3 Numbers: UK Industrial Output On Track To Rebound
James Picerno | Jan 11, 2017 01:12AM ET
- UK industrial production set to revive in today’s November update
- Moderate UK growth is expected for today’s Q4 GDP growth estimate from NIESR
- Rise above 2.6% for the 10-year Treasury yield could be a tipping point for bonds
The UK economy is under the microscope today with the release of two reports. First, the government publishes an update on industrial production for November, followed by the Q4 GDP estimate from the National Institute of Economic and Social Research (NIESR).
Meantime, keep a close eye on the 10-year Treasury yield in the wake of bond manager Bill Gross’s warning that a jump above the 2.60% rate would mark the end of the bull market for bonds.
UK: Industrial Production (0930 GMT): Analysts are expecting a rebound for Britain’s industrial sector in November.
If the projections are right, the news will further boost confidence for dismissing recent predictions that the UK is headed for an economic slump after voting in June to leave the European Union.
Econoday.com’s consensus forecast sees industrial output rising 0.6% in November for the monthly comparison following a 1.3% slide in the previous month.
In addition, the year-over-year trend for industrial activity is expected to return to a positive reading – 0.8% – after going negative in October by 1.2%.
A return to growth is also expected for the manufacturing slice of industrial production.
Economic numbers from other corners also paint an encouraging profile. “The jobs market continues to beat expectations as we begin the New Year,” said the chief executive at Recruitment and Employment Confederation this week in connection with the update of the Markit/REC Report on Jobs for December.
Meanwhile, the UK Manufacturing PMI jumped to a 30-month high for last month, providing support for expecting that industrial activity remains on track for recovery.
“Based on its historical relationship against official manufacturing output data, the [PMI] survey is signalling a quarterly pace of growth approaching 1.5%, a surprisingly robust pace given the lacklustre start to the year and the uncertainty surrounding the EU referendum,” an IHS Markit economist said.
And as detailed below, the crowd is also expecting upbeat news in today’s estimate for GDP growth in the fourth quarter.
The future’s still uncertain, of course, but for the moment the data suggests that any post-Brexit blowback has been a relatively minor issue for the macro trend.
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UK: NIESR GDP Estimate (1500 GMT): Fourth-quarter economic output is expected to ease slightly to a 0.5% quarterly rate, based on the consensus forecast (via TradingEconomics.com) for today’s estimate from the National Institute of Economic and Social Research (NIESR).
If the prediction is right, the NIESR release will effectively put a nail in the coffin for previous warnings that last June’s vote to leave the European Union would push the UK into a recession.
Although the expected Q4 advance is weaker against Q3’s 0.6% increase, the forecast still compares favourably with recent history.
In fact, some analysts advise that the UK macro trend may be strong enough to warrant a round of monetary tightening.
In the wake of encouraging PMI survey data for Britain’s manufacturing and services sectors in December, IHS Markit’s chief business economist said that the improvement in the mood “suggests that the next move by the Bank of England is more likely to be a rate hike than a cut”.
Meantime, a slightly slower Q4 GDP growth rate in today’s report may be due to falling output of North Sea oil rather than a fundamentally softer macro trend, an economist mused in Investors Chronicle last week.
Short of a hefty downside surprise in today’s figures, this much is obvious: Confidence is rising that the UK economy will close out last year with a healthy macro trend.
US: 10-Year Treasury Yield The so-called "bond king" on Tuesday advised investors to monitor the 10-year yield and watch for any move above 2.60%, which is a bit more than 20 basis points above the current yield (as of mid-day trading yesterday).
“If 2.60% is broken on the upside – if yields move higher than 2.60% – a secular bear bond market has begun,” the widely followed Janus Capital fund manager Bill Gross wrote yesterday.
“Watch the 2.60% level. Much more important than Dow 20,000. Much more important than $60 a barrel oil. Much more important that the dollar/euro parity at 1.00. It is the key to interest rate levels and perhaps stock price levels in 2017.”
The surge in yields generally following Donald Trump’s election victory pushed the 10-year rate to 2.60% level in mid-December.
But the crowd has become a bit more cautious in the new year in assuming that the changing of the guard in Washington will trigger a sharply higher rate of economic growth.
Nonetheless, the recent pullback on the 10-year yield has been slight, with the benchmark rate hovering just below 2.40% in mid-day trading on Tuesday. That's still sharply higher from roughly 1.80% on the eve of the November 8 election.
The question weighing on the crowd is whether the pumped-up expectations for stronger growth under a Trump administration are more than politically inspired speculation?
Pessimists say that on the employment front, the US economy is already at or near full employment and so there’s minimal opportunity for improvement.
“It’s very hard to see how Trump is going to double economic growth or create 25 million new jobs,” noted Chris Rupkey, chief financial economist at MUFG Union Bank.
But other analysts counter that firmer growth is in the cards once the Trump policy mix of tax cuts, lighter regulation, and infrastructure spending kicks in.
A new forecast from Deutsche Bank, for instance, projects that the US GDP growth rate will double in 2018.
For the moment, the 10-year yield implies that the market’s betwixt and between for deciding what lies ahead.
A decisive rise above 2.60%, however, would tip the scales in favour of the economic bulls. But for now, reaching that milestone in the benchmark rate doesn't look imminent, based on the modest downside bias for yields in recent weeks.
Disclosure: Originally published at Saxo Bank TradingFloor.com
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