This week’s we cover the call for the UK snap general election, UK and German economic sentiment, and US inflation. It also provides a portfolio update ahead of Sunday 23 April and the first round of the French presidential election.
SNAP ELECTION CALLED
In an unscheduled announcement, Theresa May has called an early general election to secure a mandate for her approach to Brexit. However, other reasons are also being cited, including the Tories’ lead over Labour in the polls by up to 21 points, which should translate into a large parliamentary majority. This would give May a stronger negotiating hand during the forthcoming Brexit negotiations.
MIXED MESSAGES FOR UK SENTIMENT
Figures released by the Office for National Statistics showed that the UK jobless rate held steady for the three months ending February at 4.7%, down from 5.1% from a year earlier. However, the strong jobs market does not appear to be feeding through to wage growth with average weekly earnings including bonuses increasing by 2.3% in the same three months. Once adjusted for inflation though, wages recorded just 0.2% growth, which is the slowest pace since 2014.
US CONSUMER PRICES FALL
The US Labor Bureau published data on 14 April showing a decline in the consumer price index of 0.3%, down from the 0.1% increase in February. Year-on-year, prices were up by 2.4%, but this was less than the consensus 2.6% fore-cast. The figures provide validation for the view that inflation is only creeping up gradually and, if a trend is confirmed in April, it could mean that the likelihood of a Federal Reserve interest rate rise in June falls back, especially as the year-on-year (2%) gain in March’s core CPI number (which is the watched figure) was the smallest rise since November 2015.
Data from Eurostat released last week showed that Eurozone industrial production declined unexpectedly by 0.3% month-on-month in February, having rebounded in January by 0.3% – although that number was itself a downwards revision from 0.9%. The fall was unexpected as the consensus opinion was for an increase of 0.1%. On an annual basis, industrial production growth accelerated to 1.2% in February from 0.2% in January, but this figure too was below expectations that had averaged out at 2.0%. The markets shrugged off this news and instead focused on the release of the German ZEW^ economic sentiment survey, which posted a 17-month high for the region’s largest economy, on the grounds that it is seen as a better forward looking indicator.
The French expression arriver dans un mouchoir (to arrive in a handkerchief) perfectly describes the French presidential race, where (at the very end of the first round) four candidates’ have each converged around the 20% poll mark. Since other surveys put 40% of voters undecided, many think it’s too close a call, while others think it’s a perfect scenario for Le Pen. The uncertainty is playing out in markets – a scenario we reasoned could happen. The Euro Stoxx 50 was up 6% from Dec 2016 to our recent decision to cut. It is now off 0.7% and could drift lower. This view led us to cut our allocation to European equities in our lower risk profiles, where there is less appetite for political risk to play through to portfolios. However, we have remained overweight versus our Strategic Asset Allocation in higher risk profiles where investors can stomach more volatility.
THREE ANNOUNCEMENTS DUE THIS WEEK
19 April – Eurozone Inflation Rate & Balance of Trade // 21 April – UK Retail Sales // 21 April – US Existing Home Sales
* ZENTRUM FÜR EUROPÄISCHE WIRTSCHAFTSFORSCHUNG / CENTRE FOR EUROPEAN ECONOMIC RESEARCH
SOURCES: OPINIONWAY, BLOOMBERG, 7IM
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