What were the major market and macroeconomic events from the past fortnight? This roundup includes The Conservative Party’s election victory, disappointing GDP figures on both sides of the Atlantic, and the developments we can expect later this week.
A shock win for the Conservatives
The Conservative Party has defied the odds in the UK General Election to secure a slender majority of effectively 12 seats (with Sinn Féin not taking their four seats). You can read our views on the election results here and here. The Scottish National Party was always expected to do well following the groundswell of support after the referendum, but the scale of the swing was surprising as they gained another 50 seats in Westminster. Given the devastation that fell upon the Liberal Democrats, who were left with only eight seats, the SNP is now the third largest party in the Commons. It will be interesting to see how they impact Westminster politics.
Markets reacted positively to the outcome of the election, with sterling and equity markets rallying on the news – partly on the relief that we have avoided a period of political limbo. From here the outlook is for a continuation of the current deficit reduction programme, which is expected to have a positive impact on the UK’s public debt situation. However, at some point the issue of the EU referendum due in 2017 is likely to come into focus. This could mean a fresh bout of volatility and pressure on UK risk assets at some point in the future.
UK and US GDP results both fall short
Last week saw the release of GDP figures for the US and UK. Both figures fell short, but the US numbers were a real blow. The US annualised quarter-on-quarter rate was already expected to have slowed from 2.2% to 1.0%, but in reality it was even worse with a slowdown to just 0.2% in the first quarter. Harsh winter weather and a port strike on the West Coast are both possible reasons for the considerably worse showing, although these were already factored in to the already-weaker forecasts.
Of particular concern is the fact that much of the growth, such as it was, was accounted for by inventory building – usually a negative indicator when economies are slowing. Things were less disappointing in the UK, where Q1 GDP slowed to 2.4% year on year from 3.0% previously (but still weaker than the 2.6% expected).
Last fortnight’s other events
- US non-farm payrolls rebounded in April from March’s shockingly poor results that caused ructions in the market. 223,000 jobs were added in April, up from 85,000 in March. Unemployment fell as expected by 0.1% to 5.4%. However, in a familiar story month-on-month earnings did not pick up as hoped – up just 0.1% rather than the expected 0.2%.
- Initial Japanese industrial production figures were better than expected. Although the measure was still down -0.3% month on month in March, this was ahead of expectations for -2.3% and a noted improvement on February’s -3.1% figure.
- European business confidence ticked up to 0.32 from 0.23 but industrial sentiment lowered marginally from 103.9 to 103.7. Unemployment was little changed at 11.3% while inflation was flat at exactly 0.0%.
- In the UK manufacturing PMI figures unexpectedly fell from 54 to 51.9 – remaining in expansionary territory but a strongly negative surprise for the economy.
- The Chinese producer price index continued to fall, and was down 4.6% year on year in April. This prompted The People’s Bank of China to cut rates again by 25bps to 5.1%, while simultaneously relaxing certain controls around interest rates as part of another step towards market liberalisation.
The effects of the General Election were seen in the sterling and UK equity markets, but how did the other asset classes perform over the past two weeks?
- Equities – After softening in the lead up to the General Election the UK equity market surged 2.4% on Friday, putting the markets only slightly down for the fortnight at 0.5% lighter overall. US markets were similarly flat, down just 0.08%. Japanese markets were closed for a number of public holidays in the last two weeks, and were 1.9% weaker by the end of the fortnight.
- Bonds – Core sovereign yields continued to soften throughout the period. US 10-year Treasuries were above 2% at 2.10%, with most of the move in the first half of the fortnight. UK 10 year gilts were at 1.90% while German 10-year Bunds, having flirted with negative rates a few weeks ago, were back out at 0.50%.
- Commodities – Oil remained fairly stable over the fortnight. Brent Crude range traded between US$65-70 to end the week at US$65.35 per barrel, whereas WTI finished at £59.27. Copper firmed up to close at US$2.93, while gold slipped back below the US$1,200 mark to finish at US$1,189.10.
- Currencies – Although sterling dipped just ahead of the election and rebounded postfact, it was relatively rudderless in the period leading up. The biggest move over the fortnight was euro strengthening, which was up 3.0% against the US dollar and 3.6% against the yen (the latter was generally weaker across the board)
The week ahead
The Eurogroup will meet again today with Greece likely to be the main focus. Despite the sidelining of the confrontational finance minister, there has been little tangible progress and it is unknown exactly how long the government can keep going with its current reserves. Early morning on Tuesday sees Japan release its Leading Composite Index, followed by Manufacturing and Industrial Production figures for the UK.
We have a relatively busy midweek, beginning in China with Fixed Asset Investment, Industrial Production and Retail sales figures on Wednesday morning. Later on we have flash GDP figures for the Euro area, which are forecast to have accelerated from 0.9% to 1.1% year on year. In the UK we also have unemployment data and earnings numbers, while the US releases retail sales figures in the afternoon.
The week finishes with consumer confidence numbers out of Japan, then on Friday afternoon the US provides updates for capacity utilisation, industrial production and the Michigan Consumer Sentiment survey. After several months of softening, overall expectations are for fairly flat numbers from the month before.