Market Drivers May 13, 2015

German GDP misses at 0.3% vs.0.5% eyed, Chinese data also weak
UK wages rise by almost 2% fueling gains in cable over 1.5700
Nikkei 0.71% Europe 0.92%
Oil $61/bbl
Gold $1193/oz.

Europe and Asia:
CNY IP 5.9% vs. 6.1%
CNY Retail Sales 10.0% vs. 10.4%
EUR GE GDP 0.3% vs. 0.5%
GBP UK Claimant count -12.6K vs. 20.5K
GBP Average Earnings 1.9% vs. 1.7%

North America:
USD Retail Sales 08:30

The euro and the pound went their separate ways during Asian and early European trade as divergent economic data sent one tumbling and the other one rising on change in investors sentiment. In Europe the downbeat GDP data pushed the pair lower with EUR/USD testing the 1.1200 figure as the night progressed, while in London cable climbed to fresh year to date highs as better wage data spiked investor expectations of a BOE rate hike in the foreseeable future.

In Europe the German GDP was significantly weaker than forecast coming in at 0.3% versus 0.5% eyed dragging down the growth rate for the whole region. Overall EZ GDP in Q1 rose to 0.4% versus 0.5% eyed as demand clearly stumbled. Although Q1 was notoriously weak across the G-10 universe as weather problems and currency volatility plagued the global economy, today’s data shows that EZ policy maker have a of work ahead of them in order to accelerate growth beyond the single percentage point level.

Part of the reason for the slowdown in German growth may have to do with declining demand from China. Today’s Chinese data was also softer with Industrial Production slipping to 5.9% from 6.1% eyed while Retail Sales declined to 10.0% from 10.4% forecast. This was the first time that Retail Sales have declined to the 10% level in more than a decade and growth in consumer demand is now less that half of what it was at its peak in 2008.

The news out of China had little impact on AUDUSD which broke above the 8000 figure in London mid morning session as traders ignored the Chinese data. However with the pair now above the key 8000 level the RBA is likely to notice and may begin to jawbone the unit lower especially in light of weakening Chinese demand that could depress exports even further.

The news out UK was considerably more sanguine with average wages rising to 1.9% versus 1.7% expected. Cable rose to fresh highs at 1.5748, but then was quickly brought back down to the ground by testimony of BoE Chief Mark Carney, who dampened any hopes of upcoming rate hike by stating that UK CPI was likely to drop down to 0% indicating that despite solid and consistent UK growth the central bank was in no hurry to normalize rates.

Mr. Carney noted that both the strength of the pound and persistent drag from lower fiscal expenditures were keeping a lid on inflation suggesting that the UK central bank is likely to remain stationary for the foreseeable future with little chance of any move on rates until Q4 of this year at the earliest.

His cautious testimony reversed the upside move in cable and the pair tumbled more than 100 points off its highs in the aftermath his statement. Cable has been on a tear over the past 5 days rising nearly 600 points and today’s comments from Mr. Carney could put a halt to that move and start a much needed correction as the pair works off the parabolic rise of the past few and weeks.

In North American trade the focus will be on Retail Sales with market expecting core sales to match last month number of 0.4%. Any upside surprise could help fuel a rally in the buck as the consumer remains the key to Fed’s policy on rates. With job growth relatively steady, the Fed will now look for any signs that consumer spending is starting to pick up and if it is FOMC policymakers will become much more comfortable with the idea of moving towards normalization.

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