Q1 GDP : recession for the UK, lower growth for the US

Last week, the markets began on a weak note because of political uncertainty. French presidential candidate François Hollande beat Nicolas Sarkozy to win the first round of the presidential elections, while the Dutch prime minister resigned after the coalition government failed to agree on austerity measures. Despite this, encouraging corporate earnings reports led US and European equities to advance for a second consecutive week. More notably, tech giant Apple reported a 59% increase in revenue and 94% jump in net income on the same quarter a year earlier. 10-year government bond yields in the UK, US and Germany all slipped lower over the week. Meanwhile, the euro reached a three-week high against the dollar and Brent crude oil slipped back towards $120 per barrel.

The UK entered recession after the first estimate of Q1 GDP (Gross Domestic Product) came in at -0.2% but experts have questioned the reliability of official construction numbers. On Wednesday, the US Fed announced that further measures to boost the economy would only be taken if the US economic outlook weakens. Revisions to economic projections were more upbeat for 2012; GDP is predicted to grow between 2.4% and 2.9% while unemployment is forecast to be lower, between 7.8% and 8%. Meanwhile the Federal Open Market Committee toned down its assessment of the jobs market and noted a recent pick-up in inflation. US consumer confidence fell the most in a year after the latest weekly unemployment claims rose more than forecast to 388,000 signalling a slowdown in employment; the weekly Bloomberg Consumer Comfort Index fell from -31.4 to -35.8. On Friday, US Q1 GDP came in at 2.2% annualised, behind market expectations of 2.7%. While consumer spending growth added 2% to the figure, cuts in government spending took 0.6% off. Meanwhile Spain’s credit rating was downgraded from A to BBB+ with a negative outlook by Standard & Poor’s; yields on Spanish 10-year government bonds have risen above 6% this month. Almost 1 in 4 Spaniards are unemployed while its banks may need bailing out. Amid additional signs of a slowing economy, the Bank of Japan boosted its asset purchase programme by ¥5 trillion, taking the total stimulus target to ¥70 trillion by June 2013.

Shaping the markets – this week

In the limelight : UK construction and US jobs data

On Monday, Spain reported it is back in recession after Q1 GDP contracted by 0.3% quarter-on-quarter. Tuesday may reveal a rise in China’s manufacturing PMI for April from 53.1 to 53.6 as the economy may have troughed in Q1 2012 and the upward momentum could continue in April. There may be a small decline in UK manufacturing activity from the 52.1 level registered in March as Euro area PMIs fell in March. On Wednesday the focus will be on UK construction sector data, where the sharp slowdown over the first quarter was blamed for dragging the UK back into recession – the CIPS Construction Index is likely to have eased back to 55.0 from 56.7 in March. April’s Euro area PMI manufacturing index is likely to remain in contraction territory at 46. On Thursday the April PMI reading for the UK services sector is likely to fall from 55.3 in March to 54.3. No changes are forecast for Eurozone monetary policy and Eurozone services PMI, which is in contraction territory at 47.9.

In the US, on Tuesday the consensus is for ISM manufacturing data to weaken slightly from 53.4 in March. The focal point on Friday will be jobs data; the consensus is for a net addition of 175,000 in non-farm payrolls in April from 120,000 previously.

Markets in numbers

World equities

Index

% 1W

% YTD

S&P 500 Composite

1403.36

1.8

11.6

Dow Jones Industrials

13228.31

1.5

8.3

NASDAQ Composite

3069.20

2.3

17.8

FTSE 100

5777.11

0.1

3.7

Euro STOXX 600

259.13

0.5

6.0

Nikkei 225

9520.89

-0.4

12.6

Hang Seng

20741.45

-1.3

12.5

Benchmark government bonds

Yield

1W /bp

YTD /bp

US Treasury – 10 year

1.93

-3.7

5.8

UK Gilt – 10 year

2.04

-4.9

5.5

German Bund – 10 year

1.61

-1.8

-22.2

Japanese JGB – 10 year

0.89

-4.0

-9.4

Credit indices

Yield

1W /bp

YTD /bp

IBOXX £ Non-gilts All maturities

4.83

-3.6

-12.6

ITRAXX Crossover 5 Year (MID)*

665.53

-16.5

#NA

Volatility index

Index

% 1W

% YTD

CBOE PX Volatility – VIX index

16.32

-6.4

-30.3

Commodities

Index

% 1W

% YTD

Brent Oil ($/Barrel)

119.51

0.2

10.4

Gold Bullion $/ Troy Oz

1664.18

1.4

5.7

Currencies

vs $

vs £

 

¥

80.45

130.6

$

1.62

Euro

1.326

1.227

Source: Datastream. * Spread in basis points. Past performance is not a guide to future performance.

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