Economic and markets briefing: last night and today

We’ve got so used to rating agency downgrades since the onset of the global financial crisis that it’s quite a day when there’s an upgrade – but Fitch have upgraded its sovereign credit rating for Greece to B-minus from CCC, citing a rebalancing of the economy and progress in eliminating its fiscal and current account deficits that have reduced its risk of Euroland exit. Separately, Finance Ministry sources play down European Commission’s warnings on the fiscal gap, expecting the shortfall to be smaller at €4.2 bn and not €8bn as was suggested. Meanwhile Cyprus Finance Minister Georgiades said the government will be careful about a further easing of capital controls while aiming to act “as soon as possible”. Cyprus has already lifted some banking curbs and faces calls from European partners to do more.

Then in China, Chinese Premier Li Keqiang said that there was limited room for using stimulus and direct government investments to achieve China’s development targets for this year. He also said that China has to depend on market mechanisms and over-reliance on government initiatives and policies for growth cannot be sustained and may create new risks. The context for this is ofcourse recent macro data disappointment, and the government appears tolerant of the slowdown, suggesting a new lower growth equilibrium for China.

Turning to what’s coming up today, in the UK we have the Bank of England’s Inflation Report and employment data. We don’t expect any major innovations in the Inflation Report given that the BoE left policy unchanged at its May meeting, and there do not appear to have been any substantial shocks to GDP or inflation since February (cyclical data has ticked up somewhat in the most recent couple of months). There is likely to be some discussion around the Funding for Lending Scheme. As for jobs, we expect relatively solid data. The headline unemployment rate may move up to 8.0% on the back of single-month dynamics, but we expect a decline of around 5,000 in the claimant count measure of unemployment. As for market relevance, the recent resilience of sterling versus the euro can be attributed to the streak of positive UK data surprises and the reduced likelihood of more quantitative easing. This makes the pound vulnerable to a dovish Inflation Report or downside data surprise.

Later on in the US, we’re due producer price index (PPI) and industrial production data. The April PPI  looks set to come in down 0.9%, which would be the biggest drop in nearly four years. The key driver would be lower energy prices, but food prices also should be a drag. If the estimate of -0.9% turns out to be correct, year on year PPI inflation would ease to 0.4%, which would be a fresh four-year low, and core PPI inflation would be steady at a two-year low of 1.7% year on year. The low PPI pressure in part reflects the dull economic climate and US industrial production should post a small drop in April while manufacturing output should post the first back-to-back decline since June 2009. But the picture isn’t disastrous and despite short-run softness in manufacturing output, the imbalances between supply and demand are not sufficient to bring the current industrial expansion to a halt. In the near term, and following the recent substantial sell-off, the US Treasury market may actually be oversold, with therefore scope for a modest rally near term, which could be catalyzed by softer industrial and inflation data. But we would see that as rally in the context of a long term cyclical trend to higher yields, just as with gilts.

Of course the implications of more modest growth trends in both developed economies and China ripples out to other economies. So for example, Malaysia’s GDP growth looks set to moderate to 5.0% yoy in Q1 from 6.4% yoy in Q4, although consensus is 5.5% yoy. It’s just that the combination of weak global growth, unfavourable commodity prices, and locally, the uncertainty ahead of elections, will likely drive growth lower in H1 – but importantly we expect a pickup in H2. As ever the challenge is anticipation of changes in fundamentals and what markets are pricing, without loss of focus on the sustainable long term.

James Bevan is chief investment officer of CCLA, specialist fund manager for charities and the public sector. CCLA launched The Public Sector Deposit Fund in 2011 to meet the needs of local authorities and other public sector organisations. You can follow James on twitter @jamesbevan_ccla