Global Month Ahead by 7IM - January 2012In our regular feature Seven Investment Management (7IM) look forward to what the month ahead might hold for the world’s largest economies.

United Kingdom

Outlook Issues
The middle of February is when the Bank of England releases its quarterly Inflation Report. In the latest report, we should see the continued assertion of a drop in CPI inflation over the next 12-18 months. The BoE should finally have some supporting data with which to back up its claims of an appreciable decrease in inflation. January is likely to see a significant fall, as the VAT hike leaves the calculations.
The less than stellar Q4 GDP growth figures (-0.2%) give ample grounds for believing that Governor Mervyn King and his Committee will vote for an increase of the Asset Purchase Program at the February 9th meeting. Markets had been expecting a renewal of Asset Purchases in February or March, and the combination of negative GDP growth and falling inflation provide conditions conducive to a rise sooner rather than later.
Further monetary stimulus is likely to hold gilts around the 2% level, whilst UK equity markets will rise and fall along with the confidence, or lack of it, in concrete steps towards a solution of the Eurozone crisis. Deutsche Bank believes that different amounts will tell different stories – “£75bn: Weakness of recovery…euro risks, dark clouds hanging over the world economy, tight credit. £50bn or less: Improved sentiment, risks of persistent inflation, surveys looking more optimistic”

North America

Outlook Issues
The US Federal Reserve surprised markets with its further commitment to keep interest rates lower for longer – near-zero until at least the end of 2014. Low interest rates are implemented with the aim of providing relief for debtors, and fostering growth – as the public are encouraged to spend rather than save.
US fourth quarter GDP growth was 2.8%, slightly weaker than the forecast 3%, but still fairly noteworthy in a stagnant global environment. However nearly 2% of the growth came from a short term build up in inventories, something that is unlikely to be sustainable given the lack of demand. Any signs that growth is beginning to slow are likely to prompt action from the FOMC. However, with the next meeting not until mid-March, there will be plenty of discussion over various economic indicators over the coming month – so expect plenty of overreaction whichever way the data goes.
The first release likely to send markets one way or the other is Friday’s non-farm payrolls data, with forecasts predicting a fall from December’s creation of 200,000 new jobs to around 150,000 in January. Seasonal part-time employment will drop out of the January numbers, as department stores have little need for a Santa Claus and similar roles after Christmas. This means that payrolls are likely to remain below 200,000 in January.

Europe ex UK

Outlook Issues
The Eurozone crisis remains in the headlines, but media attention is notoriously fickle. The longer it drags on, the more likely it is that other global events will get some of the spotlight – possibly (hopefully) easing market pressure. The press and public may start getting the message that there will be no alarm sounding the “all clear” for Europe. With Russian elections at the start of March, the potential for unrest – a “Russian Spring” perhaps – is high; and riots sell more papers than inconclusive summits.
Until the focus shifts however, the core Eurozone equity markets are likely to rise gradually, subject to pullbacks when another possible obstacle appears in the way of resolving the issue of Greek Sovereign debt. Investors want to believe that the politicians are finding a solution – and no one wants to miss the recovery – so a mood of cautious and fragile optimism is driving European markets at the moment.
The EU leaders’ summit at the end of January ended with the signing of an agreement to enforce stricter fiscal guidelines – although the Czech Republic has joined the UK veto – and to concentrate on job creation. The ECB may have to engage in an alternative sort of stimulus should the focus on growth and jobs take centre stage – providing liquidity to the banking sector may be replaced by more conventional quantitative easing/

Other markets

Outlook Issues
Inflation across Asia is falling – something of particular importance for China and India. In December, China saw annual inflation fall to 4.1% – the lowest in 15 months, and Indian inflation was at 7.5% year-on-year, down from 9.1% just the month before. Consumer price rises are of huge importance to the two largest Asian nations – who between them encompass over 1/3 of the world’s population. However, growth is just as important, and with a global slowdown some sort of stimulus may be needed.
In Asia, the bulk of income is spent on food – so inflation is something feared by governments and public alike, as any price hikes tend to spark protests. In addition, economic growth has been promised for so long that any serious signs of slowing also encourage unrest. Central banks face a difficult situation: any money printing or policy loosening that stimulates growth is likely to cause an inflation spike, but higher interest rates stifle any economic expansion.  The central banks of both countries are relatively inexperienced compared to those in the developed world (although they haven’t exactly been covering themselves in glory). This means that drastic moves – such as China’s RMB 4 trillion stimulus package in 2008 – are probably off the table. Instead, we will probably start seeing a series of smaller, perhaps more localised actions such as tax breaks and local bank loans – probably beginning in China.

Indicators

  Present Situation Next Meeting Expectation Source
Bank of England 0.5% 8 & 9 February  50% chance of further monetary easing Click here
US Federal Reserve 0% – 0.25%  13 March  No action until the economic situation clearly shows signs of deteriorating Click here
European Central Bank 1.5%  9 February  No change in rates, possible further liquidity measures Click here

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