This time last week we posed the question, what odds sterling finishes the week higher than where it started the week? The answer was implied in the question. After a sharp fall on Monday morning, post the weekend press, sterling did recover after Theresa May’s speech on Tuesday, closing the week over 3% from its Monday low. The FTSE 100 after 14 days of rises, partly because of sterling’s recent weakness, gave back some of the gains to finish the week about 2% lower.
There were plenty of events, aside from Theresa May’s speech, for capital markets to focus on. UK December inflation rate picked up more than anticipated. Also of note, was the pick in producer input prices relative to output prices. The Producer Price Input index rose over 15% in December from a year ago, in contrast the output index rose 2.7%. Month on month producer input prices rose 1.8%, output prices just 0.1%. This difference demonstrates the passing on input costs to the end consumer is proving difficult, and is likely to impact company margins and, by definition, company profits.
Thursdays meeting of the ECB we covered, the other main event was the inauguration of the new president of America. The first thing President Trump told the rest of the world, in no uncertain terms, was that you need us more than we need you. Which is undoubtedly true. President Trump comes to power with one of the lowest approval ratings in history. The weekend has been littered with demonstrations, not only in America. This contrasts with most incoming Presidents who arrive with a strong approval rating, and leave with most voters happy to be seeing the back of them. After five days of equity prices in the US drifting lower, and an initially negative reaction to the Trump inauguration speech, in the end the S&P snapped the losing streak on Friday. Ten year US treasury yields also rose post the inauguration speech. Is the reflation trade back on?
Looking to the week ahead, the preliminary estimate for fourth quarter and year on year GDP growth for the UK economy is released on Thursday. The UK economy is forecast to grow at 2.2% year on year and by 0.6% in the fourth quarter. After lasts week inflation uptick, a disappointing GDP number may lead to a return in stagflation fears.
It’s another busy week for US economic data, we get Durable Goods orders for December, as well as new and existing homes sales earlier in the week. At the end of the week the Michigan consumer confidence for December. On Friday, we get the latest estimate for fourth quarter growth for the US economy.
In tune with other major developed economies the Euro area economy has shown further signs of improvement in the past months. This week Markit release, January flash Purchasing Manager estimates for Germany and the whole region. These estimates are considered something of a lead indicator for the overall economy, and will hopefully underpin these improving signs.