UK Negaitve Surpise, but Apple Trumps

The UK reported a disappointing 0.2% contraction in Q1.  The consensus was for a small gain.  since Q4 '11 GDP also contracted (-0.3%), many observers are claiming recession.  Yet that word is among the more slippery one economists use and has not objective meaning.  Two quarters of contracting GDP is a popular notion of recession, but in the US, for example, that does not define a recession.  The overall point is that the UK economy is best understood as broadly stagnant.   The Olympics and the Jubilee offer support to the economy in the months ahead. 

The GDP data does not change our view that the BOE will refrain from expanding its gilt purchase (QE) scheme next month, when the current program is complete.  Yet, like the Federal Reserve that does not rule out QE3, a new round of asset purchases by the BOE is dependent on the economic performance going forward. 

That said, most disappointing for the UK is what appears broader weakness.  The BOE had warned of weakness in the construction sector, and it was indeed weak.  However, the real drag came from services.  The other important take away is the gaps between survey data and real sector data.  The sense of resilience of the UK economy was largely a function of survey data.  Going forward, market participants may be more restrained in reacting to such reports. 

The data was sufficient to knock sterling off its approximately 6-month high, but bids returned near $1.6080.    As the cross unwinds, the euro is being helped to new 3-week highs .   The euro itself is being helped by a couple of other considerations today as well. 

One of those considerations can be summarized in one word:  Apple.  Its earnings blew away expectations and single-handily helped lift the general risk appetite and helped lift the MSCI Asia-Pacific Index and European bourses.

Even though the ECB's bank lending survey showed tightening conditions, the more report underscored that demand has weakened.  Bank shares in Europe are rallying and peripheral spreads are narrowing are are key core spreads like France-Germany and Dutch-German. 

Another important consideration is the FOMC meeting outcome.  While the FOMC statement and economic assessment is unlikely to change substantively, many are more wary of Bernanke's press conference.  We have argued that the troika as in BYD (Bernanke, Yellen and Dudley) is key and they are more dovish than many of the regional presidents.   

A weak durable goods order report before the FOMC meeting concludes may prevent a dollar recovery until after Bernanke and barring fresh dovish overtures, the market's attention is likely to shift back toward the May 6, when both France and Greece hold elections, which some claim, the future of the euro zone is at stake. 

Lastly, note that India's sovereign credit outlook was cut to negative from stable by S&P, citing the risks of slower growth and widening external imbalance.  This weighed on the rupee and local assets.  This brings India a step closer to losing its investment grade status.