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The Marketplace - August 15th 2014

All eyes will be on this morning’s second estimate for UK GDP for the second quarter. The release is expected to confirm the preliminary estimate of 0.8% growth that would move the UK economy back to pre-recessionary levels. Concerns regarding the Eurozone recovery were reignited yesterday as figures showed that the Eurozone’s largest economy contracted through the three months to June, with Eurozone consumer inflation reaching 0.4%. Policy makers in Germany and the ECB remain confident that growth will pick up, remaining committed to act if outlook worsens.

German Output Contracts

Germany's economy contracted while France's stagnated in the second quarter, indicating the Eurozone’s yearlong recovery may have stalled, and likely pressuring policy makers to come up with some new ideas for boosting growth. The Eurozone’s largest economy contracted 0.2% in the three months to June, Germany's federal statistics office said, the first decline in output since the start of 2013. Compared with the second quarter of 2013, output was up 1.2%. Economists polled last week said they expected the economy to shrink 0.1% on the quarter and grow 1.4% in annual terms.

Earlier on Thursday morning, figures from France's statistics agency showed the Eurozone’s second-largest economy failed to record any growth for the second successive quarter in the period April through June. Economists polled expected a 0.1% expansion in gross domestic product in the second quarter from the first. Compared with the same period of 2013, GDP was up just 0.1%.

The weak recovery leaves the region lagging other advanced economies such as the UK and the US. The sluggishness is keeping unemployment high and inflation low, increasing pressure on the European Central Bank to lower its outlook for economic growth and take more action to bring inflation closer to its 2% target from around 0.4% currently.

Eurozone Inflation Flat in July

The Eurozone’s inflation rate was flat at just 0.4% in July, as Eurostat’s final data confirmed the initial disappointing flash reading. However, month-on-month prices fell 0.7 % in July, more than expected by economists and adding to concerns over the Eurozone’s flirtation with deflation. Data released on Wednesday indicated that French consumer prices fell 0.3% in July, and even Germany is seeing little price pressures, with its inflation rate falling to 0.8% in July.

The situation is the most precarious in the Eurozone periphery, where zero or negative inflation adds to weight of their debt burden. Portugal’s inflation rate has been negative for most of this year, and fell to minus 0.9% in July. The consensus sentiment on Eurozone inflation remains unchanged following  yesterday’s official reading, with any arguing that we are seeing the bottom of the trough for Eurozone inflation, however recent concerns over stagnant growth could be set to alter these forecasts and prompt the possibility of further monetary easing.

US Jobless Claims Rise to Highest Level in Six Weeks

The number of Americans applying for unemployment benefits in the last week rose more than forecast, breaking up a steady decline to pre-recession lows. Jobless claims climbed by 21,000 to 311,000 in the period ended August  9th, the highest in six weeks with the median forecast of economists calling for 295,000. The US Labour Department revised the prior week’s reading to 290,000 from an initially reported 289,000.

The jump represents a departure from a run of low readings that showed employers had been holding firm on staffing levels in order to keep up with demand. Federal Reserve Chair Janet Yellen is among policy makers who remain concerned that pockets of slack in the job market, including stagnant wages and elevated numbers of long-term unemployed workers, continue to hold back the world’s largest economy.

Today’s Key Data:

GBP – Second Estimate GDP: The UK’s GDP for the second quarter is expected to confirm the first estimate issued in July and show a quarterly gain of 0.8%. The anticipated advance moves the UK economy to pre-recession levels. The positive forecast indicates the recovery is back on track, but wage growth needs to rise in order to sustain long term recovery. The second GDP estimate is expected to remain unchanged at 0.8% growth rate.

USD – PPI: US producer prices edged up 0.4% in June amid rising gasoline costs, but overall inflation remained tame. Analysts expected a smaller rise of 0.2% as posted in the previous month. But prices declined for grains, cheese and rental cars to offset some of those increases. Nevertheless, inflation remains tame with in the Fed’s 2% target. Low inflation has enabled the Fed to pursue extraordinary measures to boost the economy but can drag down wages and spark a recession. US producer prices are expected to rise  0.1%

USD – Prelim Consumer Sentiment: Consumer sentiment declined in July to 81.3 from 82.5 in June amid a fall in the consumer outlook index. Analysts expected the index to reach 83.5.  Current economic conditions rose to 97.1 from 96.6, better than the 97.0 forecast. But consumer expectations plunged for a third straight month, to 71.1 from 73.5 below the 74.0 expected. Consumer sentiment is likely to improve to 82.7.

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