Monday, 13 January 2014

Week in review Jan 10 2014

Last week saw gains in the equity markets in the US, UK and Europe due to growth in consumer spending (mainly through holiday sales) which continue to be a major driver in the economic recovery in these regions. Retail sales (ex-car sales) in the US grew .4% for the second month according the economists’ forecasts. The Fed and most of the financial world got a surprise as the US unemployment rate fell to a five year low. However, the unemployment number was more negative than positive as workers leaving the labour force were a major factor in the jobless rate plunge. Has the Fed’s target 6.5% jobless rate become irrelevant? No, the rate is nothing more than a view which will be taken into account along with other variables, and with the ‘shrinking labour force’, the rate set in 2012 might need to be adjusted or a new target variable found.

In the last quarter of 2013 speculation on when the Bank Of England (BOE) would raise interest rates grew as the UK’s economy continued to strengthen. However, recent industrial data suggested stagnation in November, dampening the momentum of the country’s growth which means that GDP growth in the fourth quarter may not be as strong as previously anticipated.  The BOE held its benchmark rate at 0.5% and its asset purchase plan at £375b last week, with the country’s trade deficit narrowing to a five month low as exports to the EU grew. The UK property market continued to support the country’s economic growth as housing prices rose by 5.2% in 2013 on low borrowing costs and government incentives. We look to the January 14 inflation report to give a guide on Governor Carney’s potential decision on interest rates and the potential of the economic recovery.

There has been a lot of news coming from the European region as Ireland returned to the bond markets after completing its bailout program. The German unemployment rate fell for the first time in five months while the jobless rate remained unchanged. However, it was the regulators that topped headlines as the Basel Committee on Banking Supervision adjusted the leverage ratio after “thoroughly analysing data”. The committee’s changes to the leverage rule, eased proposals on how lenders determine the size of their off-balance sheet activities as the original plan would have penalised low-risk financial activities and created a liquidity trap (i.e. banks stop lending ).