MARKET UPDATE: LAST CHANCE FOR GERMAN COALITION TALKS AS EUROZONE CONFIDENCE RISES
LAST WEEK – KEY TAKEAWAYS
Chinese service sector growth hits three-year high
China’s services sector activity expanded at its quickest pace since August 2014, suggesting a buoyant economy. The Caixin/Markit services purchasing managers’ index (PMI) climbed to 53.9 in December – from 51.9 in November – with a reading above 50 indicating growth. As mentioned last week, the manufacturing PMI rose to 51.5 in December, up from 50.8 the previous month.
US unemployment remains at low
Unemployment in the US remained steady at 4.1% in December, the third month in a row it has remained at this low level. The Bureau of Labor Statistics reported that 148,000 jobs were added to the economy during the month. This was lower than the 190,000 consensus estimate. Average hourly earnings rose by 9 cents to $26.63 in December, though some are optimistic that wage growth will pick up in 2018 which could help push up inflation.
UK productivity at fastest rate for six years…
Hard-working Brits have seen their productivity increase at the fastest rate in more than six years, though we still lag many other economies. According to the Office for National Statistics, economic output per hour grew by 0.9% in the three months to September 2017, thanks to stronger growth in factory output. Although only a small rise, it was the largest since the second quarter of 2011. However, another contributing factor was a fall in the number of people entering the workforce.
… As household expenditure falls
Visa’s UK consumer spending index showed household expenditure fell 1% in December, compared to a year earlier. Annual spending in 2017 fell by 0.3%, making it the worst year for consumer spending in the UK since 2012. Consumer spending was hit last year by a sharp increase in inflation and sluggish wage growth, despite unemployment falling to a 42-year low. The index is based on total spending on Visa credit, debit and prepaid cards, which account for £1 in every £3 spent in the UK.
Talks underway to thaw Korean relations
Inter-Korean talks are going ahead to decrease tensions on the peninsular, a big topic of discussion being the North’s participation in the Winter Olympics in Pyeongchang next month. Any dialogue between Pyongyang and Seoul is welcome, particularly as the two neighbouring nations are officially still at war.
Looking ahead – TALKING POINTS
Last chance for Merkel to form German coalition government
More than three months on from the general election, and Germany is still without a new government. This could change in the week ahead as chancellor Angela Merkel’s Christian Democrats (CDU), sister party the Christian Social Union (CSU), and the Social Democrats (SPD) enter into five-day talks aimed at forming a stable coalition. Immigration, tax and healthcare are points of contention. An initial attempt to form a three-way coalition between the CDU/CSU, the green party and the Free Democrats collapsed in November, with many Germans equally sceptical about the prospects for success from the latest talks.
Failure to reach a compromise would have wider-reaching implications in terms of confidence across the eurozone, and in order to serve a fourth term in office, Merkel would have to either form a minority government or announce new elections.
This is the biggest threat yet to her leadership – a poll published by the ARD TV channel found that 45% of Germans were opposed to her remaining chancellor. Germany’s annual Gross Domestic Product (GDP) rate is due to be published on Thursday (11 Jan), forecast to come in at around 2.5%
Germany annual GDP growth rate – January 2015 to November 2017
Source: Federal Statistical Office, Tradingeconomics.com
Eurozone confidence up; unemployment to fall?
Data published by the European Commission on Monday (8 Jan) showed economic confidence across the eurozone has hit its highest level since October 2000, with the economic sentiment indicator climbing to 116.0 in December from 114.8 in November. A further measure showed that consumer confidence was at its highest level since January 2001, with the index registering its first positive figure for some time.
The eurozone region has been a standout performer of late, and further good news could come on Tuesday with a possible shrinking of unemployment levels. The last published data for October registered at 8.8%, compared to 9.8% one year earlier. This represented the lowest jobless rate since January 2009.
Eurozone unemployment rate – October 2016 to October 2017
Source: Eurostat, Tradingeconomics.com
THE OMNIS VIEW
Through a well-diversified approach to asset allocation, the Omnis investment team aims to defend and grow the value of your portfolio through market cycles. The renewed strength of the eurozone economy surprised many last year, particularly given the populist threat to the region’s future in the wake of the Brexit vote. European stocks and bonds should be key holdings in any diversified investment portfolio, with the region home to some of the best-run companies in the world.
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