MARKET UPDATE: NEW HORIZON FOR UK GDP DATA

MARKET UPDATE: NEW HORIZON FOR UK GDP DATA

9th July 2018

LAST WEEK – KEY TAkeAways

UK’s Brexit plan agreed, but David Davis and Boris Johnson resign

  • Following a marathon meeting at Chequers, the cabinet has reached an agreement on the UK’s future relationship with the EU after Brexit.
  • Signs point to a ‘soft’ Brexit, with the UK maintaining a “common rulebook for all goods” and “continued harmonisation” with the EU.
  • Brexit secretary David Davis, who has been leading UK negotiations with the EU, subsequently resigned from government and was immediately replaced by Dominic Raab. Foreign secretary Boris Johnson also resigned.
  • The Omnis view: Davis and Johnson may not agree with the plan, but a soft Brexit is arguably the most investment friendly option for the UK going forward. However, Theresa May could now face a leadership challenge.

Bank of England governor upbeat on UK economy

  • Mark Carney, the governor of the Bank of England, said recent data had given him “greater confidence” that weak first-quarter growth for the UK economy was largely weather related.  
  • In a speech in Newcastle, Carney said household spending and sentiment had bounced back strongly following the disappointing 0.2% GDP growth of January to March.
  • According to Bloomberg, there is an 81.2% probability of an interest rate rise at the Bank of England Monetary Policy Committee’s (MPC) August meeting (as at 9 July). 
  • The Omnis view: at its last meeting, three MPC members voted in favour of an interest rate rise. It now seems more likely that interest rates will be at 0.75% by the end of the summer.

German coalition holds firm as immigration row ends

  • German interior minister Horst Seehofer said his standoff with chancellor Merkel over asylum policy is now “history”.
  • Seehofer, who leads the Christian Social Union (CSU), had threatened to resign or bring down the coalition government as he demanded Germany turn away asylum-seekers at is borders.  
  • A survey of public opinion had found that Seehofer’s popularity had plummeted as a result of his hard-line stance.
  • The Omnis view: formed in March, the German coalition government remains vulnerable, wary of the strong showing from the far-right Alternative for German (AfD) party during last year’s elections.

Eurozone unemployment falls, while wage growth picks up

  • Eurozone unemployment came in at 8.4% in May, down from 8.5% the previous month, which was the lowest headline figure since December 2008.
  • The jobless total has been falling steadily since it hit 10% in September 2016. The highest was 12.1% in February 2007.
  • Hourly wage costs rose 2% in the year to the end of the first quarter of this year, according Eurostat. This was the biggest increase since the start of 2013.
  • The Omnis view: it appears that economic recovery in the eurozone is now spreading to wages, which could boost overall inflation. However, the European Central Bank is unlikely to raise interest rates anytime soon.

Chinese service sector grows but manufacturing cools

  • For June, the Caixin/Markit Services Purchasing Managers’ Index (PMI) rose to a measure of 53.9.
  • The services sector already accounts for more than half of China’s economy, with rising wages giving its consumers more spending power at home and abroad.
  • The Manufacturing PMI fell to 51.0 from May’s 51.1 with new export orders contracting for the third month in a row.
  • The Omnis view: it is understandable that exports would be hit given the current trade standoff with the US. Going forward, China is moving more towards a consumer-driven economy rather than one reliant upon manufacturing.

Looking ahead - TALKING POINTS

New monthly UK GDP data to come as part of ONS publishing revamp

  • Monthly UK gross domestic product (GDP) will be published on Tuesday, though forecasts are not straightforward.
  • The Office for National Statistics (ONS) said monthly data will mean “higher quality and quicker estimates”. 
  • Estimates will come with a two-month lag, meaning figures will cover the three months to the end of May.
  • The Omnis view: while the new model may mean we have to wait less time for data, the real significance is always the underlying trend. We are looking for economic recovery following a slowdown in the first quarter of 2018.

UK GDP Growth (%) – March 2015 to March 2018

 United -kingdom -gdp -growth

Source: Office for National Statistics, tradingeconomics.com

Financial heavyweights kick off US earnings season

  • Many US companies are reporting their earnings for the second-quarter; a sign of the health of corporate America.
  • Analysts are particularly interested in the financial sector with JP Morgan Chase, Citigroup and Wells Fargo all reporting this week. 
  • Many stocks exceeded consensus expectations last time around, meaning analysts are now more cautious.
  • The Omnis view: S&P 500 companies are expected to report earnings growth on average of above 20% for the quarter. Also positive is the latest US Bureau of Labor Statistics non-farm payroll report which indicated a rise in the labour market of 213,000 jobs in June.

S&P 500 earnings growth (end of quarter estimate vs actual) – Q2 2015 to Q1 2018

 Earnings July 2018

Source: FactSet

 

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