A View from the Bridge - January 2014
With record low temperatures on the other side of the Atlantic and miserable sodden conditions this side, continuing signs of an economic Spring buoyed the US and UK. The UK enjoyed its strongest annual growth since 2007 with the services and construction sectors leading the way. Against this backdrop UK unemployment dropped further to 7.1%, close to the Bank of England "trigger" level. Mark Carney was quick to point out that forward guidance should evolve and that rates should remain low as any ill-considered rise would undermine the recovery.
Despite the double impact of the Federal shutdown and the adverse weather the US economy grew 3.2% in Q4. Although the jobs growth was weaker than expected the Federal Reserve again took the decision to make a further $10bn reduction in its monthly bond buying taper programme, bringing it down to $65bn.
The knock on effect was much as anticipated as Emerging Market stocks tumbled into "bear" territory down 22% from their 2011 high. Rate rises from Brazil to India failed to stop the sell off and the Central banks had to step in to provide some relief and the Russian authorities pledged unlimited intervention to support the Rouble.
Crucially in the Eurozone, inflation fell further below the 2% target to 0.7% prompting calls for further rate cut next month from its current low of 0.25%. Mario Draghi maintains that there is no risk of Japanese style deflation but says stagflation is a possibility. It was not all bad news though as Spain's 10 year bond attracted pre-orders of €35bn for a €10bn issue and Ireland raised €3.75bn in the first debt sale after its exit from the EU bailout.
As far as the markets were concerned near term rates were again unchanged from last month (3mth closed at 0.52%, 6mth closed at 0.62%). In contrast Fixed Term rates (longer than 1 year) were all lower, 5 Years closed at 1.94% (-20bp), 10 years closed at 2.77% (-25bp), 20 years closed at 3.22% (-22bp) and 30 years closed at 3.28% (-17bp)
UK Government Bond yields were also lower. The 10 year UK Gilt Benchmark closed at a yield of 2.71% and the 30 year UK Gilt Benchmark closed at a yield of 3.50%.
GBP future inflation expectations expressed through 20 year Inflation Swaps traded lower throughout the month opening at 3.70% and closing at the low of 3.58%
In the Foreign Exchange Market GBP was practically unchanged against both the USD$ at 1.6436 (1.6557) and the EURO at 1.2176 (1.2041)
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