manufacturing index. However, the latter may be overdoing the strength in the manufacturing sector. Nonetheless, we expect some rebound in optimism among manufacturers after the government reopened and as both the global and domestic economies are recovering. (Amna Asaf)

 

Meanwhile, October’s industrial production (14.15 GMT) figures are likely to support other evidence that suggests the government shutdown had little impact on private sector activity. The 21,000 rise in the number of people employed in the manufacturing sector last month boosted the total number of hours worked and suggests that manufacturing output rose by 0.5% m/m. It would appear, then, that the recent strengthening in global demand has trumped the government shutdown. Such an increase would generate an annualised rise in output of 2.5% in the three months to October. Some small gains in both utilities and mining output would mean that overall industrial production also rose by 0.4% m/m. Coming after September’s 0.6% m/m gain, that would be a pretty good result. (Paul Dales)

 

The trade deficit widened to a four-month high of $41.8bn in September, from $38.7bn, suggesting that third-quarter GDP growth will need to be revised down to around 2.5% annualised, from 2.8%. Nominal exports fell by 0.2% m/m, while imports increased by 1.2%. The decline in exports would have been even worse if not for a 14.2% m/m surge in food & beverage exports. The solid gain in imports was led by a 3.4% m/m jump in automotive imports, but the strength was fairly widespread across all categories. (Paul Ashworth)

 

Canada

We estimate that September’s manufacturing sales (13.30 GMT) grew by 0.2% m/m. Meanwhile, the merchandise trade deficit narrowed surprisingly to C$0.4bn in September from C$1.1bn in August. (Data released on Thursday.) (David Madani)

 

Continental Europe

No major data or events scheduled for today.

 

The near-stagnation of the euro-zone economy in the third quarter (data published on Thursday) underlines the fragility of the recovery and the growing dangers of a damaging bout of deflation in the region. The 0.1% quarterly rise in GDP was in line with expectations but left the annual growth rate still negative at -0.3%. The slowdown compared to Q2 was caused primarily by the weaker performances of Germany and France. By contrast, Italy and Spain performed a bit better than in Q2, providing further hope that the imbalances between the Northern and Southern economies have narrowed (although growth in Portugal slowed and Greece probably contracted). Nonetheless, the figures are a clear blow to hopes that the period of market stability seen over the last year or so would translate into a solid and sustained economic recovery. (Jonathan Loynes)

 

UK

No major data or events scheduled for today.

 

Thursday’s retail sales data for October show that the steady, if unspectacular, recovery in sales came to at least a temporary halt. Overall sales volumes unexpectedly fell by 0.7% m/m, after rising 0.6% in September. This pushed down annual growth to 1.8% from 2% in the previous month. Overall, with recent data showing a robust labour market and October’s faster-than-expected fall in inflation easing the squeeze on real earnings, the decline in sales volumes in that month is hopefully a temporary blip. (Martin Beck)

 

Japan

GDP growth slowed from 0.9% in Q2 to 0.5% q/q (1.9% annualised) last quarter, broadly in line with our own and consensus expectations. (Data released on Thursday.) Admittedly, the Q3 figures were helped by large boosts from inventories and from government spending. Private consumption, investment and net exports were all much weaker. But Japan’s economy had expanded at an annualised rate of around 4% in the first half of the year, which was clearly unsustainable. (Marcel Thieliant)

 

China

Hong Kong’s economy, which has been very weak over the past couple of years, has been showing signs of a gradual improvement in 2013. The latest evidence suggests that Q3’s GDP growth (08.00 GMT) was probably little changed from Q2. We are forecasting growth to pick up from 2.8% this year to around 3.5% in 2014 on the back of a steady if unspectacular recovery in the global economy. (Gareth Leather)

 

Other Asia-Pacific

Q3 GDP growth in Malaysia is due to be released on Friday (10.00 GMT). Malaysia’s economy rebounded slightly in the second quarter, with growth accelerating to 4.3% y/y from 4.1% in Q1. Recent monthly data suggest the economy continued to gain momentum in Q3. Overall, we think Malaysia’s GDP growth will average 4.5% this year, before picking up to 5.0% in 2014 as the global economy improves. (Krystal Tan)

 

The Bank of Korea (BoK) kept its policy rate on hold at 2.5% on Thursday, as expected. Looking ahead, with inflation set to remain low, the central bank will be in no rush to raise interest rates, and we expect monetary policy to remain on hold until 2015. (Gareth Leather)

 

Latin America

No major data or events scheduled for today.

 

The sharp pick-up in growth in Brazil in Q2 seems to have fizzled out, according to the economic activity survey published on Thursday by the country’s central bank. Although the September data suggest that growth accelerated to 3.3% y/y, from 1.3% y/y in August, the monthly data are volatile and, over Q3 as a whole, growth seems to have slowed. The survey is pointing to GDP growth of 2.8% y/y, from 3.3% y/y in Q2. This would be consistent with a small contraction in Q3 GDP in q/q terms of around 0.1%. (Neil Shearing)

 

Emerging Europe

No major data or events scheduled for today.

 

A raft of preliminary GDP data published on Thursday showed that Central and South Eastern Europe largely shrugged off the slowdown in the euro-zone in the third quarter. Romania was the region’s best performer, growing by 4.1% y/y, while GDP growth in Poland accelerated to 1.9% y/y and growth in Hungary picked up to 1.7% y/y. The major disappointment came from the Czech Republic where output fell by 0.5% q/q and by 1.6% y/y (we and the consensus had expected output to expand over the quarter). (William Jackson)

 

Key Data and Events

Fri 15th                   08.00    Slk    GDP (Q3, Prov.)

                              08.30    HK    GDP (Q3)

                              09.00    Ita    Trade Balance (Sep)

                              10.00    Ita    Current Account (Sep)

                              10.00    EZ    CPI (Oct, Final)

                              10.00    Mly   GDP (Q3)

                              13.30    US    Empire State Manufacturing Index (Nov)

                              13.30    CA    Manufacturing Sales (Sep)

                              14.15    US    Industrial Production (Oct)

                              14.15    US    Capacity Utilisation (Oct

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