The Week In Hindsight, 16 May 2014
Equity markets were volatile this week as investors reacted to mixed economic data in the US, the UK and Europe. Poorer than expected retail sales initially led investors to begin betting that the US economic rebound may be weaker than was first anticipated, and that this may force the FOMC to reconsider its stance on tapering.
The Dow Jones rallied to a record high while the FTSE 100 also rose to a 14 year peak in response to the announcement however, gains were short lived. This was as US inflation barometers, a key contributor to FOMC policy decisions, rose further than expected for the second month running. The news on price pressures sent US indices spiralling toward a lower close on the week, while global counterparts also reacted to the downside.
Although weaker sales data in the US does provide a base for suggestions that Q2 growth may arrive to be weaker than expected, we do not believe that this will be the be the case. On the contrary, rapidly declining unemployment and stirring inflation provide a good indication that a rebound from the Q1 weather effect is underway. Given the low base to begin from in Q1 growth figures, we remain confident of an improvement for Q2.
UK unemployment falls to five year low; no change to interest rate outlook
The UK unemployment rate fell to a five year low during April according to numbers released on Wednesday. The official figure came in as expected at 6.8%, down from 6.9% the previous month.
Average earnings figures, also released at the same time, showed the increase in incomes for ordinary workers remaining at 1.7% over the previous three months, relative to the same period a year ago. Although the official print was below the expected 2.2%, it remains above the rate of inflation which is positive for consumers and positive for the recovery.
Despite this; we do not see any material change to the present interest rate scenario. If anything, we expect the weaker than expected growth in incomes and a small increase in first time unemployment claims to continue to reinforce beliefs among policy makers that there remains too much slack within both the labour market as well as the wider economy.
No surprises from the BOE inflation report
All in all, no new information of significance was divulged in the BOE inflation report on Wednesday and according to Mark Carney, the interest rate outlook for the UK economy remains as it was.
Although the governor did concede that spare capacity within the economy had reduced slightly over recent months, he reiterated that considerable slack remains and as a result, the first increase to the base rate is some way off.
The governor did provide some further guidance relating to the balance sheet inventory which the BOE has accrued over recent years. The official line is that until a time when interest rates reach a level from which they can be meaningfully reduced, the BOE will continue to hold all of the UK government treasuries that it has acquired under its asset purchase program.
The next major event scheduled for the UK economy is the release of CPI figures for April which are due on Tuesday of next week. Here economy watchers will be looking for signs that the reduction in price pressures (CPI) has begun to bottom. The benchmark measure has shown inflation falling by 44% over the nine months between July 2013 and April 2014.