This week’s topics include the Bank of England’s changing growth forecasts for the UK, the latest Eurozone retail sales figures, US job numbers and an update on the French presidential election, as well as the usual portfolio update.
UK GDP UPGRADED
The Bank of England made a second large revision to its GDP forecast for 2017 at its last Monetary Policy Committee meeting on Thursday 2 February. The bank’s update came on the back of stronger than expected domestic demand and the higher investment and spending announced by the Chancellor of the Exchequer. It still however expects growth to slow in 2018 to 1.6%.
EUROZONE RETAIL SALES DROP
Retail sales in the Eurozone fell for the second straight month in December by 0.3%, surprising expectations which had put the figure at +0.3%. November’s number was also revised down from -0.4% to -0.6%. Speculation as to the reasons behind the numbers and dampening consumer spending centres on the higher energy prices. The increased energy prices were seen as a key reason for the recent increase in inflation to 1.8% for January, which is only just below the European Central Bank’s (ECB) target of 2%. Energy prices in December were up 2.2% on the year, and there was also a 1.1% drop in spending at petrol pumps. The mixed economic messages support the ECB’s continued quantitative easing, which although scaled back is still very important in the minds of the central bank committee members.
US JOB FIGURES BEAT EXPECTATIONS
Businesses in the US added 227,000 jobs in January, up from the 157,000 jobs added in December and above consensus expectations of 175,000. However, the level of average pay only increased marginally, as did the number of people working part-time but looking for full-time work. Meanwhile, the unemployment rate edged up slightly to 4.8% from 4.7% in December, although this was due to more people looking for work. The numbers will still work well for Trump though who has promised to create 25 million jobs over the next 10 years.
FRENCH PRESIDENTIAL ELECTION UPENDED
The favourite for France’s presidential election, Francois Fillon, is facing calls to quit his campaign after reports surfaced that the state paid nearly €1mn to his family to ‘work’ fake jobs for him. Instead, Emmanuel Macron, a banker who has never before been elected, is being hailed as the new favourite to beat Marine Le Pen in the second round of the elections. The first vote is on 23 April, with the two leading candidates then put through to a second vote on 7 May.
With the debate about the hard vs. soft Brexit still headlining in the media, we have taken steps to protect portfolios in these two scenarios. In the case of a hard Brexit, our allocation to foreign currency (circa 30% of the Balanced strategy) would help if Sterling were indeed to fall to the US$1.10 some are predicting. In the case of the option of a soft Brexit gaining ground, we could see a surprise rally in the Pound. We have therefore purchased a one year out-of-the-money call option on Sterling vs. US Dollars, which has the potential to deliver a positive return in the event of a strong Sterling rally over the next 12 months. We have spent up to 0.2% of every portfolio on this position. As with the other risk mitigation strategies, we view this as a form of insurance that we are willing to pay in order to help our clients sleep more easily at night.
THREE ANNOUNCEMENTS DUE THIS WEEK
7 February – US Balance of Trade // 9 February – Germany Balance of Trade // 10 February – UK Balance of Trade
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SOURCES: BANK OF ENGLAND, BLOOMBERG, 7IM