UK first-quarter GDP disappoints – weekly update 30 April

A look back over macroeconomic and market events for the week ending 27 April 2018. UK GDP for the first quarter was disappointing, likely exacerbated by adverse weather conditions. By contrast, the US numbers were much stronger, with business investment offsetting a weaker consumer and further signs of solid wage growth. There are plenty of data to look out for this week, with US Non-Fam Payrolls as the highlight.

UK first-quarter GDP disappoints

UK GDP for the first quarter was a source of disappointment as the official reading showed the pace of economic growth slowed from 1.4% to 1.2% year on year (yoy) whilst the market was expecting the rate to remain unchanged. The key contributing factor was a sharp fall in construction output of -3.3% yoy translating to a -0.2% impact on the GDP figure, and most likely the result both of the adverse weather experienced in the first quarter and also disruption from the collapse of Carillion, the country’s second largest construction firm.

With this just being a first pass of the data (and based on only about 45% of the dataset) there is plenty of scope for revision, as well as a rebound in the second quarter if this dip was indeed driven by isolated factors. However, even accounting for that, the UK’s economic growth is clearly now lagging behind the rest of the pack (such as the US, covered below). The miss was enough to nix expectations that the Bank of England will hike interest rates at its May meeting, with the market-implied probability falling from the near-certainty of 96% a fortnight ago (16 April) to just 23% by Friday, hitting sterling and driving a rally in gilts.

Market-implied probability of an increase in UK interest rates for the May 2018 meeting

Strong data out of the US

By contrast there were strong data out of the US, with first-quarter GDP growth dipping from 2.9% to 2.3% annualised – but the reading was still comfortably ahead of the 2.0% expected. Within the details, there was a sharp slowdown in consumption growth – an area we’ve highlighted previously as being of potential concern – which fell from 4.0% to 1.1% annualised, but business investment remained strong at 6.1% annualised (though slightly down from 6.8% previously).

There were also signs that wage growth was coming through, as the Employment Cost Index increased 2.7% yoy, with the core private wages and salaries measure rising 2.9% yoy, the fastest rate since 2008. Other economic data were also solid, with the Markit Composite PMI increasing from 54.2 to 54.8 and Durable Goods Orders of 2.6% month on month (mom) – from an upwardly revised 3.5% previously, but well ahead of the 1.6% expected.

In all, the data last week suggested the US economy continues to do well, with business activity making up for a slightly fatigued consumer – but the rising wage signals increase the risk of wage-push inflation later in the year.

Last week’s other events

• In Europe the European Central Bank left monetary policy unchanged, as expected, but gave a press conference that was largely interpreted as being slightly dovish. PMI data showed Manufacturing PMI slip from 56.6 to 56.0 (56.1 expected) and Services PMI rose from 54.9 to 55.0 (54.6 expected). Economic Confidence from the latest official survey recorded an increase from 112.6 to 112.7 (112.0 was expected)
• Japanese Manufacturing PMI rose from 53.1 to 53.3, with Industrial Production also improving from 1.6% yoy to 2.2% (2.0% was expected). CPI inflation was more of a disappointment, falling further than expected from 1.0% to 0.5% (0.8% expected), and at the Bank of Japan monetary policy meeting, the committee opted to drop language about when they expected to hit the 2% inflation target, as projections showed that board members expected inflation to still be below target at 1.8% in 2020 (excluding fresh food and the effects of the consumption tax increase)

The markets

Markets seem to be back on the go-slow with another week of fairly limited moves, with both equities and bond prices drifting higher, and the weakness in sterling the most notable move.

One-month performance of major asset classes in sterling terms

Equities

Another relatively subdued week for the main equity indices. UK equities led the pack of the major regions, with the MSCI United Kingdom up 1.7% for the week, with the TOPIX index of Japanese equities just behind, rising 1.5%. Continental Europe (MSCI Europe ex-UK) returned 0.9% whilst in the US the S&P 500 was flat. The MSCI Emerging Markets index was marginally down on the week, falling -0.3%.

Bonds

10-year UK gilt yields were 3 basis points (bps) lower by the end of the week, to finish at 1.45% whilst 10-year German bund yields were 2 bps to 0.57%. The equivalent US Treasury yields were unchanged at 2.96% having traded fractionally above 3% mid-week.

Commodities

Oil remained at elevated levels, with Brent Crude finishing the week at US$74.64 per barrel. Both copper and gold were weaker, with copper ending the week at US$3.05 per lb and gold slipping to US$1,324 per ounce.

Currencies

After starting the week on a stronger footing, sterling steadily softened through the week to finish down over 1% against major currencies, especially the resurgent US dollar. Sterling finished the week at US$1.40, €1.14 and ¥151.

The week ahead

There is lots to look forward to this week – and it’s not just US Non-Farm Payrolls. In light of the global data from last week and the ECB commentary, it will be interesting to see the first estimate of Eurozone first-quarter GDP on Wednesday (2.5% yoy from 2.7% expected) and Eurozone CPI inflation on Thursday (1.3% yoy expected from 1.4%). Ahead of that, the US releases PCE data on Monday (the Fed’s preferred inflation measure, 2.0% yoy expected from 1.8%) and the Fed’s Federal Open Market Committee (FOMC) rate-setting meeting concludes on Wednesday, though no press conference is scheduled and no policy change is expected. Friday is back to US Non-Farm Payrolls, with markets expecting 195,000 jobs to have been added in April, after the disappointment of a 103,000 reading last month, whilst the all-important Average Hourly Earnings figure is expected to be unchanged at 2.7% yoy. The daily breakdown is as follows:

Monday: Just after midnight, the latest Lloyds Business Barometer reading is released, followed a couple of hours later by the latest official Manufacturing and Non-Manufacturing PMI from China. In the afternoon, as well as PCE inflation data, the US will also give us Personal Income and Spending numbers as well as the Dallas Fed Manufacturing Activity index.

Tuesday: In the morning, the UK will report on monetary conditions including consumer credit and money supply growth. We will also have the latest UK PMI Manufacturing reading to look forward to (54.8 from 55.1 expected). In the afternoon, the US will report Manufacturing PMI from the Institute for Supply Management (58.5 from 59.3 expected).

Wednesday: Several early morning releases are out mid-week, with the UK shop price index from the British Retail Consortium out just after midnight, followed by Japan’s Services PMI data and the private Caixin China Manufacturing PMI. Later in the morning, the UK will report on Construction PMI – which is likely to be closely watched after the construction-led drag on first-quarter GDP. In the afternoon, Eurozone GDP and the US FOMC meeting are the main highlights, both of which are covered above.

Thursday: UK Services PMI is reported in the morning (53.5 from 51.7 expected), ahead of the Eurozone CPI inflation numbers (covered above). In the afternoon, the US will report on Non-Farm Productivity and Unit Labor Costs for the first quarter, which could add to some more colour to the state of the US labour market.

Friday: There are some data of interest due out ahead of Non-Farm Payrolls, including the Caixin China Services PMI reading (no change at 52.3 expected) and Eurozone Retail Sales numbers (1.9% from 1.8% expected). Then it is on to Non-Farm Payrolls, with the key numbers covered above, but data including unemployment (4.0% from 4.1% expected), underemployment and labour force participation also of note.