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  • Weekly macroeconomic and market update 23 February 2015

Weekly macroeconomic and market update

Here we give you a review of the major macroeconomic and market events for the week ending 20 February. We discuss economic recovery in the Eurozone, the ongoing saga surrounding Greece, and what we can expect between now and Friday.

Economic growth in Europe and the US

Last week’s data continued to suggest economic recovery in Europe is gaining traction. European flash composite PMI measures of business activity beat expectations with a reading of 53.5, comfortably ahead of the reading of 50 that indicates economic expansion. Eurozone economic sentiment (as measured by the ZEW survey) was also encouraging, showing an increase from 45.2 to 52.7 over the month led by a particularly strong Germany.

In the UK, employment data provided a boost to the economic outlook by offsetting weakness in the latest retail figures. Average earnings were surprisingly positive, with growth of 2.1% accelerating from last month’s 1.8% (against expectations of a slowing to 1.7%). There was other encouraging news as unemployment levels fell to 5.7%.

In the US, the data generally disappointed but have remained in expansionary territory. The latest reading of the Philadelphia Federal Reserve index of manufacturing showed activity slipping from 6.3 to 5.2 this week, despite expectations of an acceleration to 9. The broader industrial production measure also showed month-on-month growth of 0.2%, just shy of the 0.3% expected. Capacity utilisation failed to pick-up as hoped, instead holding steady at 79.4%, and new housing starts slowed more than expected.

The Eurozone saga continues

After yet another dramatic collapse in talks on Monday, Greece submitted a formal request for a financing extension on Wednesday – only to have it almost immediately rejected by the hard-line German finance minister. A deal was finally struck late on Friday, as the Eurozone once again demonstrated it can only really get things done once the pressure is suitably intense.

The Greek government has submitted a tentative proposal for a four-month extension, which we’re told is very similar to the existing bail-out programme. This looks a lot like a humiliating climb-down by the Greek government, with the German finance minister reportedly commenting: “The Greeks certainly will have a difficult time to explain the deal to their voters.”

However, the deal is far from set in stone – it was closer to a promised outline of a deal which is being submitted to creditors on Monday. Reports suggest a rather qualitative proposal which lacks much in the way of hard numbers. Considering that the bail-out package finishes at the end of the week, there is still time for more theatrics from Brussels and Athens.

Last week’s other events

  • The Rightmove UK house price index showed growth in prices of 6.6% over the past year, down slightly from 8.2%.
  • Elsewhere in the UK, headline inflation fell more than expected (-0.9% month-on-month compared to -0.8% expected). This was largely driven by falls in energy and food prices – what some are calling ‘good’ deflation. In contrast, the core measure of inflation actually increased from 1.3% to 1.4%.
  • The minutes from the Federal Reserve meeting were more dovish than many expected, with concerns that simply dropping the language of ‘patience’ from the press release could trigger an adverse market reaction. However, it should be remembered that the meeting took place before the recent strong employment numbers, and at the meeting ‘several’ members expressed concern over the risk of excessively loose monetary policy if the rate hike is left too long.
  • The ECB released another €3.3 billion in emergency liquidity to keep Greece ticking over, with reports suggesting €200-300 million a day is being withdrawn from banks. However, the amount was less than hoped for and conditions are being kept tight.

The markets

This week we saw increases for equities but mixed results for bonds, along with further fluctuations in the price of oil and a noticeable lack of change for most currencies.

Graph 23-02-2015

Equities – The S&P 500 once again made all-time closing highs, finishing 2,110 on Friday and up 2.66% on the week. Japanese equities were also strong, up 3.49% on the week. The UK and Europe lagged slightly – the FTSE All-Share index was up 0.71%, while Europe (ex UK) was up 0.85%. Conversely, emerging markets slipped 0.34% (FTSE All Emerging) and the Asia Pacific region (excluding Japan) was flat.

Bonds – Government bonds generally continued to ease. UK 10 year gilt yields were 9 bps wider at 1.78%, and US 10 Year Treasuries also increased 10 bps to 2.12%. With the ongoing Eurozone issues, German 10 year Bund yields moved 3 bps to 0.39%. Japanese 10 year bonds actually tightened 4 bps to 0.39%.

Currencies – The Japanese yen was weaker through the week, falling 0.31% against the sterling. Most other major currencies were relatively unchanged.

Commodities – Oil was weaker, with Brent crude briefly falling below US$60 per barrel mid-week before finishing fractionally above this level on Friday. Copper ended the week on $2.62, as gold fell below $1,200 per ounce.

The week ahead

The week ahead should be fairly quiet, although ongoing talks over Greece mean the prospect of further emergency meetings remains. On Monday we will see more sentiment data out of Germany in the form of the IFO survey results, which we expect to improve with a rise in the IFO ‘Expectations’ index from 102 to 103 this month.

Tuesday will see Eurozone inflation revisions released, as well as speeches from European Central Bank president Mario Draghi and Chair of the Federal Reserve Janet Yellen. Both have further public engagements on Wednesday, with Draghi giving testimony to the European parliament and Yellen speaking at the House Financial Services Committee.

On Thursday the US releases inflation data, while on this side of the Atlantic the Eurozone M3 money supply data are also released. Thursday finishes with a slew of Japanese economic data including inflation and household spending, before a quiet end to the week with only the Bank of Japan minutes due on Friday.

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