The Global Month Ahead – An insight into May 2012

Financial News

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

Whether you are invested in the UK or overseas, in stocks and shares or fixed interest assets, read on to discover the latest insights from one of the UK’s most respected investment managers.

United Kingdom

Outlook Issues
The Bank of England’s (BoE) Monetary Policy Committee (MPC) meeting in May will be closely scrutinised as the current programme of asset purchases winds up. In April, the MPC showed a markedly more hawkish stance regarding inflation, yet Q1 GDP growth in the UK was negative. This creates a problem for the MPC in terms of policy – another round of quantitative easing would exacerbate inflation fears, yet any interest rate hike would be seen as challenging to growth prospects. The most likely outcome is inaction – allowing QE to finish, without committing to further purchases.
This month also sees the publication of the Inflation Report – the BoE’s quarterly analysis of the outlook for inflation and GDP growth in the UK. The near-term persistence of higher inflation and the continuing weakness in GDP growth suggests that the BoE will revise its predictions somewhat – perhaps inflation above 3.5% until the end of 2012, with GDP growth remaining below 1% over the same period.
The negative GDP growth of -0.2% has been trumpeted as announcing the beginning of a double dip recession, and the PMI manufacturing data – particularly new orders – was far weaker than expected. In fact, the number gives no immediate cause for alarm – although the weakness in PMI manufacturing indicates that there is still no clear sign of expansion in the UK.

North America

Outlook Issues
The United States keeps expanding – first quarter GDP growth was 2.2%. However forecasts by analysts ranged from 1.2% to 3.6%, making it hard to decide whether the US is doing well, doing badly, or just doing. The Federal Reserve has treated these figures with cautious optimism, but will not be taking action to either loosen or tighten policy. Domestic demand increased in Q1 2012, and as long as unemployment continues its slow downward trend, the Fed will remain static.
The “fiscal cliff” in 2013 has been much talked about – without intervention, taxes are due to rise (as previous exemptions expire) and government spending is due to fall. The conjunction of these is calculated to wipe around 3.5% off US GDP – obviously a huge burden for a fragile economy to cope with. Chairman Ben Bernanke stated very clearly that there is “absolutely no chance that the Federal Reserve could, or would have any ability whatsoever to offset that effect on the economy”. Although this is cause for worry in six to eight months’ time, this is a reassuring sign that currently, Fed policy remains consistent – we are unlikely to see a rise in interest rates until the 2014 deadline.

Europe ex UK

Outlook Issues
The main focus of attention in Europe this month is likely to be French housing – specifically the matter of who is occupying the Palais de l’Élysée, socialist François Hollande or the current President centre-right leaning Nicolas Sarkozy. In the battle for the French Presidency, François Hollande has developed a commanding lead; he is ahead by 8-10% in the most recent polls. Unless President Sarkozy is able to rouse the apathetic French voters in the next few days, Monsieur Hollande looks likely to win.
Monsieur Hollande has made it clear that he feels the Eurozone policymakers should increase focus on economic growth. Interestingly, senior ECB members have made a number of similar comments recently; to the effect that they too believe more must be done to support GDP growth in Eurozone countries. The Executive Board of the ECB will instigate some sort of “growth compact” – in an effort to appease Monsieur Hollande and like-minded European leaders. With the relatively low oil price anchoring inflation somewhat, further non-standard policy measures seem likely within the next couple of months – probably an extension of the multi-year bank refinancing operations perhaps.

Other markets

Outlook Issues
China has been making some unexpected moves in 2012. The People’s Bank of China increased the daily trading band of the Renminbi to 1%, and the China Development Bank signed agreements with the other BRICS to establish credit lines in Renminbi. China has always been somewhat obstinate in its international conduct, refusing to be pressured into opening up its economy too much. However, these decisions, although largely symbolic, suggest that China may feel itself ready to become fully involved on the world stage – further progress is expected.
The Bank of Japan expanded its asset purchases by 5 trillion Yen at the end of April, with ¥200bn of this being used to buy indextracking ETFs. The programme was also extended by 6 months to June 2013. This current programme began in February as an attempt to weaken the Yen vs the Dollar, and with the Yen creeping downwards again, more moves are likely. These actions (particularly the purchase of riskier assets) were bolder than expected, emphasising the BoJ’s tacit commitment to exceeding market expectations. This level of activity from the BoJ has not been seen for some years, and it suggests that failure to achieve the 1% inflation target will be met with yet more easing – possibly not this month, but in the near-term.


Present Situation Next Meeting Expectation Source
Bank of England 0.5% 9 & 10 May No action likely – stalemate situation as inflation is monitored Click here
US Federal Reserve 0% – 0.25% 19 & 20 June No action while the economic situation remains balanced Click here
European Central Bank 1.5% 3 & 16 May Consideration of further LTRO’s Draghi’s call for growth Click here

The views expressed in this document are for information only and do not constitute investment advice.

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