UK & US Economic Update – 02 October 2014

UK economy appears to falter in September; quashes case for a 2014 interest rate increase

The UK recovery appeared to lose its step during September according to a volley of economic data released this week. In addition to the shaky economic picture on this side of the Atlantic, US industrial data also placed the North American recovery under the spotlight when a number of midweek releases underperformed against expectations.

In detail, both UK manufacturing and services PMI’s missed expectations by a considerable distance to the downside. This was as manufacturing activity fell to its lowest level for 2014 while conditions within the services industry also deteriorated.

Given the relative size of both industries in the UK, a significant out-performance in construction numbers on Thursday went overlooked as investors focused instead on the dissipating argument for an early (2014) interest rate rise from the MPC at the Bank of England.

In addition to dispensing with any notion among investors of an early increase in rates, the week’s data also helped to deepen the correction in sterling, which fell close to a 12 month low against the US dollar.

This was while shaky economic data emerging from the US during opening stages of the week, combined with relative disappointment of investors over another perceived lack of action from the ECB , saw developed market equities heading toward another week of losses by Friday morning.  

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US payrolls and employment numbers pull equity markets back from the brink

After spending much of the week in decline, global equities pared losses on Friday afternoon as better than expected US payrolls and employment figures hit the market.

In detail, Non-farm payrolls came in considerably above estimates with 248,000 new jobs added during September as opposed to the 216,000 forecast. This was while August’s poorer than expected figure of 142,000 was also revised higher to 180,000.

The payrolls release preceded another sharper than expected decline in the unemployment rate which fell from 6.1%, down to 5.9% during the month; marking its lowest level since 2007.

In addition to the better employment numbers, trade balance data also highlighted a brightening outlook for the US economy. This was as the value of exports increased on both a MoM (Month on Month) basis as well as a YoY (Year on Year) basis, while a smaller positive increase in the value of imports led the overall trade deficit to narrow.

All in all, Friday’s US data served to dismiss earlier notions that the economic recovery may be beginning to slow. On the contrary, an aerial view of recent releases suggests that the US economy has continued to recover during late Q2 and through Q3 at a faster pace than many had previously expected.

While this does little to change our view that the FOMC will be likely to remain cautious by holding off until at least Q2 2015 before raising rates, the week’s data does increase the volume of the argument that when the Fed does eventually move it could be forced to tighten policy much faster than many currently anticipate.  

Having said this the same data does not act as an automatic trigger for a rate increase and going further;  we believe that inflation will be a more important factor in the making of monetary policy over the months ahead than employment and unemployment indicators.

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