There was only one story in the markets yesterday and that was the very disappointing UK Q4 GDP release. The proud pound took an absolute thrashing after an extremely poor Q4 GDP figure shocked even the most pessimistic of forecasters.

In Q3 UK growth was recorded at +0.7% and prior to last week’s soft -0.8% UK December retail sales figure, was expected to come in around +0.5% for this preliminary number. It was clear that the snow in December would have had a negative impact on the high street so analysts revised their numbers down with the range of expectations sitting between +0.1% and +0.5%. Not in my wildest dreams would I have expected growth to have contracted by -0.5%. The government was quick to excuse the fall in growth by blaming Decembers weather. However when the negative impact of the snow is stripped out, growth is still non-existent at 0.0%, well below the initial +0.5% forecast.

It could have been much worse for sterling which fell less than 2 cents against the US dollar and less than a cent against the Euro following one of the biggest upsets I can remember in the markets.

We had expected the soaring UK inflation figures to eventually force the Bank of England’s hand in the first half of this year. Their credibility has been shot to pieces as CPI inflation sits well above the 2% target in 52 of the past 66 months. This dreadful growth figure now means a rate hike remains very much on ice until later this year.

The minutes from this month’s Bank of England meeting have just been released and show that another member Weale joined Andrew Sentence in voting for a rate hike. This is now old news however as none of the members would have known about yesterdays GDP number and may have voted differently had they known.

In a speech last night Bank of England Governor Mervyn King said he saw inflation rising to 4-5% in the coming months. He remains unconcerned however as his crystal ball shows the determinants of inflation falling back sharply and CPI to return to the target level. Really there are two scenarios required for inflation to fall as sharply as King suggests is possible. The first is for the UK economy to fall off a cliff back into deep recession. Demand would fall back to minuscule levels. The second (and more likely) is the economies of China and other emerging nations slowing down thereby reducing their demand for commodities. This insatiable demand for food and other commodities is what is keeping non-core CPI at such elevated levels.

Last night President Obama delivered the State of the Union Address with the main points being - A freeze on annual domestic spending for the next 5-years, no extension of the tax cuts to the wealthiest 2%, eliminating the billions given to oil companies and simplification of the corporate tax system to eliminate tax loopholes and reduce the tax rate.

Tonight we get the US Federal Reserve rate decision where 0.00-0.25% interest rates and US$600bn asset purchases are expected to be left unchanged. We may see a subtle improvement in the FOMC’s view of the US economic outlook.

The Reserve Bank of New Zealand is likely to leave interest rates on hold at 3.00% tonight. We expect another dovish assessment of the NZ economy given the disappointing data of late.

Ratings agency Fitch has said that a NZ sovereign downgrade from AA+ was likely without evidence of economic rebalancing. NZ is currently on negative watch. Prime Minister John Key has said the government is considering the part sale of state owned power companies and Air New Zealand to raise funds.


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Fatherhood is pretending the present you love most is soap-on-a-rope. Bill Cosby