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No great surprise

No great surprise

Having European markets open on a firmer footing after a positive Asian session following slightly stronger than expected Chinese GDP, retail sales and industrial production data. GDP expanded by 2% quarter-on-quarter and 8.9% year-on-year against consensus annual forecasts of 8.7%. This was the slowest pace of growth in over two years. Both exports and imports slowed while consumption contributed more than half of overall growth. The positive reaction probably owes more to a relief that growth is not falling precipitously, but markets are aware Chinese authorities are standing ready with stimulus measures such as possible cuts in the reserve requirement ratio should they be necessary. These could be taken positively or negatively on any day. Equities have opened strongly in Europe following 4% and 5% gains in Shanghai. The EUR has bounced by almost 1% against the USD and less so against GBP, but remains lower against a host of high beta currencies such as the AUD and NZD. The first test of this positive sentiment will come with the EFSF’s 182-day EUR 1.5bn bill auction at 11.00 GMT. Overnight S&P lowered the long-term sovereign credit rating of the EFSF from AAA to AA+. The Japanese government who has been a buyer of EFSF debt has since said it’s trust in EFSF has not been shaken and the downgrade will not immediately change its stance of purchasing them. The Japanese finance minister also he wanted to examine current FX moves before deciding on whether to intervene in EUR/JPY.

Markets were also keen to see the outcome of the latest French bond auction yesterday when €1.9 billion of 1 year bills were sold at a rate of 0.406%. This is an improvement on last week’s auction when the average yield was 0.454% and more evidence that while unwelcome, the EFSF news had already been largely factored in.

Draghi’s testimony to the European Parliament on Monday evening sternly reemphasized the need for coordination over the European debt crisis. The German Centre for European Economic Research (ZEW) survey is our first look at January data. There was a small improvement in the December survey, which suggested that the economy was slowing less than feared. A further improvement in the economic sentiment index is expected, but it would still see it at levels last seen in September. With the current situation index expected to fall from 26.8 to 24.0, which would mark its lowest level since July 2010.

Consumer Price Index (CPI) remains the key focus in the UK, with expectations for a sharp fall in prices from 4.8% to 4.2%. Retail Price Index (RPI) Index and House prices round of the events. Looking forward, with the Advance Estimate of Q4 GDP being released next week, we start to get the final piece of hard data to firm up forecasts. Last week National Institute of Economic and Social Research (NIESR) estimated that the economy grew by 0.1% in the three months to December despite what looks to have been a fairly sharp contraction in industrial production. December labor market data and retail sales could well outperform expectations as we would expect to see a seasonal hiring in December a little stronger than last year due to the mild winter. We look for only a 2,000 increase in the claimant count, but average weekly earnings seem destined to remain below 2%, leaving them well below the rate of inflation.

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