Global Markets Weekly – 16^th April 2007

Key Macro economic developments

• Measuring ‘surprise’ is an inexact science.  Especially so when it relates to how economy data has turned out compared with expectations.  The published consensus forecasts are often lagging and the ‘market consensus’ for any data release may have already moved on.  Nonetheless, even accounting for these concerns, surveys of recent economic news clearly show that the global economy has been doing better than forecast.  This does not necessarily indicate a surge in growth, for some countries it means that growth is slowing more gently than was being forecast.  However this all goes to support the Coutts forecast that there will be a ‘soft landing’ for the global economy this year even as the US economy slows.  The International Monetary Fund’s latest forecast is for 4.9% growth this year and next, only slightly lower than the 5.4% of 2006. 
• With growth remaining strong, inflation remains a key concern of the US, European and UK central banks.  Consumer Price Indices for all three are due for release over the next week.  Of the three only the European Central Bank is currently on target, though the latest report from the Bank of England’s Monetary Policy Committee expressed confidence that inflation was headed back on target, having flirted with the top end of the range last year.  The Fed’s position is complicated by the lack of a stated inflation target and its more explicit requirement to support the economy and employment.  Nevertheless US inflation has already fallen substantially and with slower growth forecast, inflationary pressures are likely to ease.  However the low level of energy taxation, especially petrol/gasoline, means that the US inflation figure is unusually sensitive to changes in the oil price.  One conclusion would be that sharp cuts in interest rates are unlikely unless economic growth significantly disappoints. 
• UK wage growth is a key indicator for the Bank of England.  Final figures for the three months to April are likely to show a 3.5% annual rise, well within the bounds of non-inflationary growth after taking into account inflation.  This period covers a significant proportion of pay settlements, including many of the largest and highest profile deals, so is likely to set the trend for the rest of the year.  Hence a satisfactory outcome will provide greater confidence that the UK economy is on course to hit the Bank of England’s 2% inflation target over the next two years.

Key global market developments

• Global equity markets have mostly regained their highs for the year, recovering from the end of February sell-off to stand at multi-year peaks.  A key driver has been a stream of economic data that has beaten the prevailing, overly cautious, consensus.  This has pushed equity markets ahead as investors have recovered confidence in the outlook for the global economy.  Such an out-turn accords with Coutts positive view on equities and confidence in a soft-landing.  However the lesson of the recent correction is that a positive economic background does not preclude short-term over-exuberance and subsequent pull-back and so rising investor confidence and falling volatility should sound a warning.
• Currency markets have also largely reversed the moves at the end of February.  The euro is forging ahead once more, as a further interest rate rise is confidently predicted by the end of the quarter.  However this puts the euro at record levels against the yen and closing in on the peak set against the US dollar at the end of 2004.  With the recent correction so fresh in investors’ minds, the risk versus reward of holding the euro at these levels appears to deteriorate sharply, even if there is no warning statement from this weekend’s G7 meeting.

Indices, Interest rates and Inflation

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