A strong showing for the UK consumer – weekly update 25 March

A look back over macroeconomic and market events for the week ending 22 March 2019. Core sovereign bond yields tumbled amid weak PMI data and a more dovish Federal Reserve (Fed), whilst equities remained fairly resilient. We also had strong consumer-related data out of the UK. The week ahead is fairly quiet on the data front, though some of the survey data are likely to be of interest.

Ben Seager-Scott Ben Seager-Scott
25 March 2019

A strong showing for the UK consumer

It was another strong showing for the UK consumer, with sustained spending appetite apparent in the retail sales figures, enabled by continuing strength in wage growth. Average weekly earnings growth in February stood at 3.4% year on year (yoy), a slight dip from the upwardly revised 3.5% reading in January, but ahead of the 3.2% expected (though stripping out bonuses the rate was unchanged at 3.4% as expected).

Perhaps on the back of this strong wage growth, consumers continued to spend through February, defying expectations for more of a season blip. Retail Sales growth was 4.0% yoy compared to forecasts for 3.3% (though slightly lower than the 4.1% seen in January). We will need to see whether the resurgent consumer – after years of weak wage growth and Brexit-induced inflation – signals a bounce for the economy, or whether broader weakness will start to erode the enthusiasm (and, quantitatively, the wage growth rate).

The Fed turns even more dovish

The US Fed turned even more dovish at its latest meeting, abandoning any forecast for a rate increase this year (compared to expectations for 3 in 2019 made just six months ago) and only one next year. The terminal rate forecast has fallen to 2.75% as the upper bound, meaning the Fed sees rates as pretty much ‘normalised’ for this cycle – at least as we stand today.

Conversely, the Bank of England gave little of particular interest, apparently in a holding pattern until there is further clarity on the Brexit outcome. It seems likely that an orderly Brexit would result in one or two ‘catch up’ interest rate increases over the next couple of years, whilst a disorderly Brexit is likely to require fresh stimulus.

Fresh concerns over the global economic outlook

Global Purchasing Manager Index (PMI) survey results raised fresh concerns over the economic outlook, with poor US data and even more disappointing Eurozone readings. Starting with the Eurozone, even though the Services PMI number held up reasonably well (dipping from 52.8 to 52.7 as expected), the Manufacturing reading fell considerably deeper into contractionary territory, from 49.3 to 47.6 (a mild improvement to 49.5 had been expected). Of particular note is the fact it was Germany, the Eurozone economic powerhouse, that dragged the reading down as its Manufacturing PMI reading fell 3 points to 44.7, the lowest since 2012 on the back of a range of concerns, including the risk of auto tariffs and softer global demand as well as the broader political and trade uncertainties.

In the US, the Manufacturing PMI from Markit showed a deterioration from 53.0 to 52.5 (an improvement to 53.5 had been expected), whilst the Services PMI reading fell from 56.0 to 54.8, worse than the 55.5 expected, though at least the US remains fairly comfortably in expansionary territory. As forward-looking measures, these disappointments are likely to be even more closely watched as we wait to see whether policy changes over the last few months will be able to restore broader economic growth.

The Brexit saga rolls on

In UK politics, the Brexit saga rolls on, and what had been a softer Brexit outlook took a somewhat hardening turn last week, with no request or offer for a long Brexit extension and the latest attempt to bring Theresa May’s deal back for a vote effectively blocked by the speaker.

However, short extensions of a couple of weeks or months are now in the offing, and the moves pushed the pound back to the US$1.30 level that, as a very rough rule of thumb, is considered the ‘neutral’ level for hard versus soft Brexit.

Last week’s other events

  • Japan’s CPI inflation was unchanged at 0.2% yoy (0.3% was expected), whilst Manufacturing PMI was unchanged at 48.9. Sales in supermarkets contracted -2.5% yoy in February, but this was an improvement on the -3.4% reading previously.
  • UK unemployment dipped from 4.0% to 3.9% (no change had been expected). Inflation had very small surprises to both the up and downside. CPI inflation rose from 1.8% to 1.9% yoy whilst Core CPI fell from 1.9% to 1.8% yoy (no change had been expected in either).
  • The ZEW survey for the Eurozone showed that expectations had improved, with the -16.6 February reading rising to -2.5 for March. Consumer Confidence was marginally improved, from -7.4 to -7.2 (-7.1 was expected).

The markets

Dovish Central Banks and the poor PMI data worried markets last week, pushing core sovereign bond yields lower and hitting equities at the end of the week after what had been a fairly quiet week until then.

One-month performance of major asset classes in sterling terms

Equities

European equities were hit the hardest, as the Europe ex-UK index fell -1.8% by the end of the week, mostly on Friday. Other major markets were less impacted. In the US equities fell -0.8% and UK equities also fell -0.5%. Japanese equities made a positive return of 0.8% whilst the Emerging Markets index was also in the black, up 0.4% (all indices are MSCI measures, in local currency terms on a total return basis).

Bonds

10-year gilt yields fell dramatically, down 20 basis points (bps) to close at just 1.01% on Friday. 10- year US Treasury yields were 15 bps lower to 2.44% inverting even more parts of the curve (though not yet the 2s10s), whilst the equivalent German bund yields turned negative, falling 10 bps to -0.02%.

Commodities

Oil made a round trip on the week, moving from just over US$67 per barrel, up to US$68.50 before falling back to close the week roughly where it started at US$67.03 (Brent Crude measure). Gold continued to strengthen, rising to US$1,314 per ounce whilst copper softened to US$2.84 per lb.

Currencies

Sterling was generally softer across the board last week as the Brexit outlook hardened, whilst the Japanese yen was notably stronger. Sterling closed on Friday at US$1.32, €1.17 and ¥145.

The week ahead

There’s not a huge amount to look out for this week. The main focus is likely to be on Friday when the US releases the PCE inflation measure (which is closely followed by the Fed), as well as US income and spending activity data. Thursday’s Eurozone business confidence measures could also provide interesting data, given the weak PMI data last week. The daily breakdown is as follows:

Monday: Japan reports the All Industrial Activity Index early in the morning, and then later in the morning the IFO survey results for German business sentiment are released. In the afternoon, the US gives us the Chicago Fed’s National Activity index and the Dallas Fed’s Manufacturing Activity index.

Tuesday: There’s little of note due out in the morning, whilst in the afternoon US housing starts data are released, as well as the Richmond Fed’s Manufacturing index reading and the Conference Board’s Consumer Confidence measures.

Wednesday: Wednesday is particularly quiet on the scheduled data front, with nothing of particular note.

Thursday: Things start picking up from Thursday. In the morning, the Eurozone reports on the latest business sentiment survey results, and then in the afternoon the US fourth-quarter GDP data estimates will be updated. In the afternoon, the Kansas City Fed releases its Manufacturing Activity index, and then later in the evening Japan reports its Jobless rate and the latest Industrial Production activity rate.

Friday: We start in the UK, with the GfK Consumer Confidence and Lloyds Business Barometer readings released. Later in the morning UK consumer credit activity is reported as well as the latest updates to the fourth-quarter GDP estimates. In the afternoon, the US releases Personal Income (0.3% mom from -0.1% expected) and Personal Spending (0.3% mom from -0.6% expected) as well as PCE inflation (1.3% yoy from 1.7% is forecast). 

Important information

Data correct as at 25/03/2018. Source: Lipper.

The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested. This is not a personal recommendation or advice to invest. Past performance is not a guide to future performance.

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