Economic Data Analysis

Signs of Cyclical Turn?

• Key indicators suggest modest improvement in activity, supporting risk sentiment.
• The coming week's PMI's should add to the view that global output is firming.
• Euro area remains key risk to a more positive outlook, with the upcoming Summit in focus.

Equities followed the now familiar pattern of 2012: a more cautious close following earlier gains. Nevertheless US, Euro area and UK bourses looked like closing another week in positive territory, a further testimony to the wider improvement in risk sentiment this year. Unless the last days of the month see a sharp reversal, January looks set to post a strong rise on the month, something that in stock market lore bodes well for the year ahead (true just over twothirds of the time over the last thirty years).

Improving global economic indicators have underpinned the recovery in risk appetite. Regional variation remains with US indicators appearing more robust and European indicators generally less weak, yet both have followed the same direction. The coming week will post further evidence with global manufacturing PMIs posted for January. These are often key indicators of global cyclical turning points. With headline Euro area PMIs significantly firmer on a preliminary basis and our own forecast of further improvement domestically, we are hopeful of further news supportive of the view that global economic activity is now turning higher again.

That said the US ‘surprise' index has been running around 10-year highs since last November. We forecast further gains in both the ISM indices, looking for a rise in the manufacturing ISM to 54.2. Yet markets are expecting a pick-up to 54.5 from 53.9 suggesting indicators will have to work harder to generate positive ‘surprises' over the coming months. The first week of the month also brings the payrolls report on Friday. We forecast a further pick-up in payrolls in January to 165k reflecting the falling trend in initial jobless claims (this is modestly firmer than the consensus 150k). To our minds, the US is now in the early stages of recovery and the Fed's cautious assessment last week could prove too downbeat. Nevertheless Chairman Bernanke is unlikely to change tack in his testimony to Congress on Thursday, keeping yields low. But brighter economic news could ultimately stretch this official view and result in upward pressure on yields.

The key risk to a more positive global outlook remains the Euro area. With the EU leaders' Summit on Monday this risk will come to the fore again. Ongoing negotiations about Greek PSI (debt swap) continue with parties hopeful of reaching agreement by Monday. Recent comments suggest that some ECB participation may help narrow the difference between the two negotiating parties. This will allow the Summit to focus on the next Greek bail-out package, originally envisaged at €130bn, which may require greater Euro area input if the PSI deal falls short. Yet the key tasks for the Summit are the completion of a framework for the Fiscal Compact, to allow formal passage at the March summit, and the formal approval of the ESM, for official sign-off later in February. Markets appear sanguine that these milestones will be achieved. Yet to our minds, the telescoped timetable for these interconnected negotiations provides plenty of scope for slip-up, with the global consequences of policy failure as large as ever.

Domestical ly a relatively quiet week for scheduled releases sees us focus on the PMI releases. We are optimistic for further gains this month. Volatility of quarterly growth numbers means the UK could yet escape a ‘technical ' recession. But the wider question remains over whether the UK can stage a more resilient recovery this year. Further signs of a turn in global cyclical activity would clearly be supportive.

UK DATA PREVIEW

Manufacturing PMI (Jan)

December's manufacturing PMI posted a surprising rise to 49.6. Since then there have been further signs that manufacturing output may be stabilising. Preliminary estimates of January's European PMIs posted further gains, bolstering hopes of another rise in the UK series despite a much larger domestic rise in December. More pertinently, the CBI posted a marked increase in expected output in January, a series that has historically moved in line with the PMI. As such, we forecast a significant increase in the headline PMI this month, pencilling in 50.8. This would suggest stabilisation in manufacturing output after Q4's sharp 0.9% contraction. In turn, this would go some way to removing the risk of a second successive quarter's fall in output and a technical recession.

Services PMI (Jan)

Similarly the services PMI posted a sharp rebound in December (54.0). There is little to guide estimates of the services PMI, although movements often mirror those in the underlying manufacturing PMI, reflecting the direct impact of increased manufacturing output on services as well as more general macroeconomic trends. Given our manufacturing call, we pencil in a small rise in the services PMI to 54.5 (smaller allowing for a distortive impact of last year's snow on the seasonal adjustment process). While still indicating subdued ‘core' services activity, at this level the PMI is an area that has historically seen the MPC indifferent to providing additional stimulus to the economy. Given structural impediments on credit provision and the likely size of the output gap, this should not prevent a further £50bn QE boost in February.

GfK Consumer confidence (Jan)

While business confidence has tentatively shown signs of improvement, consumer confidence remains weak. Sentiment continues to be undermined by concerns over the euro area and a deteriorating domestic labour market outlook. With unemployment currently at a 16-year high, and the government committed to further public sector spending cuts our in-house Consumer Barometer suggests that job security and prospects remain weak. As such, we forecast the headline GfK index in January at -31. While the outlook for consumers should improve somewhat this year, any improvement is likely to be modest. Despite inflation expected to slow sharply this year, real incomes are expected to contract once again in 2012, constraining any pick-up in consumer spending, with the labour market presenting ongoing downside risks.

Mortgage approvals (Dec)

Contrary to the deterioration in consumer sentiment, the housing market has continued a slow improvement. In November, mortgage approvals rose to 52.9k and we look for a rise to 54.0k in December. Such an outcome would mark the highest outturn since December 2009 (although still less than half the pre-crisis average). While activity around mid-year was supported by some easing in credit conditions, more recently the end of the stamp duty holiday looks like to be a hindrance to the recovery. The scheme provided temporary stamp duty relief for firsttime buyers completing on properties valued at between £125k - £250k. However, with this scheduled to be reversed end-March, details of the government's mortgage indemnity scheme still sketchy and risks of the rise in commercial banks funding costs being pushed through, housing market activity could slow again in 2012.