UK economy avoids a deflationary headline

Contrary to expectations the UK economy did not fall into deflation during the month of March, at zero percept, inflation remained unchanged from the month of February. One has to assume the likelihood of the UK economy falling into a deflationary spiral is unlikely whilst growing at its current pace of around 2.5%. One should also bear in mind a period of mild deflation would in all probability not have much of a detrimental impact, set against a background of modest earnings growth. The core rate, the one that removes the effects of oil and food, at 1% remains comfortably above zero.

Encouragingly sterling rallied modestly against the US dollar post the report, and to our way of thinking the inflation report’s impact on sterling is where the focus should lie. Sterling is more than likely to face pressures into the election and a sense the economy as suffering deflationary forces would add to that pressure. The one thing the Bank of England does not want to be facing is the prospect of putting up interest rates to defend the pound.

The shoots of recovery euro area continued as industrial production came in for the month of February plus 1.6%, this was against expectations of 0.2%. The other piece of economic data economists was looking for today was the US retail sales for the month of March. The past months consumer confidence reports has recorded consumer confidence rising, but this has not always been reflected in retail sales data. Tuesday’s report showed year on year retail sales rose 1.3% in March, below expectations and below the 1.9% recorded in February. This was in spite of the improvement in the weather.

Results season started in earnest today, Johnson and Johnson, along with Wells Fargo and JP Morgan reported earnings on Tuesday all managing to beat expectations, later in the day Intel likewise met expectations. We pointed out in the week ahead that earnings are likely to be the driver of markets in the coming weeks. Reuters analysts have pencilled in earnings to fall for the S&P 500 overall by just under 3%. Putting on a positive spin that should make those expectations easier to meet.

The FTSE 100 has been resilient, against some expectations, ahead of the election. The latest fund manager survey from Merrill Lynch indicates fund managers are equally cautious, as 24% of fund managers are underweight UK equities, an increase from last month of 22%. 

Posted on April 14, 2015 .