UK economic data were disappointing – weekly update 23 April

A look back over macroeconomic and market events for the week ending 20 April 2018. UK economic data were disappointing, but were distorted by the timing of Easter as well as weather disruption. Sterling was weaker and core sovereign bonds sold off during the week. This week the European Central Bank’s (ECB) meeting will be of interest, as well as the first estimates of UK and US GDP for the first quarter.

UK economic data – all major measures were disappointing

UK economic data were disappointing on pretty much every major measure. CPI inflation slowed from 2.7% to 2.5% year on year (yoy) – no change had been expected. The core measure, which strips out the more volatile elements of food and energy, fell from 2.4% to 2.3%, against expectations for acceleration to 2.5%. The main drag was from clothing and footwear, which is a highly import-sensitive sector, and could signal that the impact of Brexit-induced sterling depreciation has passed through, though the timing of Easter has probably impacted.

Retail sales growth also slowed markedly, increasing just 1.1% yoy in March from 1.5% previously – markets had expected 1.9% growth. Clothing and household goods sales were markedly down, as were auto fuel sales as the country was gripped by the Beast from the East, so these data could prove to be isolated. This makes next month’s reading particularly important given the significant turnaround in the weather conditions.

Wage growth was also disappointing – it was unchanged with a rise of 2.8% yoy in the three months to February against expectations for 3.0%. However this now means positive real wage growth (after the effects of inflation) is back, and the data show unemployment falling 0.1% to 4.2% (no change was expected).

Taken in the wider context, while the data were disappointing we don’t see any clear signs of a fundamental shift in the investment outlook. While some have argued that the poor data could cause the Bank of England to hold off raising rates – reinforced by some dovish comments from the Bank’s governor – the elevated headline rate has always been known to be transitory. The focus on sustained inflationary pressures are more likely to come from real wage growth which remains robust despite the small miss on last week’s numbers.

China’s latest data gave no signs of a slowdown

China’s latest data release was mixed but gave no real signs of a material slowdown from the world’s second largest economy. GDP growth for the first quarter came in as expected, unchanged at 6.8% yoy growth which is still comfortably above the 6.5% official target. Industrial Production growth slowed 0.2% to 6.0% yoy in March (6.3% had been expected) while Retail Sales growth accelerated from 9.4% to 10.1% yoy (9.7% was expected). Fixed Asset growth slowed from 7.9% to 7.5% year to date versus the same period last year (7.7% was expected).

The People’s Bank of China gently loosened monetary policy by relaxing the Reserve Requirement Ratio by 1% to 16%. The Bank was quick to reiterate it was pursuing a ‘prudent’ monetary policy, suggesting this is not the start of material monetary stimulus.

Last week’s other events

• US Retail Sales growth accelerated as expected from flat month on month (mom) in February (revised down from 0.1%) to 0.4%, in line with expectations. Industrial Production slowed from 1.0% to 0.5% growth mom, ahead of the 0.3% forecast
• Japanese CPI inflation slowed from 1.5% to 1.1% yoy, as expected, with core inflation unchanged at 0.5%, also as expected
• Eurozone consumer confidence remained strong, with the index advancing from 0.1 to 0.4, against expectations for a fall to -0.1

The markets

Most equity markets were slightly higher on the week, while core sovereign bonds sold off and sterling weakened following the inflation numbers and the Bank of England governor’s comments. The industrial commodity complex was stronger, but gold weakened.

Equities

It was a fairly subdued week for major equity markets. The UK led the pack, with the MSCI United Kingdom up 1.6% on the week. Continental Europe and Japan were just behind, both up 1.3% (MSCI Europe ex-UK and TOPIX indices respectively) while the US returned 0.8% (S&P 500). The MSCI Emerging Markets index returned 0.1% for the week.

Bonds

US 10-year Treasury yields moved towards the psychologically important 3%, rising 13 basis points (bps) to 2.96% by close on Friday. UK 10-year gilt yields were up 4 bps to 1.48% while the equivalent German bund yields were 8 bps up to 0.59%.

Commodities

Oil continued to strengthen, with Brent crude oil closing at US$74.06 per barrel by the end of the week, while gold was slightly weaker, easing to US$1,336 per ounce. Copper had also strengthened to US$3.14 per lb by Friday.

Currencies

Sterling softened on the week after the Bank of England governor’s dovish comments and weak inflation. Sterling finished at US$1.40, €1.14 and ¥151 on Friday.

The week ahead

Things get a little more interesting this week. There are two Central bank meetings with the ECB meeting concluding on Thursday and the Bank of Japan meeting finishing on Friday. No changes in policy are expected, though investors will be on the lookout for any change in the signalling, particularly from the ECB which is expected to withdraw its quantitative easing programme towards the end of the year. Ahead of these, there are also PMI readings from the Eurozone and US on Monday, and we will have the first readings of the first-quarter GDP growth from the UK and US on Friday, where the UK reading is forecast to be unchanged at 1.4% yoy and the US reading is expected to have slowed from 2.9% to 2.5% quarter on quarter (annualised). On top of this, US earnings season continues. The daily breakdown is as follows:

Monday: Early in the morning, Japan releases Manufacturing PMI and Eurozone PMI later in the morning, with forecasts suggesting the Composite PMI will have slipped from 55.2 to 54.8 with both the Services and Manufacturing components down. In the afternoon, US Markit Manufacturing PMI is forecast to have fallen from 55.6 to 55.3 while Services PMI is expected to have increased 0.1 to 54.1.

Tuesday: In the morning, the UK reports the latest monthly government borrowing levels, while the Confederation of British Industry (CBI) will update the latest trends and business optimism measures. In the afternoon, US consumer confidence from the Conference Board is reported, and the Federal Reserve Bank of Richmond updates its manufacturing index.

Wednesday: It’s a very quiet mid-week, with just the Japanese All Industry Activity Index of note in terms of scheduled releases.

Thursday: As well as the ECB meeting, which concludes around lunchtime, the US Durable Goods Orders in the afternoon will get some attention, with forecasts suggesting the rate will have slowed from 3.0% to 1.2% mom. Bloomberg will also report consumer comfort, while the Federal Reserve Bank of Kansas City will give us its Manufacturing Activity report.

Friday: As well as the Bank of Japan output and GDP releases, there are quite a lot of other economic releases scheduled. Japan will release Industrial Production (2.0% from 1.6% yoy expected) and Retail Trade (1.5% from 1.7% yoy expected), while the Eurozone will release the latest business and consumer confidence reports.