UK & US Economic Update – 19 September 2014

Scottish referendum takes centre stage in the UK again; FOMC drives US markets higher

The long awaited Scottish referendum dominated markets in the UK and Europe throughout much of this week, depressing both equities as well as the pound before a “No Vote” prompted Friday’s relief rally in sterling assets.

Despite the domineering presence of the independence question throughout the week, Scotland’s referendum wasn’t the only key event for UK focused investors.

In addition to a battle at the ballot box; employment, average earnings and inflation figures for August were also released during the week. According to the official numbers, both unemployment and the rate of inflation fell during the month to 6.2% and 1.5% respectively.

The figures at first appeared to call into question market expectations for interest rates to begin rising in the new year, although this was before average earnings data highlighted a bounce in nominal wage growth throughout the same period.

While the week’s UK numbers do little to advance the argument of whether or not conditions are right to begin to think about raising interest rates in the near future, they will provide hope to some that the persistent decline in wages seen throughout recent years may be beginning to slow.

Going forward we continue to see geopolitical and conflict risks as a cause for concern however, the overall economic outlook for the UK & US remains positive; so further downside for local equities should remain limited over the near term.

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No change to the US policy mantra drives North American markets higher; QE fully wound down in October

US markets looked set to close another week of strong gains today as Wednesday’s FOMC press conference saw an additional $10 billion taper but yielded no real change to the policy maker mantra.

From the market reaction it would appear that investors are now discounting the rhetoric of policy makers in preference of a more fundamental focus upon economic data and market projections of interest rates.

With lower unemployment beginning to translate into stronger consumer confidence data and higher consumer spending, investors now appear to be positioning for policy changes in the opening quarters of 2015 as well as a much steeper climb in rates than many had previously expected.

The is supported by alterations to the FOMC’s medium term interest rate outlook, which now implies a hike in the Federal Funds rate from 0 to 1.35% by the close of 2015. The revised forecast is somewhat higher than the 1.125% projection announced in June.  

While most forecasts now suggest that an accelerated tightening cycle is likely, some private sector projections indicate an underlying expectation of even sharper tightening from the Fed, with some suggesting that rates could close out 2015 as high as 1.75%.   

Clearly this would mark a further turn of the pages in the current chapter of post crisis economic history, which is positive for investors over the longer term. However, we remain uncertain about the exact impact upon equities that rising rates are likely to have in the near term.

While we certainly envisage some level of portfolio adjustment induced volatility, it is not possible to say exactly how this will affect investor sentiment in the short – medium term. Consequently, we continue to favour a highly cautious approach toward opportunity at present.

FTSE 100 

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Dow Jones

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