UK data points to a rebound in growth during Q2

UK PMI data for June is indicating that there has been an acceleration in GDP growth during the second quarter (Q2), following a sharp slowdown in the first (Q1). While the most recent PMI data has fallen slightly, the average for Q2 is consistent with quarterly growth of 0.5%. However, some forward looking aspects of the survey found that there is potentially some weaker performance over the coming months. For example, new orders fell to a nine-month low and the future activity index dropped sharply. Furthermore, the construction and manufacturing sectors of the economy have failed to pick up the slack from the consumer driven growth of the last 12 months. The potentially slowing growth rate in the second half of the year, may leave the UK economy short of the 1.9% anticipated by the Bank of England in 2017.

Following last week’s jump in global government bond yields, many are anticipating that there is further to run. The hawkish tone on central bankers has continues and bond investors are becoming increasingly wary of being exposed to rising interest rates. Furthermore, discussion around the limits of QE in the Eurozone has returned. Given the number of bonds in issue, the rules of the process and the rate of purchases, the time the European Central Bank has to taper their programme is shrinking. There are pending shortages of bonds in several countries, but most importantly in Germany.

A free trade agreement between the European Union and Japan was signed last week, bringing together over 28% of global GDP. While the deal could take years to finalise, both parties should benefit significantly. The auto industry is likely to be one of the major beneficiaries, with the deal facilitating an unrestricted movement of parts as well as finished goods to consumers. Nevertheless, given both regions are net exporters it is unlikely to fix the issue of low consumer demand, particularly in Japan. The EU has looked to use this agreement as a pin up example of the ability of the organisation to negotiate trade and could impact the level of inward investment from Japan into the UK.

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UK 10 Year Gilt Yield 1.257 1.3 0.043 3.42%

 

US inflation figures and retail sales for June are to be released on Thursday and Friday respectively. German, French and Chinese inflation data are also due to be announced during the week.