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  • Weekly macroeconomic and market update 16 February 2015

Weekly macroeconomic and market update

Here we give you a review of the major macroeconomic and market events for the week ending 13 February. We discuss political unrest in Greece and Ukraine, the latest movements of the oil price, and what we can expect over the next seven days.

Political tension in Europe

All eyes were on Europe last week, with two major political meetings and a number of notable economic releases. Eurogroup ministerial talks with Greece collapsed mid-week with no visible headway made – a clear indication of how far apart the two sides are. Not only did the participants fail to agree on an outline for future talks, they were unable to agree on a joint press release for the meeting itself.

However, all is not lost and a follow-up meeting is planned for later today (16 February). There are suggestions that back-channel discussions continued after last week’s public bust-up, which could pave the way for more productive negotiations this afternoon.

Elsewhere in Europe, there was an apparent breakthrough in talks between Russia, Ukraine, France and Germany to introduce a ceasefire between government and rebel forces in Ukraine. Last September a similar ceasefire failed to hold, so it remains to be seen whether things will be different this time round. However, a successful negotiation would be the first step to easing tensions in the region that have led to economically-crippling sanctions on Russia – which is also struggling in the face of weak oil prices.

GDP estimates and the price of oil

Away from politics, early European GDP estimates surpassed expectations. This was mainly driven by the strong outperformance of Germany, which achieved 0.7% quarter-on-quarter growth in the final quarter (compared to estimates of 0.3%). This meant growth of 0.3% for the region during the quarter, (ahead of an expected 0.2%), and estimated full-year growth of 0.9% (ahead of an expected 0.8%). But despite these figures, optimism was nonetheless dampened by a failure to meet the Eurozone industrial growth forecasts.

Last week’s other major news was the continued recovery of the price of oil, which was above $60 per barrel for Brent oil at market close on Friday. This was largely driven by fresh data showing another fall in the US oil rig count, down by 84 rigs to 1056 at the end of last week. The number of active US rigs is now more than 25% lower than a year ago, and coupled with announcements of project abandonments and layoffs across the energy industry, points the way to a serious reduction in supply. Despite this, we believe there may be a natural limit to the potential short-term price rebounding, as US inventory levels remain high and the production of shale oil can be re-started very quickly if necessary.

Last week’s other events

  • There were further signs of weakness in China as January’s inflation reading slipped to 0.8% year-on-year. Trade data also deteriorated sharply – exports slipped 3.3% and imports fell 19.9%. Although data in this period can be distorted by the variable timing of the Chinese New Year, they clearly support a picture of significant Chinese economic slowdown.
  • We saw another mixed bag of data in the US, with employment numbers confirming the trend in non-farm payroll data earlier this month – fresh highs in new job openings and an increase in new initial claims. Other figures showed retail sales falling further (by 0.8% against an expected 0.4%), and a weakening of consumer sentiment according to the Reuters/University of Michigan index (to 93.5 from 98.1).
  • Sweden was the latest Central bank to switch to a negative interest rate, with the Riksbank announcing a cut in the main repo rate from 0 to -0.10% as the country continues to battle deflation.
  • UK economic releases were mixed. Retail sales disappointed at 0.2% year-on-year (against 0.5% expected), but manufacturing production numbers were a positive surprise at 2.4% year-on-year (against 2.0% expected). Industrial production met expectations with 0.5% annual growth.
  • There were further signs of economic growth in Japan. Key machinery orders rebounded aggressively from -14.6% to 11.4% year-on-year, well ahead of expectations of 5.6% growth. Reports in the Japanese press also suggested that the Bank of Japan was reconsidering becoming more aggressive with its monetary policy. However, the GDP print disappointed with fourth quarter growth significantly below expectation at 2.2% annualised – although this does bring the economy out of its brief recession.

The markets

We have seen another strong week for risk assets, with equities stronger and bonds mostly weaker, although Eurozone worries kept German Bund yields constrained.

graph 16-02-2015

Equities – The S&P 500 hit all-time highs on Friday, closing at 2,096.99 with a 2.02% gain on the week. The FTSE All-Share was also up 0.41%, the FTSE Europe ex-UK was up 2.49%, and the Topix was up 1.47%. We also saw the effects of recovery in Russia following the Ukraine ceasefire – Asia Pacific equities (excluding Japan) grew 0.92% in the week, and emerging markets were up 1.59% (both FTSE All World Indices).

Bonds – UK, US and Japanese government bond yields were all wider on the week. US 10-year treasury yields were 11 bps higher at 2.05%, and Japanese yields on the same maturities were also up 9 bps to 0.43%. The UK equivalent grew more modestly, widening 3 bps to 1.69%, and German Bunds closed just 1 basis point to 0.36% as a result of tensions in Europe.

Currencies – Major currency movements were relatively muted, with sterling generally stronger (+1.16% versus the dollar), and the US dollar broadly weaker (-0.77% versus the euro and -0.27% versus the yen).

Commodities – The price of oil strengthened over the past seven days, up more than 5% for Brent crude which rallied aggressively towards the end of the week and finished at US$61.52 on Friday. The price of copper was marginally up at US$2.61, while gold was slightly softer.


The week ahead

As well as the latest updates to the Rightmove House Price index, this afternoon will see a further Eurogroup meeting on Greece – with time very much starting to run out for the region. Tomorrow’s focus will be UK inflation figures – we are expecting a sharp month-on-month fall (-0.8%) leading to a drop in the year-on-year figure to 0.4%.

Wednesday brings us more insight into Central bank thinking – minutes from the Bank of England and Federal Reserve meetings are released, as well as the outcome of the latest Bank of Japan policy meeting. Minutes from the ECB are expected to follow soon after on Thursday. The week culminates with new insight into UK retail sales, and Eurozone Flash PMI figures for Manufacturing, Services and the Composite – where further expansions are expected.

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