The Week In Hindsight, 25 July 2014

The focal point for the UK economy this week was the release of retail sales figures from the ONS, followed by preliminary Q2 GDP numbers. Although both were important releases, for many they were overshadowed by another upgrade to the UK growth outlook from the IMF, which now expects the economy to expand by 3.4% in 2014.

In detail, the Retail Sales rebound was slower than expected during June, with the actual figure coming in at 0.1% MoM VS a 0.3% forecast. The slower monthly expansion follows a strong opening to Q2 where sales accelerated rapidly, and is likely the result of lower food spending and lower prices in the food retail sector.

Despite the weaker June number, on a quarterly basis the sector expanded at its fastest pace for ten years which, again, bodes well for 2014 growth.

In addition to strong data in the UK, better economic numbers from both the US as well as China helped to drive the FTSE 100 to a second weekly gain, and back above the 6,800 level.

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US economic horizon continues to brighten

US Inflation fell during June according to figures released this week. Most notably – Core CPI, which strips out volatile food and energy prices, underwent a greater decline than the overall benchmark. This measure came in at just 0.1% MoM, against a forecast for 0.2% price growth; both of which compare poorly with the previous reading of 0.3%.

While most price indices experienced a deceleration during June, including food, energy and new vehicles, not all of the news relating to price pressures was bad. This was as the indices for shelter, apparel, medical care and tobacco all rose during the month, while the index for home furnishings and household items underwent its first increase for 12 months.

In addition to the above, the Bureau for Labor Statistics also confirmed that the main CPI measure increased by 2.1 % over the 12 months to June, while Core CPI increased by 1.9 %; which is positive news for economy watchers.

Further from here,1st time unemployment claims were also revealed to have fallen in the US last week, indicating that recent improvements in the labour market have likely been sustained. The actual claims number came in at 284,000 VS an official forecast for 310,000.

In summary the US economy continues to face challenges however, most measures of activity and price pressures continue to paint a picture of a brightening outlook.

With reducing slack in the labour market, inflation that is beginning to converge with the FOMC’s target and growth expectations remaining positive; the voices questioning whether or not the Fed is behind the curve when it comes to interest rates could grow louder over the months ahead.

In relation to markets, US indices put in another strong performance over the week as the better economic data and earnings out performance from reporting companies drove investors to stay long equities.

The next major event for the US economy, as well as global equities in general, is the release of July employment numbers and Q2 growth figures over Thursday and Friday of next week.

FTSE 100/ Dow Jones 30

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