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The Week In Hindsight; 24 January 2014

Global equities took a step backwards this week as concerns grew over financial stability and growth prospects within emerging markets. Although developed market indices began to correct at the opening of the week, a contraction in both Chinese manufacturing and US housing activity pushed global stocks into a sharper decline on Thursday as optimism over the global growth outlook among investors began to falter.

FTSE 100 AND DOW JONES (RED)

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UK economy powers on as unemployment falls close to BOE threshold

The UK economy took another step toward full recovery this week after shocking financial markets with a drop in the unemployment rate from 7.4% down to 7.1% over December. The drop did little to move the FTSE 100 however it did provoke a reaction from the pound as well as the bond market. Sterling rose to its highest level since 2011 against the dollar while UK Gilt yields spiked briefly in response to the announcement.

The Monetary Policy committee has previously stated that it would not look to raise interest rates in the UK until the unemployment rate falls to 7%. Wednesday’s drop brought that level clearly into view on the horizon and prompted Mark Carney, the governor of the bank to address markets during his speech at a summit of global leaders in Davos, Switzerland.

The governor echoed his counterpart at the Federal Reserve during the speech by stating that the unemployment threshold was not a trigger for an automatic interest rate rise but more an indicator of when it may be appropriate to begin considering such a move.

Despite improving economic conditions across the board in the UK, the governor described the labour market as having “too much slack”, while reasserting that any tightening of policy to come would be at a slow and gradual pace. Further forward guidance relating to interest rates is expected from the quarterly inflation report which is due in February.

In another positive move for the economy and UK housing focused companies, mortgage approvals were revealed to have increased during December to their highest level since early in 2007 this week. This news came as UK economy watchers await the Q4 Preliminary GDP announcement due out on Tuesday of next week. The current forecast is for growth to have remained flat in Q4 with the previous quarter, coming in at 0.8%.