Market Commentaries 2015
Last night the US Federal reserve committee voted unanimously in favour of raising the US interest rate to 0.25%. This increase marks the first US interest rate rise in nearly a decade, ushering in a new era of global policy divergence between developed economies. The world’s largest economy indicated it was optimistic about growth, employment and inflation prospects in 2016. The 0.25% increase in the US base rate was a reflection of that optimism. Global markets have seen this as a positive indicator with the decision providing investors with more clarity on the overall direction the US is taking, this risk on sentiment caused broad rallies across global equity indexes. Off the back of the news the US dollar rallied 0.9% against a basket of its peers causing the PBoC to lower the daily fix they have against the US dollar.
The likelihood of the first US interest rate hike since 2006 increased today as inflation rose +0.2% in November. Both the monthly and annualised figure of +2% was in line with market forecasts and was helped to some extent by the base effect of the fall in the price of oil, over 18 months of falls now, created less of a drag. However, further falls in early December may reassert some pressure. UK inflation rose +0.1% in November compared to the -0.1% fall in October, again influenced by a more stable oil price last month. Sterling held steady. It was the US dollar which strengthened over half a percent against both Sterling, to $1.504, and against the Euro at $1.0923.
The price of Brent oil fell to $37 per barrel as the International Energy Agency forecast a worsening outlook for the global supply glut following last week’s OPEC meeting where no production cuts were agreed. In theory, this should be good news for consumers but the lower cost of living that results will ultimately show up in lower inflation figures. Indeed, US inflation data is out tomorrow. An improvement to 0.5%, up from 0.2%, is anticipated and only a massive shortfall would undermine the case for raising interest rates which is what most of the market is expecting the Federal Reserve to do on Wednesday.
Japan’s Cabinet Office has revised the country’s GDP to growth of +1% in the third quarter, a big improvement on the -0.8% figure originally reported. The revision also means that the country is not in a technical recession as previously thought. The second quarter was also retrospectively upgraded from negative to positive territory. However, the revision was widely expected since last week’s corporate investment pointed to a much stronger level of activity that was bound to lift GDP and his much more aligned with our continued positive view on Japanese equities
Novembers US jobs report was announced today. 211,000 jobs were created, this figure was 11,000 over market predictions. Following on from the upward revision of Octobers employment figure the average number of jobs created in the US each month is now at 218,000. The market will likely see this as supportive of the FED beginning to raise interest rates when they meet on the 16th of December. Novembers employment numbers have pushed the futures market to price in a 74% probability that the first rise will come in 2015.
On Monday the IMF voted to make the Chinese Renminbi the 5th addition in its basket of reserve currencies. Hailed as a milestone for both the currency and the Chinese economy, the addition has been seen as a vote of confidence for the PBoC and the reform efforts being implemented. The Renminbi will have the third largest weighting behind the US dollar and the Euro. TAM expect to see some de facto weakening of the European currency as a result, this will largely continue to be a boon to the export led economies within the single currency block.
Stock and bond market reaction to the weekend Paris terrorist attacks was relatively muted although classic safe havens such as gold and short dated government bonds saw buying on Monday morning. Some weakness in the Euro was expected but the currency had already come under pressure last week from short sellers in anticipation of extended QE by the European Central Bank which had sent it to 6 month lows against the US dollar. Similarly, the UK’s FTSE 100 index was up marginally in early trading as the large oil, mining and industrial sectors bounced back from heavy selling last week on concerns for global growth. However, the defensive sectors in tobacco and pharmaceutical were notable early risers. Travel and leisure were unsurprisingly sold off. Aerospace and defence rose across the European markets generally as reports emerged of an escalation of bombing raids against ISIL targets in Syria. The futures markets indicate a similar reaction in New York and suggests that markets are more focused on central bank action in the US, Europe and Japan.
Following Fridays atrocities we will be carefully monitoring the effect on European markets when they reopen on Monday. It has been over ten years since comparable incidents in Madrid and London but on each occasion risk premium rose and market volatility increased. Our sympathies are extended to those families affected.
Japan fell into recession for the fifth time in six years and the second time under Prime Minister Abe’s administration. Third quarter GDP declined at an unexpectedly worse rate of -0.8%. Economists had been expecting -0.2%. However, almost all of the shortfall was due to a drop in business inventories which are expected to recover. Consumption marginally beating expectations at +0.5% also took the edge of a disappointing headline figure. Business investment within Japan remained weak, raising expectations that Japan will aim to boost the economy in their upcoming supplementary budget. Japan’s Nikkei 225 index closed -1% this morning with commentators attributing the drop to the Paris terrorist attacks. Nevertheless, the Yen weakened further toward Y123 against the US dollar, supporting TAM’s investment strategy in Japanese equities.
With a Federal Reserve interest rate hike seemingly nailed on for the 16th December central bank meeting, it was a bad day for oil inventories to hit a 10-year high and reawaken fears that the global economy is slowing faster than expected. Reports of an additional 100 million barrels stuck out at sea on oil tankers unable to offload added to the sense of oversupply. Other commodities such as copper and gold sold off as a result, the selling also reinforced by prospects of a stronger US dollar. Shares in mining, oil and energy all dragged down their respective stock markets in UK, Europe and the USA where the S&P500 index slipped into negative territory for the year. This may well be a short term technical sell off following the bounce from recent lows and all eyes will be on a slew of economic data from the US later today.
Third quarter eurozone GDP slowed in the third quarter to 0.3% from 0.4% in Q2 and 0.5% in Q1. Economists had hoped that the figure would have stabilised around 0.4%. A slowdown in trade from Germany, France and Italy appeared to be the main culprit despite a weaker Euro which should have helped exports but was not enough to offset slower global growth. Mario Draghi, President of the European Central Bank, repeated that the case for more monetary easing will be examined in December. The consensus is that an expansion to QE is almost certainly a done deal and this prospect may limit further losses even as European stock markets record a second day of falling prices.
Whilst markets expected the Federal Reserve to keep interest rates on hold at their Wednesday meeting, the accompanying statement which followed was more hawkish in tone than many expected. The previous comment about taking into consideration global factors (basically China) was removed suggesting a greater likelihood of a December rise. Bond yields rose further yesterday to price in a 50/50 chance of a rate rise, up from 33% before the meeting. All eyes will now turn to the few economic indicators due before Christmas including two further payroll reports and two more CPI inflation data points. The first revision to Q3 GDP will also be eagerly awaited. We suspect that if the data, which has been weaker of late, is just about in line, it will be enough for the Fed to justify a hike in December. Unusually, shares in New York and London rose on the news possibly reflecting greater confidence that the economy can weather a rise.
UK GDP figures for Q3 have showed an expansion of 0.5%, below a forecast figure of 0.6%. Whilst the UK’s services sector showed strong expansion at 0.7% this was offset with a 3rd consecutive drop in manufacturing growth. With current sterling strength and lacklustre global demand for UK products we don’t feel the UK manufacturing sector is set to recover this year, however, we do believe the UK domestic market will continue to grow at a steady pace and the slight drop in Q3 GDP is not indicative of a slowing UK economy.
Third quarter GDP figures announced from China today show the world’s second largest economy growing at 6.9%. This figure represents a slight decrease from Q1 and Q2 figures at 7% and 7.3% respectively. This quarter has seen growth from emerging markets helping to offset the continued weakness in China’s manufacturing and property sectors. Although this figure means the country is on course to meet its 7% growth target for 2015 global investors have kept their cautious tone in the market waiting for firmer economic data before shifting to a “risk on” environment.
Global fixed income and equity markets are retreating after the US announced a weaker than expected employment numbers for September. Economists predicted the world’s largest economy to have put on an extra 201,000 jobs in September. Figures released today showed that figure to be at 142,000, payroll figures also received a downward revision. The FED still maintain that any rate rise in 2015 will be data dependant but increasing headwinds from China and now lacklustre jobs results from the US will no doubt weigh heavily on any decision to pull the trigger on a FED rate rise in 2015.
Chinese manufacturing data released today was down at 47 against market expectations of 47.5. The latest figure indicates a continued contraction within the Chinese manufacturing sector to levels not seen for six and a half years. The Shanghai market shed as much as 1.5% off the announcement. This will likely weigh on the FED’s decision to potentially normalise US interest rates towards the end of this year. TAM has select exposure to the Asian market in quality securities, whilst we remain confident these investments will hold their value we will continue to remain vigilant.
With the main European stocks markets still down heavily and the futures market indicating that New York will open lower, it appears that markets have little faith that central banks have the will to intervene. However, whilst we agree that China badly mishandled their stock market slump and recent currency devaluation, The Peoples Bank of China still has ample room to cut interest rates and have the financial resources to intervene as they have before. These are early days in a what still classifies as a stock market correction, rather than a crash, and central banks may be in no hurry to react to market volatility. This week we will see the gathering of central bankers at Jackson Hole mountain resort in Wyoming. In a market long of nerves and short on new news, all eyes will be on economic policy announcements coming from the summit and to throw light on when, or if, interest rates are likely to rise.
China’s main share index, the Shanghai Composite closed down 8.5%, suffering its worst day in 8 years and wiping out year-to-gains amid fears of a hard landing for the Chinese economy. Other Asian markets, including Japan, were also hit hard and European stock markets followed on with the main indexes in London, Frankfurt and Paris all opening around 3% lower than Friday’s close. The commodity and financial sectors, to which TAM client portfolios have little exposure, suffered the brunt of the falls but nearly all stocks were affected. Bonds rose reflecting less likelihood of a mid-September interest rate hike in the US which also dragged the US dollar weaker against the other major currencies.
Sterling rose 0.4% against the US dollar to $1.564 as UK inflation came in slightly stronger than forecasts at +0.1% year-on-year in July compared to 0% in June. The UK 10-year Gilt yield rose 2 basis points to 1.82% on the news. The price of food and transportation kept a lid on inflation, as expected, but the figure is still stronger than was implied by the Bank of England’s shift to a more dovish stance at their last meeting where inflation forecasts were lowered and rate rises were pushed out to the second quarter of next year.
Warren Buffet, one of the world’s leading investors and third richest man, went for the biggest deal of his career buying Precision Castparts Corp for $37 billion. Building on his minority stake in company, which makes parts for aerospace and oil and gas exploration, Mr. Buffet’s company bought out the remainder of the company at a 21% premium to the share price using $23 billion of their $67 billion cash pile and funding the rest through a loan. The deal boosted shares in the oil and gas sector which has struggled from the fall in the price of oil over this year.
In an interview with Bloomberg TV, U.S. Federal Reserve Vice Chair, Stanley Fisher expressed mixed feelings about bond markets factoring in a 60% probability of a raise in September. Mr. Fischer said that a large part of the low inflation figure was transitory and had a lot to do with the fall in the price of oil and that rates would not stay low forever. However, he added that "The concern about this situation is not to move before we see inflation as well as employment returning to more normal levels,". Bond yields fell slightly indicating a mild shifting of expectations to December.
Today’s Non-farm pay roll figures for the US show the labour market expanding by 215,000 in July with earnings inflation remaining in line with expectations at 0.2 per cent. Although market expectations had the payroll figure at 225,000 the continued expansion shows the US keeping unemployment at pre crisis levels. Unsurprisingly this data has pushed expectations of a September rate rise ever closer with the dollar rallying versus the basket of its peers. True to form S&P futures have the US market opening at a discount off the back of these results.
Latest Q2 GDP estimates from the US indicate the economy grew at 2.3%, despite this being just shy of Wall street’s predictions of 2.5% this is widely seen as a positive figure for the US. The revision of Q1 GDP up from 0.2% decline into 0.6% growth has also helped to eradicate some of the doubt in the market about the stability of the US recovery. These positive growth indicators combined with the FOMC’s upbeat tone on the US labour market have led to further speculation that the US economy could be seeing a rate rise as soon as September this year. USD rallied on the news as did the S&P that’s now trading just 22 points off its record close.
UK Q2 GDP figures were released today, the results showed the UK economy expanded by 0.7% in line with market predictions. This has been seen as an improvement on the 0.4% growth figure for Q1. Whilst the bulk of the growth came from the services sector the Mining sector also gave the strongest relative performance since 1989. Disappointing sectors were in construction and manufacturing that remained flat and fell off respectively. This figure has been seen as return to normality with GDP now 5.2% higher than its pre downturn peak. GBP strengthened off the back of the data as traders became confident a UK rate rise is now firmly on the horizon.
The Chinese stock market Shanghai Composite Index fell 8.5% today over concerns that government efforts to prop up equity prices would prove unsustainable. The index had rallied 16% since the government announced unprecedented measures to support stocks last month including suspending trading on more than 1,400 companies, banning major shareholders from selling and funding a state owned vehicle with $480bn to support stock markets. Whilst falls of this magnitude are sure to unnerve global investors we do not expect significant contagion into western markets nor do we hold any direct exposure to the Chinese equity markets. At the time of writing European equity markets are showing modest declines.
Federal Reserve Chair, Janet Yellen, gave a predictable account of the improving US economy saying that a hike in interest rates would be appropriate by year end. However, she also threw in the caveat that any decision would be subject to economic conditions and also cited Greece and China as concerns. There was little reaction from stock and bond markets but the US dollar strengthened against the Euro and the Yen. The TAM investment team’s take on the reaction is that this is yet another example of the Fed repeatedly sounding hawkish yet repeatedly pushing back the timing of a rise and that the markets are in no mood to react in the way they might a few years ago.
Shares on the Chinese stock exchange experienced their biggest loss for several years as highly leveraged speculative buyers tried desperately to unwind their bets in what is being described as a hugely speculative bubble. Trading in over a third of companies listed in the Shanghai and Shenzhen stock exchanges were suspended. The implications for leveraged investors bodes badly for Chinese banks and stockbrokers and investors are looking to the Chinese state to step up their attempts to restore order. TAM portfolios have only a very limited exposure to Chinese shares, and that which exist are blue chip stocks which are materially unaffected by the turmoil in highly speculative stocks and new issues. This is potentially a larger problem than Greece and we are watching event closely for signs of contagion to US and European financial institutions.
On Sunday, Greek voters rejected austerity the bail out proposal from its European creditors. Sunday’s referendum showed the number of Greeks rejecting a “cash for reforms” deal at 61.3%. The vote will spell short term volatility in the country’s banking sector as the capital controls remain in place. The “No” vote does not spell a “Grexit” but it does draw nearer the possibility. European markets have opened down as much as 1.2% with haven assets such as the US dollar, Yen, US Treasury and German Bund yields all rallying as global investors move into to risk-off mode. Whatever the outcome, we do not expect the current drama to derail the US and UK economy or, indeed, Europe itself. We may use the short term volatility in the market to purchase equities if we believe the opportunity significantly outweighs the risks.
The keenly awaited US non-farm payrolls figure arrived a day early this month due to July 4th Independence Day holiday. The total number of new jobs added was pretty much in line with expectations, as was the unemployment rate. However, the average hourly wages figure was flat against expectations for modest growth around +0.2%. This dampened expectations that the Federal Reserve will bring forward higher interest rates in September, thus keeping the cost of borrowing cheap which is always supportive of equities in an environment worried about the effect that rising rates might have. Stocks rose in New York and London on the news although with all eyes on Greece, we expect no clear direction until after the Greek referendum on Sunday.
Stock markets traded lower, and bonds rose, in Asia and across Europe as news broke of the failure of the Greek government to broker a deal with creditors. The Greek government declared a bank holiday and banks and stock exchange stayed closed. A maximum cash withdrawal of 60 Euros was also imposed on Greek cash points amongst other restrictions that will last several days. The European Central Bank has given Greece a EUR 89 billion loan in order to facilitate the continued use of cash but has not boosted the facility. There are already long queues at cash points as well as supermarkets and petrol stations despite the call from Premier Alexis Tsipras to stay calm. He also announced a deal-or-no deal referendum now planned for next Sunday. Confusingly, the eurozone finance ministers also rejected a five-day extension to the bailout programme to beyond this new referendum. This raises the obvious question about the logic of voting on a non-existent deal which has now been withdrawn. There are high political and economic stakes on both sides now and the prospect of an uncertain week ahead which may well overshadow good economic news from the USA and UK. The FTSE 100 index stands at 6,641.22 down -1.66% on the day.
Stock markets across Europe and the UK rose amid cautious optimism that yesterday afternoon’s long awaited reform proposals from Greece may form the foundation for the release of EU funds. Enthusiasm was tempered somewhat by the fact that Wednesday’s meeting may still fall short of an agreement but it does send the signal that a deal is possible. The FTSE rose 20 points to 6,847 this morning having risen over 100 points, or 1.72%, in late trading yesterday.
European stock markets opened weaker and Greek stocks suffered their worst fall in six months as talks between Greece and their creditors collapsed after the reform proposal, submitted by Athens, was rejected as inadequate. The gulf between Greece and the Troika of the EU, IMF and ECB is very wide and there has been failure to come to any agreement on a number of issues ranging from VAT levels, taxations, pensions and surplus targets. Markets are increasingly exasperated at what they see gamesmanship of fiddling with the detail when the big question of whether the EU, and Germany in particular, has the political will power to bail out Greece or whether to let Greece default and leave the Euro. We believe that the failure to move the discussion onto bigger issues means that we are unlikely to see any progress in the Eurogroup meeting on June 18th. The FTSE 100 stood at 6,731, down -0.8%
French and German equities rose in morning trading as eurozone manufacturing data hit a 10-month high. The flash estimate fell slightly short of market forecasts but still indicated expansion above 50 at 52.2 for the month of May. Spain, the Netherlands and Italy were the top contributors to the growth while France slowed. However, the 23rd consecutive monthly growth figure will add to expectations of an improvement in GDP. The good news came alongside early indication of an improvement in German inflation from +0.3% in April to +0.6% in May, marking a solid bounce from the minus -0.5% figure in March. However, the Euro currency traded weaker as stalled Greek talks focused attention on EUR 300 million payment due to the IMF on 5th June.
Government bonds in the USA and Europe sold off sharply as a number of compounding factors indicated that fears of deflation appear to have been overdone. The price of oil has continued to tick up in response to falling oil inventory data as rig closures start to bite. Although OPEC announced that a return to $100 oil is unlikely in the next decade, any rise will ultimately be inflationary. Furthermore, the stability of oil prices appears to have led many to sell their large bond positions as worst case deflation fears ease. However, bond trading liquidity is currently low and the unwinding of the large consensus trade was more than the market could easily absorb, leading to quite large falls in bond prices despite the relatively low value traded. The implied rise in interest rates also put pressure on stock markets on both sides of the Atlantic. The FTSE 100 was also under additional selling pressure as stronger than expected industrial production data implied a higher likelihood of rate rises later in the year. The FTSE 100 closed down -1.37% at 6,933.80.
Investors were quick to take profits in the US yesterday in response to a mixed set of economic data. Employment data was quite encouraging and showed that the number of Americans filing for unemployment benefit reached a 15-year low. However, consumer spending and wage data were worse than expected, confirming our observation last month that despite having more money in their pockets, the US consumers are not necessarily spending it. However, this could be as a result of the bad weather in the first quarter which was also blamed for the weaker than expected 1st quarter GDP figure which came in at 0.2% compared to forecasts for 1% growth. There are other short term factors to consider and while stock markets have taken a cautionary step back, we do not expect the Federal Reserve to act on the one quarter of data which could rebound strongly in the second quarter.
UK GDP was unexpectedly weak in the first quarter of 2015 despite a fall in the price of oil. Economic growth in Q1 was 0.3% compared to an expected figure of +0.5%. Renewed strength in housebuilding has faded and retail sales fell further than economic forecasts. The annualised figure now stands at +2.4%. This figure is the first preliminary estimate and subject to revision which may mean it rises back up toward initial estimates of +2.6%. Sterling quickly lost 50 cents against the US dollar, the exchange rate falling to $1.518. This was accompanied by a quick dash into Gilts where the 10 year yield fell from 1.70% to 1.67% as the lower growth figure makes it more likely that interest rates will stay lower for longer.
Eurozone stocks and bonds rose in response to the removal from front line negotiations of Yanis Varoufakis, the Greek finance minister. Over the past few weeks, it is evident that frustration has been mounting over increasingly difficult talks amid accusations that Mr. Varoufakis is an awkward and unnecessarily fussy negotiator who is failing to get to grips with the bigger issues as time runs. Whatever the details, is clear that the antagonistic meeting over the weekend in Riga accomplished little and his departure may bring Brussels one step closer to a new bailout package. Both French and German stock markets moved up towards +1% gains for the day having been down 1% this morning. The Greek 10-year yield fell over half a percent to 12.17%.
We will see preliminary 1st quarter GDP estimates for both the UK and USA this week. On Tuesday, the UK GDP release is expected to show that economic growth got off to a good start similar to that seen in Europe. A sharp deviation from market estimates of a 2.6% annualised growth rate will no doubt become a hot topic so close to the election. We expect the US GDP data to show weakness in the 1st quarter as a result of the bad weather which hampered economic activity. Further insight into what exactly is happening may be gleaned from the Federal Reserve statement which comes out on the same day, Thursday. The FTSE 100 opened the week above 7,100 with markets more focused on company news and bond markets reflecting a shift in expectations for a Greek deal shifting further out to mid-May.
Manufacturing PMI for the eurozone in April unexpectedly slipped to 53.5 from 54 in March. As Eurozone business activity pulled back from March’s 11-month high this represents the first decline since November for the region, indicating both the manufacturing and service sector indices softening. Whilst this data indicates the slowdown of expansion in France and Germany, which has offset the acceleration of growth in the rest of the region we don’t feel that a 0.5 decline over one month is reflective of the broader health of the market and we remain positive for the eurozone recovery to keep pushing forward.
This week is data heavy in the eurozone where purchasing managers indices and German confidence survey data are expected to show an improvement across the region even before the effects of eurozone QE are expected to have been felt. The Euro Working Group meeting at the end of the week will be attended by European finance ministers and, not surprisingly, Greece will be almost the only thing on the agenda with speculation rife that the government can even meet the national pensions and wages due at the end of the month, let alone the two tranches of EUR 203 million and EUR747 million due to the IMF in early May. Existing home sales in the US may be of interest if it confirms that weak Q1 data really was just down to the weather. We will see the Bank of England minutes relating to the last interest rate decision on Wednesday and would be surprised if it was anything other than a unanimous decision given weak inflation not to mention the upcoming election.
The US consumer price index fell short of economist forecasts for March, dragged down by the falling cost of energy. Prices fell -0.1% for the month compared to the +0.3% forecasts. However, the core inflation data, which excludes food and energy, rose 0.2% in March, bringing the annualised figure to +1.8%. The US dollar strengthened on the news by over 1 cent to as much as $1.505 against Sterling as it strengthens the expectation that the Federal Reserve is on track to hike interest rates in September.
The UK will record the last inflation and employment data ahead of the election. On Tuesday, UK inflation is expected to stay flat at zero for the month of March although there is a chance of a positive surprise given the recovery in fuel prices. US inflation figures out on Friday may rise marginally for the same reason. Friday will also see the publication of UK average earnings, expected to show a monthly gain of 1.7% in February. With the UK economy featuring heavily in the build up to the election, the Cameron camp will be hoping that unemployment falls to 5.6% in February, down from 5.7% in January, and in line with economist forecasts.
Sterling fell against the US dollar to new lows not seen since 2010 as UK industrial production and construction figures out today fell short of market expectations and casting doubt on UK growth in general. Some of the slowdown in UK construction was put down the uncertainty of UK election outcome. However, the FTSE100 index followed the positive mood in European stock markets where the Euro was also falling. The FTSE closed at a record 7,089.77 having broken the previous high of 7,065.08 on 24th March.
Inventory data released today showed the amount of oil held in storage in the USA has reached the highest level in 14 years. A total of 482.4 million barrels is now in storage, up another 10.95 million in a month. Despite the falling rig count, as existing infrastructure is taken out of service, U.S. crude production is still the highest in decades. Together with confirmation that Saudi Arabia will not be cutting production and with the prospect of Iran coming back onto international markets as part of the nuclear deal, the price of Brent fell over 3% to $57.30. Goldman Sachs reviewed their price target on crude and said that their $65 target is unlikely to be met in 2016. The data will dampen global inflationary expectations although US and UK bonds remained almost unchanged as yields have already fallen in the last fortnight.
The Wall Street Journal was the first to break the news of talks between Royal Dutch Shell and BG Group to create a single company in a £47 billion deal. Under the deal, BG shareholders would receive a combination of cash, £3.83 per share and shares, based on a 90-day average. The combined value represents around a 50% premium to BG’s closing share price of £9.10 last Thursday 3rd April. Shares in BG rose 42% on this morning’s open. Shares in Shell fell 3.4% to £12.30. The dramatic fall in the price of oil has led to takeover activity in the oil and gas sector with notable deals in North America and Europe. This deal, however, is by far the biggest and is subject to regulatory approval which, if granted, will see completion in early 2016. The FTSE100 rose 0.6% on the news, briefly breaching 7,000.
UK inflation fell to 0% in February, dragged down from the previous reading of +0.3% as a result of falling prices of oil and food. The Chancellor George Osborne hailed the data as good news for the consumer whom he said showed no sign that they were cutting back on spending. The zero inflation rate, something not seen for 50 years, falls far short of the Bank of England target rate of 2% but the monetary policy committee relatively sanguine and determined to see through what they see as temporary factors and without the need to cut rates further.
The week kicks off with a special one on one bailout session between Greece and Germany. The re negation of the package could bring some renewed volatility to what has been a stellar run for the European markets of late. March PMI data for the eurozone is to be released on Tuesday with the market widely expecting a figure of 51.1 with anything over 50 indicating growth in the region. Germanys individual PMI is predicted to be in the 55 region which indicates continued growth in the leading eurozone economy. Inflation results for the UK and US will be released on the same day with expected reverberations through the markets as investors with a risk off attitude wait to see how this figure will affect the FED’s rate rise. Market sentiment is that the US economy dipped into deflation territory in in February with the UK faring slightly better with inflation expectations at 0.1%. Finally Japanese inflation and unemployment figures are released on Thursday with market predictions for JPY inflation holding at 2.1%.
The Chancellor of the Exchequer, George Osborne, delivered a confident pre-election budget that contained almost as many politically swipes at the opposition as it did policy changes. This was never going to be a giveaway budget so close to the election but there were some key changes targeted at savers and investors. The lifetime pension limit was lowered from £1.25 million to £1 million but with the new lower limit being inflation linked. Annuity holders will be allowed to sell their income to a third party and draw down the proceeds over time. A new help-to-buy ISA will subsidise savers with 25p for every £1 for those saving up to £200 per month up to a total of £3,000. Normal ISA savers will be able to withdraw and replace money from their ISAs within the same tax year. The biggest change was the growth and spending assumptions in 2019/20. Citing low interest rates and lower inflation, Osborne, a scaling back of cuts to public services. The FTSE rose 1.6% to 6945.20
Greece has agreed a make or break extension deal on its current bailout package with its European lenders. The deal will see the country's 172Billion Euro bailout package extended for another 4 months. The deal struck late on Friday evening failed to stipulate what further reforms Greece had to commit to in order to qualify for the remaining 7.2Billion Euros that will mark the end of Greece's bailout package but has agreed enough to stop a full scale bank run that was running at 800 million Euros per day late last week. Further negations are set through the coming week with both sides warning of difficult times ahead in securing a more permanent solution.
The agreed 4 month extension on the Greek bailout package will help to bring some needed stabilisation to global markets. In the latter part of this week the markets will be looking to Janet Yellen's latest announcement on US monetary policy for another clue as to when the US might see a possible rise in interest rates. The second estimate of US Q4 GDP figures will be released this week, the market is predicting a slight dip to 2.1% from a previous estimate of 2.6%. February's PMI data for China is released on Thursday with a predicted decline down to 49.5% from Januarys figure of 49.7%. Finally the second set of UK GDP revisions will be released this Thursday showing a figure of 2.7% maintained.
UK annual inflation in January fell from December’s +0.5% to +0.3% in January. This was slightly weaker than markets were expecting and is the lowest level of annual inflation since the Office of National Statistics records began back in 1996. Back tested data suggests that the overall level of inflation is the lowest it has been since 1960. The -0.8% monthly fall was mostly attributed to the lower price of oil, as expected, but supermarket price wars are now also starting to have an effect. The Bank of England expects this period of falling inflation to be temporary and is unlikely to cuts rates from 0.5%, even if the UK slips into deflation, as the fall in prices stem from the supply side, rather than falling demand, and is good news for consumers. Sterling weakened 0.25% on the news and the FTSE 100 index pushed back up to recent highs around 6,877.
The continued stand-off between Greece and the EU will continue to dominate the headlines although we don’t expect any resolution this week even after today’s Eurogroup meeting. UK inflation data out on Tuesday is likely to have slipped to an annual rate of 0.4% from 0.5% last month. This will be followed on Wednesday by the minutes of last month’s Bank of England’s MPC meeting which we expect to confirm that all nine members are in favour of keeping rates on hold. Of greater interest on the same day we will see the US Federal Reserve minutes. The market reaction will largely depend on whether the accompanying statement still contains the word patient or not. If it has been removed from the standing statement, it will be a strong indication that the US central bank may be looking to raise rates sooner.
Bank of England governor, Mark Carney, fired a warning shot to bond markets yesterday by expressing a more positive outlook for the UK economy saying that investors should not bet too heavily on base interest rates staying at 0.5% through 2016. Commenting on the recent fall in UK inflation, he said that the bank is minded to look through the current low level being cause by the dramatic fall in oil, the effects of which they believe to be temporary. He was also of the view that falling oil prices were unambiguously good for the economy; forecasting stronger GDP of 2.9% in 2015 as well as rising real household income and falling unemployment. The 10-year UK Gilt yield rose as high as 1.71% on the news and the FTSE 100 push on to new highs for the year at 6,880.
Global markets rallied today with President Putin announcing a ceasefire in the Ukraine conflict. The ceasefire which will commence on Sunday will also see a reduction in heavy weapons from the front line and has been hailed as a victory for diplomacy against the stark contrast of the US arming the Ukrainian military. European markets are presently trading up 30 points having taken in a needed boost ahead of next week’s deadline on a re-negotiated Greek bailout deal being struck.
We will see UK December industrial production figures on Tuesday and we expect to see a slowdown on the same period last year. This is followed on Wednesday by the Bank of England minutes on inflation, giving us an insight to the future path of UK interest rates although we believe the Bank of England is just as willing to see through the current 0.5% inflation level as it was when it was over 5% in 2011. Wednesday is a big day for Europe and the eurozone. A special Eurogroup meeting will convene to discuss the Greek stand-off and European leaders will meet with Russian and Ukrainian leaders in the Belarusian capital, Minsk, extending the peace talks held at the weekend. Eurozone Q4 GDP figures come out on Friday. The market is expecting no change to the annual rate of +0.8% although this could disappoint if signs of French growth fail to offset a slowing Germany.
An unexpectedly strong US non-farm payrolls report boosted US shares and took the shine off of recent strength in bonds. The S&P500 index of leading shares rose 0.25% and US Treasury yields rose, reflecting a stronger possibility that the good news on jobs may lead to earlier interest rate rises. The real surprise was the upward revision to the December data which showed that 329,000 were added that month rather than an already healthy 252,000. The data also showed wages rising at 0.5% in one month, the strongest most since November 2008 and pushing the rate of growth back up to levels seen in August. Encouragingly, the additional jobs were seen in retail and construction perhaps reflecting that the US consumer is in better health than previously thought.
A combination of eurozone QE and persistent worries over EU-wide deflation brought German bond yields below that of Japan for the first time in recorded history. Chocolate maker Nestle saw the yield on its 4-year euro denominated corporate bonds turn negative to minus 0.008%, a highly unusual event given that, effectively, buyers are paying to hold the bonds. There is now a total of EUR 1.5 trillion worth of euro denominated bonds with maturities of under a year now trading on negative yields.
It is hoped that consumer related data out of the eurozone mid-week will show some signs of stabilising but of greater interest will be data out of the US where manufacturing data is likely to show a mild slowdown. Employment data, including the important US non-farm payrolls is out on Friday. The Bank of England’s Monetary Policy Committee will announce their interest rate decision on Thursday but with the two detractors who voted for rate rises now back in the pack with the other seven members, nobody expects anything but for rates to stay on hold at 0.5% particularly as the falling oil price has dragged inflationary expectations much lower. In will be an interesting week in politics as the new Greek Prime Minister, Alexis Tsipras, does the rounds of European leaders, including David Cameron, as he and his finance minister unveil their proposals for how they intend to deal with Greek debt.
UK fourth quarter GDP rose at 2.6% on an annualised basis, marking the strongest growth seen since the financial crisis. The quarterly figure of 0.5% was weaker than expected due to a slowdown in the construction, mining and energy sectors. As expected, the services sector stayed strong, leading some to express concern that the growth is not as balanced as predicted in George Osborne’s Autumn statement. The Chancellor said “Today's figures confirm that the recovery is on track and our plan is protecting Britain from the economic storm, with the fastest growth of any major economy in 2014”. The data release had little effect on the FTSE100 but will, if anything, have pushed out interest rate hike expectations slightly further towards year end.
The victory of the Syriza in the Greek elections will dominate the headlines this week as party leader Alexis Tsipras cobbles together a coalition, having failed to secure a majority win. We will also see how ECB President, Mario Draghi, handles a number of questions in today’s Eurogroup meeting on the finer details of how he might actually go about buying things like Greek government bonds if Syriza move the goalposts. On the economic front the inflation estimates for eurozone inflation out on Friday together with eurozone unemployment for December. UK Q4 GDP figures are out on Tuesday and expected to show an modest increase year-on-year. US GDP reports on Friday. Industrial production figures for heavily industrialised Japan add to the interest in a busy week. The US Federal Reserve announce their decision on interest rates on Wednesday. We expect no change as oil prices keep downward pressure on inflation.
Stocks and bonds across Europe were boosted this afternoon as ECB President, Mario Draghi, announced details of the keenly awaited quantitative easing stimulus programme as the central bank battles to stave of deflation. The EUR 1.1 trillion plan will involve buying eurozone government bonds at a rate of EUR 60 billion a month until September 2016 and possibly longer if inflation shows no sign of reaching the ECB’s target rate of 2%. The size of the programme and the time scale are bigger and longer than the market was expecting. Stocks rose on the news as the Euro fell 1.5% against the US dollar and reached the lowest level against Sterling for seven years at EUR1.31. The 10-year Spanish Government bond yield, which moves inversely to bond prices, hit a record low of 1.46%.
It’s a big week for investment news with this Thursday’s scheduled ECB announcement on interest rates expected to include the much anticipated furthering of asset purchases, or quantitative easing. Whilst the announcement is an almost certainty, the devil will be in the detail. The size of the programme will be expected to be at least £500 billion and hopefully will give some idea of what it is attempting to achieve; possibly an inflation target. Eurozone manufacturing survey data is due same day. We also see the Bank of England minutes of the last interest rate decision. We expect the split to remain 7-2 in favour of keeping rates on hold following the latest fall in inflation despite falling unemployment and rising wages. Labour market figures released same day will throw light on both. Chinese GDP is expected to show a slight fall to 7.2% in the fourth quarter of 2014.
With many forecasters expecting UK December CPI Inflation to come in at 1%, the drop to 0.5% comes as a surprise. Indeed, 12 months ago, something nearer the Bank of England's 2% target was the consensus. Of course, the halving of oil prices has not helped and neither has the ongoing supermarket price wars, both of which, for now, is great for the consumer. Also, as around a fifth of imports comes in from the EU, it is perhaps no surprise that their battle against deflation is now spilling over into UK prices. Markets must now brace themselves for the possibility that inflation falls further in January to around 0.2% which will extend the prospect of interest rates staying lower for longer.
As expected, the halving in the price of oil is having the inevitable effect of lowering prices across the eurozone sufficiently to push the currency union into deflation. Forecasters are expecting the same downward pressure to affect UK inflation figures out on Tuesday where the annualised figure is likely to fall from an already weak 1% to around 0.7%, a new 12-year low. However, news on industrial output and employment out of the USA later in the week will likely show continued economic recovery similar to that being seen in the UK and we do not expect either bad news on eurozone or falling UK inflation to alter the Bank of England's stance delay interest rate rises later in 2015.
Latest unemployment figures in the US today showed a drop to just 5.6% unemployment in the December period. 252,000 new jobs created in December on top of November's 353,000 pushed the total number of new roles created in 2014 to a staggering 2.29million. This has capped what many see as the most encouraging year for US economic growth since pre 2000. Unsurprisingly the S&P is struggling today as investors see this good news as a prelude to a tightening of fiscal policy. Eurozone deflation strengthens calls for full scale Q
Latest eurozone CPI figures have contracted by 0.2% pushing the Euro into a state of deflation. This fall in the consumer prices has been attributed to the continued fall in the price of oil to now less than $50. European economists have widely stated that the biggest call factor for full scale quantitative easing in the region would be increased deflation pressure. It seems now the question for the ECB on the 22nd of January is not if, but, when ECB president Mario Draghi will implement some form of monetary easing contrary to objections from Germanys central bank