MARKET UPDATE: UK SET FOR ANOTHER ‘SUPER THURSDAY’

MARKET UPDATE: UK SET FOR ANOTHER ‘SUPER THURSDAY’

5th February 2018

LAST WEEK – KEY TAkeAWAYs

Mixed news for UK economy…

Economic think tank, the EY Item Club, has upgraded its growth forecasts for the UK economy, lifting its gross domestic product (GDP) estimates for 2018 to 1.7%, up from the 1.4% predicted in October. It acknowledged that growth was better than expected in 2017, and it expects this momentum to carry into this year. However, the latest IHS Markit purchasing managers’ index (PMI) data for the manufacturing, construction and services sectors all disappointed for January. The surveys question firms on measures such as new orders, hiring and inventories to gauge the health of various sectors.

… As UK consumer confidence improves

UK consumers have started the year with a rosier outlook as the widely followed GfK consumer confidence index climbed 4 points to -9 in January. This was a boon to economists, who had predicted no change with the reading holding at -13. However, the index still remains in negative territory and is likely to stay that way while UK wage growth remains below inflation.

Eurozone on the rise

The eurozone continues to impress having grown at its fastest rate in a decade in 2017, according to Eurostat data. It reported that GDP expanded by 2.5% in the bloc last year, which represented the most rapid rate of growth since the 3.4% achieved in 2007. Further good news came from the latest composite purchasing managers’ index (PMI) from IHS Markit, which showed that output from private companies in the eurozone grew at the fastest pace for nearly 12 years during January. 

US wage growth accelerates 

Growth in average hourly earnings in the US registered at 2.9% for January. This was the strongest year-on-year gain since 2009 and, with the economy close to full employment, it suggests that employers are having to increase pay in order to attract scarcer labour.

German coalition talks pass another deadline 

There was further progress in negotiations between the chancellor Angela Merkel’s CDU/CSU and the Social Democrats (SPD) last week, though the two sides missed their self-imposed deadline to forge a new government by Sunday. Discussions have already resumed this week, with the main talking points being disputes over healthcare and labour policy. 

Looking ahead - TALKING POINTS

UK set for another ‘super Thursday’

This week, the Bank of England (BoE) takes centre stage for ‘super Thursday’ as its Monetary Policy Committee (MPC) will vote on whether to move interest rates, and we will also see the release of its quarterly inflation report and minutes from the MPC’s last meeting. The BoE is expected to hold interest rates at 0.5% for now, while the EY Item Club (as mentioned above) forecasts two rate rises later in May and November – the think tank expects rates to hit 1.25% in 2019.

Interest rate policy is the BoE’s primary mechanism for controlling inflation. The headline inflation figure stood at 3% in December, continuing to overshoot the Bank’s 2% target, though it is expected to fall back this year. Inflation has in part been caused by weakness in the pound, which led to increases in the cost of imports, but more recent strength in the currency should mean UK consumers begin to see slower price rises.

UK CPI inflation rate (%) – January 2014 to December 2017

 Cpi _feb _18

Source: Office for National Statistics, Tradingeconomics.com

Industrial production data due

Another widely watched measure of economic performance, industrial production data is due from Germany, France, Italy and the UK this week. The industrial sectors covered are manufacturing, mining and utilities, and although they often only contribute a small portion of a country’s gross domestic product (GDP), these are highly sensitive to moves in interest rates and consumer demand. As the eurozone’s largest economy, analysts are keen to see how well Germany is holding up – its industrial production rose 3.4% month-on-month in November, easily beating market expectations.

Italy’s output increased by 2.2% in the same month, while France is looking for a positive figure with its industrial production having shrank by 0.5%. On a year-on-year basis, the November figure for the UK was up 2.5%. Looking specifically at manufacturing, the Office for National Statistics reported last month that output is expanding at its fastest rate since before the financial crisis in early 2008.   

UK industrial production index – December 2016 to November 2017

 Rsz _uk _industrial _production

Source: Office for National Statistics, Tradingeconomics.com

THE OMNIS VIEW

Through a well-diversified approach to asset allocation, the Omnis investment team aims to defend and grow the value of your portfolio through market cycles. For all the efforts of central banks, inflation has remained stubbornly low in the post financial crisis era. However, robust data – most noticeably in the US labour market – are beginning to challenge this trend. Having become accustomed to a low inflation and low interest rate environment, the market’s reaction to this challenge is likely to dictate investor outcomes over the coming months. The Omnis investment team continues to run diversified portfolios that seek to balance this risk against what, for the most part, remains an encouraging economic backdrop.

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