UK, US & EU Economic Update – 23 December 2014
Developed markets bounce back as investors and traders call time on the slump; – for now
Developed markets bounced back sharply last week with the Dow Jones recovering almost all of its earlier losses, the S&P closed at a new record high and the FTSE 100 jumped by 6%.
The rebound was driven largely by US monetary policy once again, when the FOMC revised lower its inflation expectations for 2015, before stating that there has been no significant change to its guidance on when interest rates could begin to rise.
Markets Yellen’s statement on rates guidance as a positive indication that the status quo will continue for some time to come, and therefore; pared previous losses rapidly.
At present, the Dow Jones has gained just over 8% for the year and the S&P 500 is up by 12.45%. The FTSE 100 remains down by 2.28% at the time of writing, despite its sharp recovery last week.
1st Greek presidential vote proves a non-event
While US interest rates formed the core focus of investors last Wednesday evening, the first chapter in a fast evolving saga of uncertainty in Europe was unveiling in Greece at the same time.
This was as the Greek parliament gathered to for the 1st vote on the Prime Minister’s preferred Presidential candidate. The incumbent Prime Minister failed at the first attempt to secure the 200/300 parliamentary votes for his candidate, meaning that the issue goes to a second vote where the required majority remains at 200.
That second vote takes place today (Tuesday 23rd December), providing the Prime Minister’s 155 seat government with another chance to secure support for the preferred candidate Stavros Dimas.
Should the parliament fail to elect Dimas this time around, a third and final round of voting will be held on December 29, where the majority required falls to 180, which could boost the government’s chances of securing sufficient endorsement for Dimas.
However, the government only managed to gain 160 votes in the first round and if it fails to make headway on this number today, then markets could grow nervous over whether or not the coalition government will be able to secure a deal at the final round of voting on December 29.
If the government does not secure endorsement for the Prime Minister’s candidate then parliament will be dissolved in the new year and national elections held in February. This is the main risk to markets, most notably because, present opinion polls suggest that if elections are held now then the radical Syriza party will be voted into parliament.
It is the Syriza party that has championed a wide range of measures that provide European finance ministers with the greatest cause for alarm, measures which include tearing up the bailout the agreement and leaving the euro zone.
UK data continued to point toward a strengthening economy during the recent week, with November retail sales outperforming considerably against estimates with 1.6% growth vs official projections for expansion of just 0.3%.
CPI data also showed inflation falling further during the same period, with the official print coming in at 1%, down from 1.3% the previous month. This was while average earnings figures for the three months to November also highlighted another boost to consumers, with take home pay increasing by 1.4% during the period.
While events in Europe were also a key focus for investors, the headline act for the week was without doubt the release of the FOMC’s quarterly economic projections report and the most recent rate statement, followed by the usual press conference.
Here, the FOMC revised its own internal growth projections higher for the current and coming year, before downgrading its own inflation expectations. Janet Yellen also stated that there was no change in the FOMC’s official guidance that rates would remain low for a “considerable time” in order to safeguard the recovery.
Markets took the collective group of statements as an indication that rates would not rise until mid to late 2015 and therefore, underwent a rapid reversal of earlier losses which has now been carried through into the opening days of the new week.
All in all, there are signs that wages may be picking up in both the UK and the US, while growth also continues to gain momentum. This is positive for investor sentiments toward corporate earnings prospects and should go some way toward ensuring that, with a disaster in Europe notwithstanding, equity markets get off to a positive start in the new year.
However, we caution against excessive bullishness for 2015. Not least of all because of the multiple risks detailed in our Risk factors to watch out for in 2015 report, but also because we believe that US rates could still rise sooner than the market expects.
Most notably, we cite Janet Yellen’s provision of a definition for the term “considerable time”. Under the Chairwoman’s guidance this description is defined as “at least the next couple of meetings”.
We take this to mean that rates are very unlikely to rise before the March or the April/May meetings, however, the FOMC could opt to move at any point onwards from here.
We see such a move as particularly likely if the US economy continues to strengthen at its current pace, something which we also believe is quite probable.
Therefore, our base case expectation is that US rates begin to rise at the beginning of Q2 2015 and that for this reason, the risk to markets becomes slanted toward the downside at this point.
FTSE 100 // 10 Minute Intervals
Dow Jones // 10 Minute Intervals
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