In the UK on Wednesday the focus was on the Bank Of England's release of its latest inflation report, although most parts of the globe reported economic data of some kind. China firstly, industrial production and retail sales coming in line with expectations. Where there was some weakness was in the lending data, but this appears to be dismissed as these things often are, as seasonal. Japanese GDP for the second quarter fell in line with expectations. Europe continues to struggle; following Tuesday's weak German investor survey and a report that the Portuguese economy has slipped into deflation, on Wednesday the eurozone industrial production showed a month-on-month fall. It continues to appear that the ECB are getting ever closer to implementing the extraordinary measures so often referred to, and our bet remains October. The euro bounced back a little last week against the US dollar, but once again has lost ground this week. So far peripheral bonds have not reacted as the risk of deflation potentially increasing the debt burden in these regions. Thursday sees figures out for q2 GDP for the eurozone, expectations are for little or no growth. Just to complete the picture, in the US retail sales came in below expectations.
The Bank of England inflation report gave little new away as they raised the economic growth forecast slightly. The latest unemployment rate announced earlier in the day at 6.4% was followed by Mark Carney stating that the Bank now expects the unemployment rate to fall to 6% by the year-end. Productivity remains weak despite falling unemployment as spare capacity is now estimated to have fallen to 1% of GDP. Mark Carney did add that even if this spare capacity was removed, he would not see rates materially different from where they are now. Wage growth also remains weak as Wednesday figures came in below expectations, the Bank of England cut forecasts for wage growth in 2014 from 2.5% to 1.25%. The Bank believes some of the lack of wage growth is due to older people who are happy to work for less, one assumes they are used to that. Mr Carney reiterated that rate rises, when they come, will be gradual. According to the Telegraph, history shows that rate changes tend to happen in the inflation report months, if that were to be the case this time, November is when one could expect the first rate rise. With the picture remaining mixed and the threat of inflation remaining unlikely, why they would feel the need to move at all this year remains unclear. Perhaps currency markets are coming to the same conclusion as the pound, which was recently trading at 1.72 to the dollar, fell again today after the report to trade back at $1.67.
When one stands back and looks at the overall picture for the global outlook, economists still expect growth to come in around or slightly above 3%. Earnings revisions remain encouraging and liquidity is likely to remain accommodative. Overall in our opinion this should continue to offer a reasonable background for risks assets to perform in.