A View from the Bridge - November 2013

The global economy is expected to continue expanding at a moderate pace over the coming two years. However in its latest 6 monthly economic outlook, the OECD has revised its forecasts downwards in 2013 to 2.7% (3.1%) and in 2014 to 3.6% (4%). The main causes for concern are a slowdown in emerging markets, brinkmanship over the US debt ceiling and concerns over the impact of the Fed’s tapering programme.

Elsewhere, the European Commission has revised its forecasts for a shrinking economy from -0.4% (-0.6%) reflecting a slight increase in GDP growth in Germany off-setting shrinkage across most of the rest of Europe. That said, it hasn’t stopped a further downgrade of France to AA and the Netherlands losing its coveted AAA status. The more worrying data coming out of the EZ relates to the spectre of deflation as the money supply (M3) has dropped to 1.4% from target of 4.5% reflecting a sharp drop in corporate lending across the southern states. In addition, the EC having dropped rates this month by 25bp, now has little room to manoeuvre and there will be increasing pressure to cut rates to 0% and to launch QE!

The largest revision of growth prospects was reserved for the UK. With factory orders at the highest levels for 18 years, the service sector growing at the fastest pace since 1997 and house prices rising at the fastest since 2006, the OECD forecast growth of 1.4% (0.8%) for 2013 and 2.4% for 2014. However, with house prices in danger of running away, the Bank of England quickly took remedial steps by putting the brakes on the funding for lending scheme available for mortgages. Lest we get carried away, the UK now has the highest inflation rate in the European Union and we are set to have the worst trade deficit in the industrialised world. Looking forward to the Autumn statement from the Chancellor to see how we can tackle both of those!

Near term rates continued their recent sideways movement unchanged from last month (3mth closed at 0.52%, 6mth closed at 0.60%). In contrast Fixed Term rates (longer than 1 year) were all higher, 5 Years closed at 1.74% (+15bp), 10 years closed at 2.72% (+19bp), 20 years closed at 3.27% (+16bp) and 30 years closed at 3.33% (+13bp)

UK Government Bond yields were also higher. The 10 year UK Gilt Benchmark closed at a yield of 2.768% and the 30 year UK Gilt Benchmark closed at a yield of 3.60%.

GBP future inflation expectations expressed through 20 year Inflation Swaps traded within a range of 3.60% and 3.68%, closing at the high of 3.68%

In the Foreign Exchange Market GBP was higher against both the USD$ at 1.6375 (1.6048) and the EURO at 1.2038 (1.1806)