A look back over macroeconomic and market events for the two weeks ending 2 June. Away from the horrific terror events that have understandably dominated thoughts, markets have had plenty to digest. UK general election polls appear very tight and are causing some concern in markets, which had previously been fairly complacent. Thursday also sees the European Central Bank (ECB) monetary policy meeting, so plenty to watch for over the week ahead.
An initially strong Conservative lead in the polls has eroded in the final weeks of campaigning, creating considerable uncertainty. In summary, at the time of writing a Conservative win still seems most likely, though the scale of the win has implications for Brexit and UK asset classes, and we see the risks as finely balanced overall.
Away from politics, there was some disappointment with the UK’s first quarter economic growth being revised down, from 0.3% to 0.2% quarter on quarter. Consumption growth was notably slower in Q1 compared to what we saw in 2016 as indebted consumers faced rising prices on the high street, a theme we have discussed before and which continues to occupy much of our thinking in the UK.
Business investment grew at a weak 0.8% year on year, though this is an improvement on the four quarters of falling investment that preceded it as businesses fretted about the EU referendum. Against these measures, some of the coincident and leading indicators were surprisingly positive. UK consumer confidence rose in May from -7 to -5, defying expectations for a slip to -8, while forward-looking Purchasing Manager Index (PMI) surveys pointed to an improving outlook for Manufacturing (a rise from 56.7 to 57.3 against expectations for a slip to 56.5) and Construction (a surge from 53.1 to 56.0, beating forecasts of 52.6).
Many were disappointed by the miss in the numbers, which saw May add 138,000 jobs compared to the 182,000 expected and a downward revision to the previous readings. Wages also failed to pick up, holding steady at 2.5% year on year (2.6% was expected). Unemployment fell 0.1% to 4.3%, but the participation ratio was also lower, falling 0.2% to 62.7%. It can be all too easy to overstate the importance of non-farm payroll numbers, however, and broader data have been encouraging. First quarter GDP – considered fairly anomalous for the last few years, with questions over the seasonality adjustment – was revised up from an annualised 0.7% to 1.2% (0.9% was forecast). PMI data was also supportive, with Services PMI increasing from 52.1 to 54.0 (53.3 was forecast) and Manufacturing PMI improving from 52.5 to 52.7 (forecast was for no change).
Over the last two weeks, there have been signs of caution in the market, even as global equities have drifted higher. Sovereign bond yields fell, with gold rallying and sterling weakening as the UK election polls have tightened.
Equities – Over the period, US equities were stronger, with the S&P 500 returning 2.4%, and the TOPIX index of Japanese equities gaining 3.4%. The UK and Europe have been slight laggards – the MSCI United Kingdom index is up 0.9%, while the MSCI Europe (ex-UK) returned 0.7%.
Bonds – 10-year gilt yields fell six basis points (bps) over the fortnight to finish at 1.04% having briefly fallen below 1% at one point. In the US, 10-year Treasury yields were eight bps lower to 2.16%, and 10-year German bund yields were nine bps lower to 0.27%.
Commodities – Oil weakened as investors questioned compliance with agreed production cuts, causing Brent Crude Oil to slip below US$50/barrel (US$49.95 at close on Friday). Gold rallied to US$1,279/ounce while copper was range bound.
Currencies – Sterling was weaker across the board amid concerns over the upcoming election. Sterling closed Friday at US$1.29, €1.14 and ¥142.
There’s a busy week ahead, with the general election on Thursday almost certain to dominate discussion in the UK. Also on Thursday, the European Central Bank concludes its monetary policy meeting and may reveal details of the thinking around tighter monetary policy in the bloc. Elsewhere:
Monday: A busy day for PMI data, with the Caixin Services PMI for China and Nikkei Services PMI for Japan out first thing before the UK Services PMI reading is released later in the morning alongside the final readings for the Eurozone. In the afternoon, the US Non-Manufacturing PMI from the Institute of Supply Management is released with the final readings from the Markit PMI measures.
Tuesday: Eurozone retail sales numbers are released in the morning. In the afternoon the US releases the Economic Optimism reading from the IBD/TIPP as well as the JOLTs Job Openings report.
Wednesday: The main data releases of note mid-week are Chinese foreign exchange reserve, followed by the Coincident and Leading Economic indices from Japan.
Thursday: A very busy day, with the UK general election and the ECB meeting, mentioned above. Aside from these events, final data around Japanese Q1 GDP are reported as well as the Eco Watchers survey of economic activity. Chinese trade data are also reported early in the morning, UK time.
Friday: While we are digesting the election outcome, other data out at the end of the week include Chinese inflation readings, and UK economic data including construction output, balance of trade figures and industrial production.