Rates of interest

After Tuesday’s stellar rally, Wednesday saw the FTSE 100 give back some of the gains. A combination of a couple of heavy-weight stocks, Rio being one, going x their dividend rights, along with some poor earnings reports contributing to the fall.  

Released on Wednesday were more of the PMI reports I referred to at the start of the week. 

The UK services PMI slipped slightly, but overall the data continues to show a picture of an improving economy. According to the producers of the survey, Markit, the report suggests economic growth in the UK of around 0.7% for the first quarter. 

In Europe the composite PMI was revised up, suggesting, according to Markit, that the Eurozone economy should grow between 0.4 and 0.5% for the first quarter of the year. If one extrapolated that figure, it would suggest economic growth in the region of 2% for the year overall.  At present, analysts are only anticipating economic growth in the eurozone of just over 1% for 2014. The other positive signal from the data is that much of the increase in the composite index was led by the services sector. Generally, analysts are of the opinion that where the services sector data leads the manufacturing data follows. On the negative side a lot of the growth came from Germany, whilst the French economy continues to struggle. The EU, on Tuesday, also warned France that it is liable to miss its agreed budget deficit reduction targets unless it takes action. 

China produced good news today as Li Keqiang, in a long-winded State of the Union address, committed to maintain economic growth at 7.5% for 2014. There were rumours in the market today of an imminent default by a Chinese solar panel company on its corporate debt. If it were to happen, some would point to this as an example of the excess leverage in the economy. I personally see it as a positive signal to others that they cannot expect the state to bail them out in times of trouble, thereby encouraging prudence. 

On Thursday, we get rate decisions from the Bank of England and the ECB. The Bank of England will leave rates unchanged, the question as to what the ECB might do, is a bit more open. I stated my view earlier in the week that they will do nothing. Rather surprisingly on Wednesday the IMF called for the ECB to cut rates and look to inject liquidity into the banking system. The IMF continues to express concerns at the low level of inflation in the zone and should this continue, it could derail the recovery.  Mario Draghi will have a tough time tomorrow at his monthly press conference. If he leaves rates unchanged, he will have to defend his position in the face of the IMF’s comments, and if he does cut rates tomorrow, he will be asked why he waited until now before making such a move.

Posted on March 6, 2014 .