US & UK Economic Update – 21 November 2014
US data outperforms as Mario Draghi preps Germans for QE, continental markets rally; DOW closing in on 18,000
Developed markets continued to advance this week as economic data emerging from the US continued to point toward a strengthening recovery, while Mario Draghi at the European Central Bank delivered his second career defining performance when he signalled to Europe’s bankers in Frankfurt that Quantitative Easing is on the way.
In detail, a steady flow of economic data from the US kept markets supported for much of the week, including better home sales, manufacturing and inflation numbers; while an absence of bad news from most other regions also contributed to the positive performance.
Most significantly to US economy watchers, Core CPI rose at an annualised pace of 1.8% according to data released for October, closing the gap between the current pace of price pressures and the Federal Reserve’s 2% target. This delivered a positive boost to investor expectations relating to both wages and overall growth.
This was while the headline act for the week was performed without doubt by Mario Draghi, who after regurgitating much of the various texts from past non-event speeches, used his address to the “European Banking Congress” in Frankfurt as his opportunity to inform the Germans that QE is on the table.
“We will do what we must to raise inflation and inflation expectations as fast as possible, as our price stability mandate requires of us. If on its current trajectory our policy is not effective enough to achieve this, or further risks to the inflation outlook materialise, we would step up the pressure and broaden even more the channels through which we intervene, by altering accordingly the size, pace and composition of our purchases,” – M Draghi, November 2014
The governor’s speech prompted the euro to fall sharply against all major counterparts, while delivering an instant shot into the arm of continental equity markets, many of which gained upwards of 2.5% on the day.
While the governor didn’t go so far as to give a specific indication of when further action could be expected, it stands to reason that should the euro-zone rate of inflation fall further below the current 0.4% next month, then the bank could act as soon as December or January.
UK retail sales and inflation rises during October; PBOC administers another shot as Chinese inflation and growth stalls
Over on the other side of the English channel, UK economic data turned a positive corner for the week when both retail sales and CPI inflation measures outperformed against official estimates.
Looking at the data in further detail, UK retail sales expanded at their fastest pace for 6 months during October, marking the 19th consecutive period of growth for the UK retail sector. More surprisingly, the notional value of sales made online actually fell during the period with high street stores recording all of the gains in activity.
In addition to stronger retail sales, inflation also rebounded modestly according to the consumer price index, which rose from 1.2% to 1.3% for the previous month.
Despite the improvement in recent measures of the UK economy, the MPC Bank Rate votes indicated an ongoing reluctance among policy makers to raise interest rates in the near term, as the official count held at 2-0-7.
In addition the policy maker consensus on the lower rates for longer question, the FTSE 100 also received another boost on Friday when the People’s Bank of China announced a surprise cut to benchmark interest rates as concern among officials over both growth and inflation reached a head.
All in all, the week’s UK economic data bodes well for overall output during Q4, particularly the retail sales element, as domestic consumption is a leading contributor to economic growth at present.
This is while central bank actions on inflation across the UK, euro-zone and China offer a continued incentive for investors to remain bullish on equity markets.
DOW JONES // 10 Minute Intervals
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