The Week In Hindsight, 08 August 2014
The UK services sector experienced another strong month during July, with the Markit PMI rising a full index point against forecasts for a monthly contraction. Most notably, the monthly statement announced that some segments of the sector appear to be approaching full capacity, which has led to expectations among management in the sector that wages and salaries will soon need to rise.
This, combined with upward revisions to earlier construction output figures, bodes well for growth in the current quarter. Looking forward; the week ahead sees a raft of key data emerge from the UK economy, beginning with unemployment claims, unemployment rate and average earnings figures.
In addition to the above, the Governor of the Bank of England will deliver the MPC’s quarterly inflation report during the week before facing audience questions at a subsequent press conference. Here, the market will look keenly for signs of increasing hawkishness, or a change in tone toward the interest rate discussion.
We note that the July CPI inflation figure is due on Tuesday 19 August, which could represent an inflection point for sterling assets. Should CPI re-align itself on a downward trajectory then this would be expected to reduce expectations for a rate rise before Q1/Q2 2015.
Should the benchmark show inflation holding its ground at the current level of 1.9%, then the risk of an interest rate rise in 2014 will increase substantially. The official forecast for CPI is, at the time of writing, yet to be released.
Last but by no means least, the second estimate for UK GDP in Q2 is also due next week. While the official forecast is not yet available, early indications (revised construction output + 1.2%) suggest that an upward revision from the preliminary figure of 0.8% is likely.
All in all, data released over the course of this week has continued to point toward a strong recovery in the UK. While we believe that the predominant driver of asset prices over the months ahead will be interest rate expectations and corporate earnings; building levels of geopolitical risk continue to present downside risks to both markets, growth and our baseline scenario.
Consequently we see risks to portfolio returns throughout the remainder of the year, despite strengthening recoveries in the UK and the US, and now favour a more cautious approach to when assessing opportunities.
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