Better than expected labour market data suggests a good foundation …

In this week’s bulletin:

  • US economic data and continued support from central banks push equity markets to new cyclical highs.
  • Better than expected labour market data suggests a good foundation for sustainable growth in the US.
  • Hopes are raised that China’s fragile recovery remains on track despite a number of on-going challenges.
  • Improving sentiment in the housing market provides opportunities for house builders.


Bulls keep on running as markets hit new highs

  • US labour market data pushes global equity markets to new highs
  • Fourth successive week of gains for UK bourses

The surge in equity markets continued last week as a combination of robust US economic data and the prospect of continued support from the world’s central banks helped push key market indices to fresh cyclical highs. The FTSE 100 rose for a fourth successive week and closed at a new five-year high. The benchmark UK index has risen nearly 10 per cent since the start of 2013, amid growing optimism about the health of the global economy.

In the US, the Dow Jones Industrial Average grabbed headlines when it registered a succession of record peaks, and the more representative S&P 500 Index moved to within striking distance of its all-time high. Underpinning this week’s solid performances was a renewed sense of optimism that the US economy might have turned the corner, particularly in respect of the labour market.

The good mood was clearly infectious as both Europe and Asia joined in the party, with stock markets in both regions posting another week of positive returns as the strong start to the year continued. The FTSEurofirst Index advanced to its highest level for more than four years, with the telecoms sector enjoying some of the biggest gains on the back of news that the European Competition Commission will drop its probe into possible collusion in the industry. In the East, the Nikkei put in its best weekly showing since December 2011 and on Friday recorded its highest close since September 2008, ending the week almost 6 per cent ahead.


Austerity forever more? Maybe not

  • Coalition holds firm on its austerity plans
  • US market shows signs of sustainable growth after switching focus away from debt repayments

As the global economic recovery rumbles on, taking two steps forward and one back, the importance of dealing with the size of the UK debt mountain remains a constant. Austerity has been with us for a few years now and, for most, the thought of further welfare cuts and higher taxes makes for a less than pleasant outlook. Whilst the coalition seems steadfastly resolute that the goal of reducing our debt sooner rather than later will provide, at some point, stronger and more sustainable growth, there is an opposite view that debt reduction alone represents a myopic view unless economic growth can be achieved.

On the other side of the Atlantic, the decision taken back in January to roll forward the issues around finding a long-term solution to the ‘fiscal cliff’ appear to be reaping rewards. Whilst the data from February’s US Employment Report shouldn’t be seen as a clean bill of health, it adds to the evidence from upbeat purchasing reports earlier in the week that the US recovery is gaining momentum.

“America seems to believe it is better to boost a weak recovery than cut the deficit.”

Jim O’Neill, chairman of Goldman Sachs Asset Management

Non-farm payroll employment increased by a better-than-expected 236,000 in February (the consensus forecast was just 165,000), up from an increase of 119,000 the month before. Revisions reduced the number of net job gains in December and January by a cumulative 15,000.

The rest of the employment report was also broadly encouraging. The average weekly hours worked edged up to 34.5 (from 34.4) and average hourly earnings increased by 0.2% month on month. Significantly, as a result of a 170,000 increase in the household survey measure of employment and a 130,000 decline in the labour force, the unemployment rate dropped to a four-year low of 7.7%, from 7.9%. Whilst this may not yet be the substantial improvement in the labour market outlook that the US Federal Reserve is looking for, it seems a positive sign that things are certainly moving in the right direction. Strengthening labour market conditions increase the likelihood that the US economy is moving closer to self-sustaining growth.


China defies forecasts

  • Latest data surprises on the upside but challenges remain for world’s biggest exporting nation

Shipments of China’s goods surged in February, raising hopes that its still-fragile recovery is on track and that the broader global economy may be gaining strength. As the nation’s new leaders gathered in Beijing last week for the annual ceremonial signing-in of parliament, official figures revealed that the world’s biggest exporting nation had shipped 21.8 per cent more electronics, clothes, toys and other goods than it did in February last year.

Many analysts had expected exports to have fallen year-on-year and while economists said that a high number of factory and office closures over the Chinese New Year holiday in February may have had a distorting effect on figures, they added that the data could, nonetheless, be seen as robust. “The story over the past year was that exports to emerging markets have been strong but to developed markets had been relatively weak,” Qingwei Wang of Capital Economics said. “More recently, exports to developed countries have improved somewhat, particularly to European economies. It is an encouraging sign.”

However, as Beijing strives to improve consumer spending at home, imports data for February painted a different picture, tumbling 15.2 per cent on the same month last year and giving China a $15.3 billion (£10.1 billion) trade surplus, where analysts had expected a deficit. The fall in imports to a 13-month low was blamed on disappointing consumption over the two-week New Year holiday, a critical period for domestic sales, similar in importance to Christmas in the West.

After last year suffering its worst full year for economic growth since 1999, with growth slowing to 7.4 per cent in the third quarter, the world’s second-biggest economy recently appeared to have turned a corner, although opinions on the strength of the recovery remain divided. Weak numbers from China’s vast manufacturing sector and services industry published last week added to concerns that the rebound may not be as strong as hoped.


Building for growth

  • Backdrop for home owners improves as competition in the mortgage market heats up
  • Continued demand for housing provides good opportunities for the house-building sector

Much has been written about the state of the UK housing market in recent months and home owners – at least those with an existing mortgage, or those trying to secure a mortgage – have had reason to be just a little more cheerful. The government’s Funding for Lending Scheme was intended to free up some much-needed liquidity for borrowers, encourage banks to lend and kick-start the sector. Whilst it is perhaps a little too early to determine conclusively how successful this scheme has been, what cannot be denied is the increased competition from lenders and the plethora of cheap-rate fixed deals available in the market.

So what about the house builders? The sector has enjoyed something of a run of late, and many commentators have questioned how much further the story will run. Richard Peirson of AXA Framlington recently explained his thoughts on the sector and why he believes there is plenty of growth left in this story. “The UK is currently only building about half of the new houses that we need. Due to changes in the modern family formation, we should probably be building a quarter of a million houses a year but that number is closer to 100,000–110,000 a year. So what that means is that if you are building a sensibly priced, decent-quality house, you can sell it. But more importantly, the house builders bought a lot of expensive land in the run up to the credit crunch in 2007/2008 and as they work through that land bank they’re slowly building on a greater percentage of cheaper land bought post-2008.”

So over the next few years, as the investment story evolves, the opportunity remains. “If the house builders continue to sell the same number of houses – which is certainly achievable given the shortage of properties – their revenue and profit margins are going to go up,” adds Peirson.

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