Friday January 25, 2013 - 15:55:01 GMT
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ECONOMIC DATA ANALYSIS - EQUITIES REACH MULTI-YEAR HIGHS
ECONOMIC DATA ANALYSIS FRIDAY 25 JANUARY 2013
EQUITIES REACH MULTI-YEAR HIGHS
• The FOMC announcement, Q4 GDP and payrolls make it an important week for the US
• UK broad money growth turning higher
• Euro area inflation expected unchanged, but unemployment to set new high
Equities reach multi-year highs ... Equity markets continued their recent rally this week. The S&P 500 reached a post December 2007 high, buoyed by developments in the debt ceiling negotiations. In Europe, stocks reached their highest since the intensification of the euro area crisis two years ago, lifted by survey evidence from Germany. And in the UK, the FTSE 100 reached a near 5-year high and the higher beta FTSE 250 set an all-time record, despite the larger-than-expected drop in Q4 GDP.
US Q4 GDP to disappoint ? ... Focus in the coming week will be on the US. Increasingly, Congress appears to be inching towards a debt ceiling extension until May. This defers a major showdown, but risks prolonging the period of fiscal uncertainty, which could weigh on investment and hiring. While watching these developments, the coming week provides key updates, including Q4 GDP, January’s payrolls report and January’s ISM index. Q4 GDP looks set to be depressed by hurricane Sandy and ‘fiscal cliff’ concerns as well as weakening trade and an unwinding inventory effect. In all, we forecast GDP growth of around 1% (saar) - a little softer than consensus. Q1 should see some acceleration, with several of these effects passing and rebuilding starting after Sandy. However, the increase in payroll taxation (part of the ‘fiscal cliff’ deal) is likely to limit the upside. Friday’s ISM release will help gauge the scale of any pick-up. We forecast it to be effectively unchanged at 50.6.
Labour market and the Federal Reserve ... Despite the soft growth outlook, US payrolls growth remained firm at 150k/month in Q4. We expect this to continue in January, forecasting a 166k gain and the unemployment rate at 7.8%. This will likely be the key take-away for the Federal Reserve. Its two day meeting over the coming week is unlikely to deliver any further policy change after December’s increase in the pace of open-ended QE to $85bn/month. With no press conference this time, we await Fed Chairman Bernanke’s semi-annual testimonies to Congress in February for a fuller update. The outlook for monetary policy is now explicitly tied to labour market developments. With growth expected at 2.1% across 2013, payrolls growth should accelerate. However, unemployment looks set to fall only slowly, which is likely to keep the Federal Reserve buying assets across the course of this year.
Watching for FLS related improvements ... Domestically a relatively quiet week leaves M4 broad money supply and the Bank’s consolidated mortgage lending numbers the main focus. Both are expected to show evidence of improving lending conditions driven, in part, by the FLS. Alongside a further improvement in M4, we expect mortgage approvals to usher a solid rise in mortgage lending. Additionally we pencil in a modest retracement in January’s manufacturing PMI, but this reflects the scale of last month’s increase, rather than suggesting a faltering trend. Surveys point to a return to manufacturing growth in Q1, which should help the UK avoid a ‘triple dip’ recession.
Labour market to reflect weaker activity ... The euro area events calendar is also light with the focus on inflation and unemployment. Our global team forecast inflation to remain at 2.2% as administered prices and indirect taxes rise. Unemployment is forecast to reach a new record at 11.9%, following Spain’s recent jobless rise to a new high of 26%. This is a reminder of the scale of the economic challenge the euro area still faces, even as the financial crisis recedes. The latter should bring about improvement in the former. But a persistent lag in economic progress risks renewing financial difficulties.
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