Ugly Macro Factors Converge on the UK

POSITION:  Consistently negative bias this year and recently covered our short via the EWU

 

The pain is rising in the UK from a macroeconomic standpoint, with new data out today and Chancellor of the Exchequer Alistair Darling's downward forecast on GDP. Britain will likely not see modest growth until well into 2010. 

 

We've had a consistently negative view on the UK; just yesterday we covered our short position via EWU for a modest gain. The budget deficit is set to hit an estimated 11% of GDP this year and the trade gap in the fiscal year through March tripled to 90 Billion Pounds ($117 Billion). Also, jobless claims rose 73,700 in March to 1.46 million, the most since 1997. The FTSE is down -9.1% YTD. This is miserable absolute performance, never mind awful relative to countries socializing like the USA and Japan.

 

Today in his budget speech Darling said the economy will shrink 3.5% this year, far from the 1.25% contraction he forecasted in November of last year. While the downward revision did not come as a surprise to us, the announcement helps to confirm our negative bias towards the UK's leadership and its ability to right the economy.  The UK's statistic office, HM Treasury, which collects a selection of forecasters, helps to confirm Darling's number, albeit their average GDP came in at -3.7% for this year. According to the same estimates, the UK won't see positive growth until 2010, yet at a modest rate of +0.3%.  

 

As a measure of inflation, CPI rose 2.9% Y/Y from 3.2% in February Y/Y, confirming its downward momentum on a month-over-month basis. It's likely we can expect CPI to fall below the Bank of England's 2% target in Q2. While deflation is being felt throughout the EU, we believe that the UK's rate of decline will outpace its European peers.  Deflationary pressure tends to reverberate throughout an economy, including depressing earnings growth, consumption, home prices, and investments, while pushing up unemployment, savings rates, and bond yields to name a few.

 

One positive data point worth mentioning is housing. According to Hometrack national average prices, (see chart below) UK housing prices are improving. The rate of change on a year-over-year basis is declining and month-over-month there was a clear upturn in October of last year.  Despite the positive rate of change, we're of the firm opinion that the uptick in prices will take a considerable duration to hit Main Street, yet on the margin the data is positive.

 

While the question isn't if the UK will recover, but when and at what rate... until we see a more positive trajectory in that recovery, we'll continue to hold our bearish view.   

 

Matthew Hedrick
Analyst

 

Ugly Macro Factors Converge on the UK - ukhousing


Cartoon of the Day: Hard-Headed Bears

How's this for "hard data"? So far, 107 of 497 S&P 500 companies have reported aggregate sales and earnings growth of 4.4% and 13.2% respectively.

read more

Premium insight

McCullough [Uncensored]: When People Say ‘Everyone is Bullish, That’s Bulls@#t’

“You wonder why the performance of the hedge fund indices is so horrendous,” says Hedgeye CEO Keith McCullough, “they’re all doing the same thing, after the market moves. You shouldn’t be paid for that.”

read more

SECTOR SPOTLIGHT Replay | Healthcare Analyst Tom Tobin Today at 2:30PM ET

Tune in to this edition of Sector Spotlight with Healthcare analyst Tom Tobin and Healthcare Policy analyst Emily Evans.

read more

Ouchy!! Wall Street Consensus Hit By Epic Short Squeeze

In the latest example of what not to do with your portfolio, we have Wall Street consensus positioning...

read more

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more

6 Charts: The French Election, Nasdaq All-Time Highs & An Earnings Scorecard

We've been telling investors for some time that global growth is picking up, get long stocks.

read more

Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more