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ECONOMIC DATA ANALYSIS - UK ECONOMY ON THE MEND
ECONOMIC DATA ANALYSIS FRIDAY 19 JULY 2013
UK ECONOMY ON THE MEND
• Central bankers in the US and UK soothe bond market nerves
• UK Q2 GDP forecast to rise by 0.5%q/q with risks to the upside
• Political tensions in the euro area periphery, amidst early signs of stabilization
Central bankers calm rate fears... With July shaping up to be the hottest month in over a hundred years, fears that bond market anxiety might boil over have been doused over the past week by further calming words and actions from central bankers. In testimony to Congress, Chairman Bernanke went out of his way to manage interest rate expectations lower. In the UK, the minutes of Governor Carney’s first MPC meeting provided an insight into how the policy debate has shifted - away, it seems, from QE, towards the possibility of other forms of stimulus, including the likely announcement of forward guidance next month. Lastly, in China, recent signs of economic weakness prompted the central bank to remove the floor on lending rates to help stimulate credit growth. Bond yields fall and S&P continues to soar... In response to the past week’s developments, bond yields have continued to drop back, with the 10- yr Treasury at 2.5% and 10-yr gilt at 2.3%. Improved bond market sentiment and generally positive US earnings propelled equities, with the S&P rising within touching distance of 1,700 for the first time. The FTSE approached the end of the week up around 1% at 6,600, while sterling was above $1.52 and €1.16, supported by a broadly weaker US dollar and firmer UK data.
UK economy on the mend... In the UK, the coming week’s economic calendar is dominated by one single release: preliminary Q2 GDP on Thursday. There is little doubt that the UK economy has improved in recent months, corroborated by the resilience of the past week’s retail sales and labour market figures. Following a 0.3% gain in Q1, we are pencilling in a rise of 0.5% in Q2, with the risks biased to the upside. A 0.6% rise in Q2 GDP is anticipated by the BoE. As such, an outturn around this is unlikely to significantly alter their deliberations at next month’s MPC meeting where the focus is likely to remain, not so much on the pace of recovery, but the degree of slack.
Japan election and US Q2 earnings... Over the coming week, international focus will be on the Upper House elections in Japan (Sunday). Polls suggest PM Abe’s LDP/New Komeito coalition are set to win a majority. If so, this should pave the way for structural reform (the ‘third arrow’ of Abe’s economic strategy, along with monetary and fiscal stimulus). In the US, the Q2 earnings season continues, with statements from bellweathers including Haliburton and MacDonalds (Mon), Apple (Tues), and Boeing and Ford (Weds).
Housing and shipments to inform Q2 GDP... While the Fed will take comfort from the recent drop in bond yields, event risk looms large. US Q2 GDP, the July FOMC meeting and the July jobs report are all due the week after next. These could well shape market sentiment for the rest of the summer. Ahead of the US GDP release, the coming week’s home sales and durable goods/shipments data will be watched. In June, building permits posted a surprise fall of 7.5% - their sharpest one-month fall since July 2008. However, sales of both new and existing homes are forecast to have reached new multi-year highs. The US durable goods orders and shipments data will provide a steer for capital spending in both Q2 and Q3.
Its politics not economics... In the euro area, recent economic data suggest the euro area as a whole is starting to stabilise. In keeping with this picture, the coming week’s July business surveys, including the ‘flash’ PMIs and German IfO survey, are expected to remain broadly unchanged. The data will be closely watched for recovery signs at the start of Q3. But focus at the moment is on politics, not economics, where instability in the periphery threatens to re-ignite market tensions
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