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  • Weekly macroeconomic and market update 09 March 2015

Weekly macroeconomic and market update

Here we give you a roundup of the major macroeconomic and market events for the week ending 6 March. This week’s review includes the latest news from the European Central Bank, recent changes in interest rates from the likes of Poland and India, and the performance of every major asset class last week.

The latest updates from the ECB

Last week, the European Central Bank (ECB) confirmed that asset purchases would begin today (Monday), whilst also clarifying that the lower limit for purchased yields would be -0.2%, the ECB’s current deposit rate. ECB President Draghi also reported upgraded Eurozone growth forecasts on the back of EQ and the fall in oil prices, with forecasts for this year up 50 bps to 1.5%, then 1.9% for next year and 2.1% for 2017.

Inflation forecasts were revised in line with these changes, down to 0% for this year, then 1.5% and 1.8% thereafter. But despite these positive changes, Draghi was quick to stress that there were “no grounds for complacency” and reminded governments that reforms were still needed. Only time will tell whether European governments will take heed now that the pressure appears to be off.

UK economic figures show continued strength

Economic activity measures in the UK continued to show signs of strength – the CIPS Manufacturing PMI reading of 54.1 beat the 53.4 forecast, and Construction PMI was up at 60.1 against the expected 59. Services PMI numbers unexpectedly slowed to 56.7 against predictions of 57.5, but readings across the board were significantly ahead of the 50 mark (indicating further economic expansion).

US numbers remain mixed

In contrast to the strong showing in Europe, numbers out of the US remained mixed. Friday’s non-farm payroll headline figures showed a surprise acceleration, adding 295,000 jobs from 239,000 in January despite an expected moderation to 225,000. Unemployment also improved ahead of expectations, falling to 5.5% from 5.7% previously. However, despite these employment numbers showing improvement, average earnings once again barely moved. They were up just 0.1% month-on-month, casting some doubt over the apparent recovery in the labour market.

Last week’s other events

  • Eurozone GDP growth for the fourth quarter came in at an expected 0.3% quarter-on-quarter, for a full year growth rate of 0.9% for 2014.
  • At the National People’s Congress meeting, Chinese Premier Li Keqiang announced a reduction in the GDP growth target to around 7% compared to 7.5% previously, whilst also reducing the inflation target to around 3% from 3.5%.
  • India surprised many with a 25 bps interest rate cut at an unscheduled meeting, leaving the official policy rate at 7.5%. The central bank cited easing inflation conditions as the main reason for the cut. Inflation is now running at 5.1%, in line with the bank’s aim of reducing inflation to below 6% by the end of the year – before reducing the rate further to roughly 4% (with admittedly wide margins).
  • Poland also joined the club and cut interest rates, exceeding expectations with a 50 bps cut to 1.5% (versus a predicted cut of 25 bps). Poland has achieved reasonable economic recovery, but inflation continues to fall (-1.3% CPI in January) and the central bank is likely to worry about Eurozone quantitative easing pushing up the zloty relative to the euro.
  • The price of oil fell sharply, as it was revealed that US crude oil inventories were up by 10.3 million barrels in the week to 27 February and well ahead of expectations. According to the Energy Information Administration this brings inventory levels to 444.4 million barrels, the highest level on record. There is also only limited capacity left, which could add serious further downward pressure on the price.
  • The Institute of Supply Management’s US manufacturing measure slipped slightly more than expected to 52.9 from 53.5 in January, indicating a slowing down of the growth rate. Furthermore, inventories increased as other sub-measures (employment, production and new orders) fell – which could be taken as a yellow flag. Non-manufacturing PMI figures provided some relief though, beating expectations with a rise to 56.9.
  • Eurozone headline inflation was slightly better than expected, containing the largely oil-driven fall to 0.3%, whilst core inflation came in as expected at +0.6%. Against a supportive inflation background, Eurozone retail sales were considerably better than expected, increasing to 3.7% year-on-year from 3.1% the month before and well ahead of an expected slowdown to 1.9%.

The markets

Last week was relatively poor for the major asset classes as equities, bonds and commodities all suffered. Currencies were mixed, with the US dollar strengthening and the euro weakening.

Graph 09-03-2015

Equities – Many equities indices returned some of their recent gains, with the S&P 500 down 1.6%, the FTSE Europe (ex-UK) slipping 2.1% and the FTSE All Share down 0.4%. Emerging markets also suffered, with the FTSE All Emerging Index returning -2.7% on the week. The only notable advance came from Japan, which rose 1.1% over the week.

Bonds – Bonds also suffered last week, most acutely in the US given the fresh focus on Fed rate hikes, with US 10-year treasuries 25 bps higher at 2.25%. UK 10-year gilt yields continued to expand, up to 1.95% from 1.8% at this time last week. In Europe, events were more nuanced given the imminent launch of the ECB’s QE programme. 10 year bund yields increased slightly to 0.39%, but conversely shorter-maturities moved deeper into negative territory.

Commodities – Last week was a volatile week for oil, as markets continue to shift their focus between the supply outlook and current inventory levels. Brent crude was weaker over the week, slipping back below $60 to finish the week at US$59.73/barrel. Copper fell through the week, ending at US$2.63 as the Chinese authorities lowered their growth outlook. Gold was also weaker, finishing at US$1,160 after reacting particularly badly to data from the US.

Currencies – The US dollar strengthened steadily through the week, with a surge on Friday following the payroll numbers. It is now up 2.64% against sterling at US$1.50/£. Conversely, the euro weakened against other major currencies.

The week ahead

This afternoon will see the release of the US labour market conditions index, which should give us some further food for thought. Chinese inflation numbers will then be announced overnight, followed tomorrow afternoon by the JOLTS US job openings report and Japan’s Machinery orders – which we expect to have fallen significantly from last month (an expected fall of 4.1% from an 8.3% increase).

On Wednesday we will see UK manufacturing and industrial production figures, both of which are expected to be stronger at 2.7% and 1.3% year-on-year respectively (from 2.4% and 0.5% last month). China will also release its latest industrial production and retail sales figures. These are followed on Thursday by Eurozone Industrial Production figures, which we expect to show an increase from -0.2% year-on-year in February to a marginally positive 0.1% this month.

We finish the week with PPI data from the US, which in line with other measures is expected to increase from -0.8% to 0.3%. Other events include the Michigan Consumer Sentiment survey output and the release of the IEA’s monthly oil market report.

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