Bank of England and other Central banks downgrade forecasts – weekly update 11 February

The Bank of England joined other Central banks with a dovish meeting and downgraded forecasts. Other economic data were also somewhat disappointing, but largely baked into prevailing asset prices, leading to a muted market response.

The Bank of England struck a dovish tone

The Bank of England (BoE) struck a notably more dovish tone as it left monetary policy unchanged. No change was expected, and the dovish theme brings the UK’s Central bank in line with its global peers, with the messaging framed by the latest forecasts in the bank’s quarterly inflation report. With global pressures weighing on the outlook, the BoE cut its forecast for GDP growth this year from 1.7% to 1.2%. Inflation expectations were trimmed more modestly from 2.1% to 2.0% year on year (yoy). Of particular concern was the downgrade to the forecast for business investment, where the BoE previously saw growth this year being 2%, it now sees a contraction of -2.75% and more anaemic growth next year (2.75% from 5.0% in the November report). The bank puts this down to an intensification of Brexit-related concerns, and is a theme that we have talked about previously as a challenge to the domestic economy with business and consumers becoming significantly more cautious as Brexit uncertainty continues – for now this is likely to remain ‘pent-up’ demand but does risk becoming a permanent loss in the absence of a resolution in the near term. PMI readings also added to the poor sentiment, with UK Services PMI falling from 51.2 to 50.1, only just above the ‘50’ breakeven mark, and worse than the 51.0 expected.

Other data releases did little to buoy the mood

Other data releases did little to buoy the mood, though there was no single release big enough to move the dial on its own. The European Commission slashed its own forecasts, now expecting the Eurozone to grow 1.3% in 2019 (down from 1.9%), the Caixin China Composite PMI registered a slowdown from 52.2 to 50.9, Japan’s Composite PMI fell from 52.0 to 50.9. In the US, Non-Manufacturing PMI (from the Institute for Supply Management) slipped more than expected from 57.6 to 56.7 (57.1 was expected) and Factory Orders failed to rebound as much as hoped, contracting -0.6% in November (from -2.1%, 0.3% growth was expected). It wasn’t all bad, though, with Eurozone Retail Sales ahead of expectations at 0.8% yoy (ahead of the 0.5% expected, and with the prior reading revised up to 1.8%). While these data did little to improve the mood, they largely reflect sentiment that is already in the market, and so had relatively little effect.

Reports that the Financial Conduct Authority has stepped up monitoring of UK property funds

There were news reports that the Financial Conduct Authority (FCA) has stepped up monitoring of UK property funds in light of significant redemptions in December. With around £315 million taken out of property funds in December, it has emerged that the FCA has asked for daily updates from the fund groups, wary that these level of flows for a sustained period in 2016 led to many of these funds temporarily suspending trading for a relatively brief period of time. Following a review of that period, the regulator has, quite rightly, been keeping a much closer eye on the sector.

It is worth highlighting that property is an illiquid asset class, and these ‘gating’ mechanisms are designed to protect the interests of long-term investors from the costs of short-term trading. Indeed, part of the return potential is in the form of a premium for taking this liquidity risk. As a result, where an investor anticipates a liquidity event in the next couple of years, we would suggest considering more liquid options, but for investors with a long-term investment horizon, we still believe physical property has a strategic place as a small part of a broadly diversified portfolio, and where it is appropriate for the mandate.

Last week’s other events

• In Japan, Labour Cash Earnings growth rose from and downwardly-revised 1.7% to 1.8% yoy (1.7% was expected). The Coincident index slipped from 102.9 to 102.3 (102.2 was forecast), while the leading index fell from 99.1 to 97.9 (as expected), though the Eco Watchers Survey Outlook measure actually improved from 47.9 to 49.4 (48.1 was expected)
• UK Like-For-Like Sales from the British Retail Consortium rebounded from -0.7% to 1.8% yoy (-0.2% was forecast)
• Eurozone investor confidence from Sentix deteriorated from -1.5 to -3.7 (-1.3 was expected)

The markets

Further Central bank dovishness pushed sovereign yields lower, while most major risk assets were relatively unmoved on the week.

Equities

The week began on a relatively positive note, but sentiment faded in the last couple of days to leave equity markets more or less where they started. The UK was the best performer of the major markets we report on here, up 0.4% for the week (MSCI United Kingdom). In the US, the S&P 500 retuned 0.1% while Continental Europe (MSCI Europe ex-UK) slipped -0.8%. In Japan, the TOPIX index fell -1.6% while the MSCI Emerging Markets index was down -0.9%.

Bonds

10-year UK gilt yields fell 10 basis points (bps) on the week to close at 1.15%. 10-year US Treasury yields were down 5 bps to close at 2.63% while the equivalent German bund yields were 8 bps lower to just 0.09%.

Commodities

There was little movement in the commodity complex last week. Brent Crude closed at US$62.10 per barrel and gold finished at US$1,314 per ounce on Friday. Copper was slightly stronger, picking up to US$2.81 per lb.

Currencies

The euro and sterling were relatively soft last week, as the US dollar regained some strength, gaining 1% against the pound. Sterling closed on Friday at US$1.29, €1.14 and ¥142.

The week ahead

The schedule picks up again this week, with the fourth quarter GDP results and inflation figures sure to be closely watched. On Monday, the UK reports GDP for the fourth quarter which is expected to have halved from 0.6% to 0.3% quarter on quarter, with the yoy reading down from 1.5% to 1.4%. In light of the BoE’s report last week, the business investment activity data will be an area to watch. Japan reports the fourth quarter GDP on Wednesday (1.4% annualised from -2.5% expected) and on Thursday the Eurozone is expected to show fourth quarter GDP growth unchanged at 1.2% yoy. UK CPI on Wednesday is expected to have cooled from 2.1% to 1.9%, while US CPI, also on Wednesday, is forecast to have slowed from 1.9% to 1.5%. We also have retail figures out, with the US reporting Retail Sales on Thursday (0.1% from 0.2% month on month expected), and UK Retail Sales are reported on Friday (3.4% from 3.0% forecast). Away from the economic reports, there is also likely to be more Brexit excitement, as the next round of parliamentary voting takes place on Thursday. The daily breakdown is as follows:

Monday: The main data of the day come from the UK which, in addition to the first estimate of fourth quarter GDP growth (covered above) reports the latest Industrial Production readings (-0.5% from -1.5% yoy expected on the headline measure).

Tuesday: It’s a relatively quiet Tuesday. In the morning, Japan reports Tertiary Industry Index activity (-0.1% from -0.3% expected) as well as Machine Tool Orders. In the afternoon, the US reports the latest reading of the NFIB Small Business Optimism index (103.0 from 104.4 expected).

Wednesday: Data pick up mid-week. UK CPI is reported in the morning, and as well as the headline reading, Core CPI will also be of interest, and is expected to remain unchanged at 1.9% yoy. Later in the morning, Eurozone Industrial Production is reported (no change at -3.3% yoy is expected). In the afternoon, US reports CPI, covered above, with some minor revisions expected to the methodology, before fourth quarter GDP growth from Japan is due out.

Thursday: On Valentine’s Day, we have Eurozone GDP out in the morning (covered above), and there is likely to be particular interest in the data from Germany, where the economy contracted -0.2% in the third quarter, largely for transitory reasons, but a miss on the expected 0.1% growth for Q4 could mean that Germany has been in technical recession. In the afternoon, US data will include Retail Sales (covered above) as well as Business Inventories. China is also expected to report its latest trade data.

Friday: Early in the morning, China reports CPI (no change at 1.9% expected), followed by UK Retail Sales later in the morning (covered above). Europe also reports its latest Trade Balance in the morning before we turn to the US for the afternoon, where releases include the Empire Manufacturing Index, Import and Export prices, Industrial Production activity and the latest US sentiment surveys from the University of Michigan.