Friday, 4 May 2012

Week in Review: Europe's kingdom of the blind...

Last week's WIR highlighted the tense race for the Premiership. Having secured a 1-0 win in the Mancunian derby, it seems Manchester City will do just enough, just in time to secure their first league title since 1968.

'Just enough, just in time' has become the unofficial motto of the eurozone as each member's procrastinations stretch the union to breaking point. Last week's collapse of the government in recession-hit Netherlands shocked investors but this week began with the news that the residual elements of the government had managed to submit a stability plan by Monday's deadline.

At least Europe still has some strong economies! Er...

What is particularly worrying about the travails of the Dutch is that they are one of the region's strongest links. Not only is the Netherlands triple-A rated, it also has a liberal economy. It should be the poster child of the zone for its fiscal discipline and competitiveness - indeed unemployment, whilst rising, remains low as the region has been able to sell into less competitive parts of the Eurozone and EU.

Export markets have however been a source of weakness as economic data in Europe remains woeful. 

All the purchasing managers surveys which we described last week were revised lower this week.  Then unemployment rose to the highest levels experienced, not just since the Eurozone's conception, but for years before too. If ever the political strains being put on the Eurozone needed further stress these kind of "never had it so bad" statistics are sure to provide it.

Even Germany was given reason to worry about its jobs market. A slight uptick in the number of unemployed is barely visible on  the long-term chart, but weakness in hiring intentions from surveyed German companies, and a declining number of vacancies, suggests that employment is likely to reverse some of its gains of the past few years.

Draghi drags his feet...

All eyes therefore turned to the European Central Bank (ECB) press conference for signs that policy might provide some relief. But little comfort was found in ECB President Draghi's repeated commitment that policy was already accommodate, that real interest rates are negative in most countries (i.e. inflation is higher that interest rates) and therefore  no further reduction in interest rates had been discussed.

Further stimulus would likely come from some form of unconventional monetary policy, quantitative easing for example.  We have been discussing the various policy options which the ECB cold consider at length during our strategy deliberations and will try and post a few suggestions on the blog next week.

Suffice to say, however, that Sr Draghi will require higher threshold in terms of weak inflation numbers than his peers in either the US or the UK to cross the Rubicon into quantitative easing. That mindset alone is dangerous as the Bank of Japan's half-hearted attempts at QE have shown.  Expect the ECB to do 'just enough, just in time', again...

China's resurgence threatens to overshadow US strength (again)...

Away from the Eurozone, China showed further evidence that its slowdown had ended with various PMI surveys continuing to tick upwards and showing a particularly strong service sector.

US data showed signs of wavering as disappointing falls in some of the regional surveys. However optimism was snatched from the jaws of despair by the national Institute of Supply Management survey which confounded expectations to indicate a strong expansion.

The question on investor's mind then was could employment news perform the same trick? Claims for those remaining out of work and those making new unemployment claims both declined more than expected but saw their previous readings revised up (as they have been every week this year). The ADP survey of employment change was lower than hoped and saw its previous figure revised down.

The headline of 115,000 new jobs added in April was disappointing however revisions were positive; most notably with a further 45,000 new private jobs were added to March’s figures. The unemployment rate declined to 8.1% and wage growth was weak. Therefore should be nothing overly worrying about this report in terms of the likelihood of policy being tightened or the recovery stalling.

Europe's weakness continues to hurt us here in the UK where house price data from Nationwide and Halifax released this week and both show prices falling. Bear this in mind if you haven't read Rob's piece on the Buy to Let market yet. Mortgage approvals, which tend to lead house prices, have fallen too which augurs poorly for UK residential property prices.

Looking ahead to next week we have a quieter week in terms of economic news but politics will return to centre stage. Investors will hedge the double election result first thing on Monday.

Expect that trend to be with us for a while. Even at home UKIP appears to have performed well in the local elections.

Guy Foster
Head of Portfolio Strategy

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