The Week In Hindsight, 20 June 2014

UK and US indices closed higher this week following a downward revision to US growth forecasts from Janet Yellen, which prompted another expedition into uncharted territory for the Dow Jones and S&P 500.

In addition to reiterating the usual mantra that interest rates would remain low for a sustained period of time, Yellen also revised downward expectations for US growth this year. Given the unusually severe winter and a wide range of geopolitical risks, year end GDP is now expected to come in fractionally lower than initial forecasts Revised expectations see the US economy growing at pace that is somewhere between 2.1 – 2.3% vs previous expectations for growth of 2.9 – 3.0%.

Despite the downward trajectory of growth forecasts policy makers continue to believe that the US economic recovery remains in place, which was reflected in the FOMC decision to further reduce the rate of asset purchases. The total of Federal Reserve bond purchases now stands at $35 billion and is comprised of a $20 billion allocation to treasury securities and a $15 billion allocation to retail mortgage backed securities.

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UK economic recovery remains in place, downside risks exist to equity markets

UK inflation continued its downward trajectory during the month of May, according to figures released this week. The actual figure fell from 1.8% down to 1.5%, VS expectations for a read of 1.7%.

The resumption of the broader term downward trajectory in inflation should go some way toward cooling interest rate speculation, which has increased since Mark Carney’s comments at Mansion House last week. In keeping with our statement here at the time, we believe recent speculation and excitement following forward revisions for the first interest rate rise in the UK were premature.

Going forward, we expect close scrutiny of inflation numbers and growth in average consumer incomes. Only when such barometers show signs of embedding themselves in a clear upward trajectory will expectations for movement in rates become warranted.

Later in the week, retail sales figures for the month of May emerged from the Office for National Statistics. The actual figure came in as expected with a minor contraction of -0.5% for period, while last month’s figures were also revised downward. Despite the negative appearance of the numbers, a deeper look at recent activity in the sector shows that on a YoY (Year on Year) basis total sales volumes increased by 4.9%; reflecting the fastest pace of annual growth since 2004.

In summary, the UK economic recovery remains in place and both consumer as well as investor confidence continues to run high. Despite this, downside  risks exist to equity markets given the current level of geopolitical conflict and civil unrest across the Middle East and Iraq, which threaten to dent global confidence and suppress risk appetite among investors.

The next major event for the UK economy, its currency and the local equity market is the BOE Financial Stability Report and related releases which is due for release from Tuesday of next week. The Tuesday sees Mark Carney testifying in front of the Treasury Select Committee, while Thursday sees the Governor hold a financial stability press conference (with Q&A). Expect lots of talk of housing market excess and interest rate rises.

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