The Week In Hindsight; 27 June 2014

Overall, a quiet week on the economic data front was overshadowed by central bank events for UK focused investors. One of the headline acts came when Mark Carney and Co went before Parliament to outline the present economic outlook, an event which was peppered with many less than successful attempts by MP’s to get to the bottom of the  “productivity puzzle”.

During the meeting, politicians also placed the MPC’s recent statements on employment and unemployment under the spotlight as part of an effort to gain further clarity on the interest rate outlook.

The mid stages of the week saw another conference where the FPC unveiled a number of recommendations to regulators, which were designed to prevent a build up of risks related to mortgage lending in the financial system.

Sterling fell following the governors appearance in Parliament as the cautious tone adopted in front of MPs appeared to contradict the rising speculation surrounding interest rates that had been building since the Mansion House dinner and speech the previous week.

UK home builders recovered earlier losses following Thursday’s press conference, after weeks of building expectations that the bank would unveil much tougher measures. Financial firms also benefited in the immediate aftermath of the announcement.

Despite a lower sterling and several buoyant sectors, the FTSE 100 closed lower for the week, with positive news equally outweighed by the bad. This was as poorer than expected US GDP and fresh regulatory action against Barclays Plc weighed on prices into the latter half.

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Policy statements and outlook;

During Carney and Co’s appearance before parliament the governor adopted a cautious tone when speaking about the economic recovery, while outlining concerns over some economic data and the subjective exercise of estimating the current gap in productivity/ output.

One thing that has become clear, if there were any remaining doubts among observers, is that wage growth remains a central focus of policy makers and a key driver behind inflation and interest rate expectations going forward.

In response to pointed insinuations that the labour market may already have tightened further than policy makers realise, the governor described wage growth within the economy as less than satisfactory before stating further concern over potential hidden unemployment and underemployment among the self-employed.

The bank’s staunch stance on income growth comes after a five year period where average weekly earnings have increased ahead of inflation for just six months out of sixty.

On a more positive note and if policy makers are correct; both wages and employment are likely to remain on an upward trajectory throughout the remainder of the current year and into H1 2015. This bodes well for both confidence levels as well as overall output heading into the closing quarters of the year and supports other forecasts for levels of economic growth that are at the top end of expectations for developed nations.  

In short, the sounds which emerged from Mark Carney on the morning were markedly different to those made at the Mansion House dinner less than two weeks ago.

Although consensus expectations for wage and price growth over the months ahead remain positive among policymakers, we believe that the mild reduction in bullishness will serve as a dampener upon interest rate expectations over the days ahead. This could lead to lower levels in sterling, while the FTSE remains event & data (US) driven.

The next major event, and primary threat to the above theory, is next week’s release of June PMI figures for the UK economy. Considering that these relate to forward expectations for orders across key industries, any significant out performance here could add fuel to an already burning fire.

FPC recommendation to the PRA and FCA

“The PRA and the FCA should ensure that mortgage lenders do not extend more than 15% of their total number of new residential mortgages at Loan to Income ratios at or greater than 4.5. This recommendation applies to all lenders which extend residential mortgage lending in excess of £100 million per annum. The recommendation should be implemented as soon as is practicable.” FPC June 2014

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