The continued recovery of sterling against the US dollar resulted in the FTSE 100 ending the week pretty much where it started it. The first estimate for UK economic growth for the final quarter and for the year confirmed that the economy is, so far at least, holding up well against many expectations earlier in the year. The UK economy grew at 0.6% in the final quarter of 2016 and by 2% in the year. The resilience of the UK economy will lead to the Bank of England upgrading their estimates for GDP growth for 2017 for the second time in 3 months this week, according to press reports.
In contrast the release on Friday of the first estimate for the final quarter GDP growth for the US economy showed an annualized rate of 1.9%, below expectations, and by just 1.6% for the year. The slowest in five years, however the probability is that these estimates will be upgraded. Despite this weaker than expected GDP estimate the S&P 500 closed the week 1% higher.
Results season will start to hit its stride in the coming weeks. So far 26% of US companies have reported, against just 8% in Europe. Early signs are encouraging, with positive earnings growth delivered across the main regions, with the majority of companies beating estimates. So far earnings for the S&P 500 have grown by 5%, despite revenues growing by just 2%. In Europe 59% of Stoxx 600 companies who have reported have beaten earnings expectations, with growth running at 11% year on year according to JP Morgan.
Several interesting data points this week for the UK economy, on Tuesday we get the latest consumer confidence survey for January. Retail sales data has remained robust whilst consumer confidence has been falling. Another drop-in confidence is forecast on Tuesday. The other focus will be on Thursday when the Bank of England meets for its monthly interest rate decision. The minutes of the last meeting will also be released along with the Bank’s inflation report. Inflation is expected to pick up this year, as result of the weaker pound. It will be of interest to see if any members of the committee vote to reverse last August’s cut on this improved outlook for the UK economy.
There is another raft of data coming out of the US economy this week. The release of the purchasing manager’s surveys for January will probably dominate headlines. After last week’s weaker than expected GDP report, it will be notable to see how bond and equity markets react if these surveys prove weaker than expected. At the end of the week we get a series of employment statistics including average earnings and the latest unemployment rate.
For Europe, the two main events will probably be the latest German inflation data. Should inflation continue to pick up in Germany this could put further strain on the relationship with the ECB and its negative interest rate policy. On Tuesday, we get the first estimate for growth in the Eurozone economy for the fourth quarter and 2016 overall. Expectations are for the euro area economy to have grown by 1.7% last year.