Daily Market Report 28/10/2013

On Friday we saw a 0.8% rise in GDP for the third quarter meaning the UK economy posted its strongest growth since the second quarter of 2010. On a year-on-year basis, the UK economy is 1.5% larger than a year ago. This was led by a 0.7% increase in the UK’s service sector.  

The recovery has largely been driven this year by increased consumer spending and falling household savings. Cheap financing has encouraged consumers into the shops, car showrooms and estate agents. The housing market is surging, retail sales rose at their strongest rate for five years in the third quarter and car sales were up more than 10% year on year in September. It would be better if this was an exports and investment driven recovery, but consumption led growth is a good start. 

This was in line with economists’ expectations and as a result there was no great directional movement for the pound. 

In the US, orders for durable goods - long lasting manufactured items ranging from toasters to tanks - rose 3.7% in September. This was better than expected but was mainly due to a surge in aircraft orders. Without that, new orders fell from 0.8% to 0.7% suggesting businesses might have held back spending because of the recent budget dispute and government shutdown. 

Potentially causing further US dollar weakness and dampening economic sentiment is economists’ expectations that September retail sales figures will fall from 0.2% in August to just 0.1% This indicates that the US economy was probably cooling ahead of the federal shutdown. 

Friday’s durable goods orders data and the expectation that September retail sales will fall is another indicator that risks for the economy are still skewed to the downside and the manufacturing cycle doesn't seem to have gained momentum.  This could convince the Federal Reserve to continue quantitative easing into 2014. The Fed has promised not to raise rates until unemployment drops to at least 6.5%, provided inflation looks set to stay under 2.5%. The jobless rate stood at 7.2% in September. 

The Australian dollar and New Zealand dollar declined for the first week in almost a month as data showed home prices in China’s four major cities rose the most since January 2011, adding to concern property market bubbles are forming. The People’s Bank of China, also refrained from adding funds to markets, may lean toward policy tightening should inflation accelerate.

Key Announcements:

14.15pm – USD – Industrial Production (Sep): Expected to remain at 0.4%.

15.00pm – USD – Pending Home Sales (Sep): Expected to have fallen by 0.5%.