UK Growth and Borrowing Forecasts back to June Figures From OBR

Main News Daily Update

Following the release of UK GfK consumer confidence overnight, the focus in the morning session is the release of German unemployment and the euro zone flash CPI estimate, both for November. Eurostat will also release October jobless statistics – although slightly dated, this will confirm the divergence in labour market (and therefore economic) developments between Germany and the euro zone as a whole. In Germany, unemployment is expected to fall for the seventeenth consecutive month. On the Eurostat measure, the German unemployment rate has fallen by nearly 1 percentage point compared with a year earlier, whereas euro zone unemployment has risen over the same period.  No great deal of reaction to the latest OBR predictions which does appear sensible in Lloyds TSB view. Growth and borrowing estimates all pretty much as they were back in June, so we carry on monitoring FTSE banks and developments in EUR/USD.

In Eurozone, Economic Sentiment Indicator up to 105.3 in November. Sentiment in the eurozone increased further in November. The Economic Sentiment Indicator (ESI), a good gauge of GDP growth, rose to 105.3, its highest level in more than 3 years. Today’s data confirm that the eurozone economy maintains a positive momentum. Survey data are consistent with GDP growth in the range of 0.3-0.5% q/q over the last quarter of the year. The survey, however, continued to show that country economic cycles are very different: Germany is booming, France is doing relatively well, while the others are lagging behind. Even though survey data showed that overall confidence in the eurozone improved in November, ongoing tensions in sovereign debt markets risk undermining the eurozone recovery. Over the weekend, European Leaders agreed on a EUR 85bn bail-out package for Ireland. Moreover, in an attempt to stop contagion to other eurozone countries, in particular to Portugal and Spain, EU leaders agreed on the principle of a new “European Stabilization Mechanism” which should replace the EUR 440bn rescue fund (the European Financial Stability Facility) due to expire in July 2013. Optimism that the euro zone economy is on a durable recovery path has been cast aside and has been replaced by a return of fears over sovereign funding conditions and the solvency of financial institutions in the EU periphery. New highs for peripheral bond and CDS spreads prompted the ECB to resume debt purchases over the last two weeks, albeit with limited success. With a bounce in EUR/USD falling flat despite news of on an impending EU/IMF resolution for Ireland, Lloyds TSB  believe that selling EUR/USD rallies on the ‘contagion trade’ is likely to remain a favoured tactic over the coming weeks. Speculative investors have already cut back EUR long positions since mid-October, but positioning remains well above recent norms and leaves EUR/USD vulnerable to a more meaningful correction below 1.30 if investors believe the credit crisis could spread to countries like Portugal and more importantly, Spain. The price action of the last 7 days reminds us of the price action observed in April/May when the EU agreed to provide Greece with 110bln eur in bilateral loans but only served to reinforce the bearish EUR/USD trend as the pair dropped 11.1% from 1.3361 on May 3 to a 1.1877 low on June 7th. EUR has failed to benefit from a late recovery in the US stock market yesterday and EUR/USD this morning is trading largely unchanged around 1.310. Both SEK and NOK have strengthened by close to 0.5% against EUR since market close in Europe.

Eurostat will also release the flash estimate of euro zone November CPI. Both the market consensus and our forecast is for the headline rate to remain unchanged at 1.9%. The flash estimate will provide no detail, but it is well known that the uptrend in headline inflation has been driven mainly by the energy component. Stripping out food and energy, core CPI inflation was only 1.1% in October. As inflation expectations appear to remain well anchored to the ECB’s target of “close to, but below 2%” – as evidenced by medium-term forecasts in the ECB’s latest Survey of Professional Forecasters – policy rates are not set to rise anytime soon, though the ECB may be edging closer, albeit only marginally, to an exit strategy with respect to its nonconventional policy measures.

Outside Europe, the US Conference Board consumer confidence and Chicago purchasing manager surveys are the main releases. A jump in November consumer confidence is expected, following the rise in the University of Michigan consumer sentiment index for the same month. The Chicago business survey will be closely watched, following rather conflicting Empire and Philly Fed surveys.  Dollar index off the 81.012 high overnight as month end looms. Asia started the week in hesitant mode but has been forced to play catch up with events in Europe and the US.

In a surprise move, the Hungarian central bank has decided to hike the key policy rate by 25bp to 5.50%.  Yesterday, the Hungarian government said that it would like the Hungarian central bank to raise medium-term inflation target to 3.5%, from the current 3%. That is yet further bad news out of Hungary and another blow to the government’s credibility. The recovery in the Polish economy continues and we expect this to be further confirmed by the Q3 GDP numbers, which will be published today. Hence, Danske expect Polish GDP to have expanded by 3.6% y/y in Q3 – slightly up from 3.5% y/y – and we seem to be on track for above-trend growth in 2011; GDP could top 4.5%.