UK Economic Update – 26 January 2015

FTSE outperforms on better than expected Chinese growth and ECB’s belated donning of the funny money hat

The FTSE 100 outperformed many of its regional peers last week, closing up nearly 5% for the period, as Chinese growth figures appeared to show the pace of the nation’s economic slowdown moderating while the ECB finally joined its developed market counterparts in donning the funny money hat.

In detail, Chinese GDP for the fourth quarter came in at 7.3% against expectations for a print of 7.2%, and bringing annual growth for the world’s second largest economy to 7.4%.

This was several days before the ECB finally unveiled its own quantitative easing program as part of a belated effort to stave off deflationary conditions on the continent.

However, the opening of the new week saw markets awaken to news that the far left SYRIZA party had swept to victory at national elections in Greece, with the party coming within two seats of an outright parliamentary majority.

This poses a risk to markets across the board going forward for several reasons. First of all, the party has been elected on promises that it will dial back the clock on austerity and restore “dignity” to ordinary Greek citizens after five year of “humiliation”.

This sets the new party on a collision course with the “Troika” of lenders who, so far, have outright rejected the notion that Greece could renegotiate the pact that it has with its creditors.

Should the new parliament in Greece prove unable to reach a compromise with the European Commission, the Germans, the IMF and the ECB; then the nation could find itself sleepwalking toward the exits in terms of its European Union and euro membership. This is the first and foremost risk facing investors as any move by Greece toward the exit would reawaken fears of a euro-zone disintegration once more.

Secondly, the very fact that an “extreme” party has been elected within Europe is bound to set some politicians, policy makers and investors on edge as it could easily be interpreted as a broad precursor to a greater political shift across Europe. One which illustrates broad public disappointment and disillusionment with the European political elite and the way in which the current system of the “Europe” actually works.

This has the potential to create long lasting volatility in 2015 as several other key nations move toward their own national elections later in 2015, most notably; the UK and Spain.


The ECB program outlined

In detail, the ECB will purchase a total of 60 billion euros worth of bonds on a monthly basis beginning in March. What is not clear at the current time is exactly how much of this will be sovereign debt, how much will be corporate debt and how much will be other types of security such as ABS. In the aftermath of the announcement Bloomberg reported that the ECB is likely to announce the finer details surrounding composition of the purchases at its next meeting in March.

Although it is worth noting that, as it stands, the program currently excludes Greece as the ECB holds too much of the nation’s debt for further purchases to be in keeping with the rules of the newly devised program.

However, from July it will be possible for the bank to include Greek sovereign paper in its purchases so long as the nation makes a number of bond payments which are scheduled to take place between now and June.


Hawkish dissent on the MPC begins to fade as voters fall back into line at 0-0-9; Carney dismisses oil price declines in favour of a focus upon wages

As of the January meeting the Bank of England rate setters are once again unanimous in their decision that interest rates should remain on hold for the foreseeable future.

The minutes of the most recent meeting showed the two policy makers that had previously dissented falling back in line with the crowd as a result of concerns over low inflation.

Both Martin Weale and Ian McCafferty of the MPC are believed to have reversed their earlier decisions to vote for a rate rise over concerns that if rates were to rise at the present time, then the downtrend in inflation could become endemic as consumers would be forced to curtail spending in order to meet greater debt payments; which would have negative implications for demand within the economy.


Looking ahead

Looking ahead, Tuesday sees GDP figures emerging from the UK for the fourth quarter followed by a statement from the most recent Federal Reserve meeting and GDP numbers for the US in the fourth quarter.

In terms of growth figures, we expect UK GDP to be lower for Q4 than in previous periods with the risk of underperformance against estimates (0.6%) running high. US GDP is believed to have remained strong during the fourth quarter as a stronger labour market and healthy consumption feed through into output.

This is while FOMC meeting statement is likely to continue to indicate a hawkish tilt among US policy makers. European inflation numbers for January are also likely to provide political observers with confirmation that the ECB did the right thing in establishing a QE program, as the new year’s declines in oil prices are widely expected to have driven a further fall into deflation territory.   

In addition to economic data and policy announcements, we also look to see horse trading begin between the new SYRIZA government in Greece and various stakeholders in the nation’s bailout.

On the whole, we see the only certainty for the week ahead being increased volatility as markets attempt to second guess the outcome of negotiations between Greece and creditors, as well as the small number of economic releases.  

FTSE 100 / 10 Minute Intervals




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