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We’ve written on numerous occasions on the splintered leadership in the UK and the inability of the economy to show meaningful improvement over recent months. The most recent (lagging) data points suggest more of the same—high inflation and no improvement in unemployment while the economy drags off the bottom with a GDP reading of a mere + 0.1% in Q4 quarter-over-quarter.

UK CPI for January registered +3.5% year-over-year, up from 2.9% in December, and well above the target rate of 2%, with the components of transportation and energy as well as an increase in the VAT leading gains to the upside. (Note: PPI input prices rose 8.4% in January Y/Y). These inflationary levels can also be accounted for due to the deterioration of the Pound versus the USD and EURO a year ago.  Should the unemployment rate hold at this level, or even deteriorate, the set-up of increasing consumer and producer prices with meek growth is decidedly bearish.    

With the BOE voting to halt its 200 Billion Pound bond repurchasing program (ie quantitative easing through printing money), we’d expect macro fundamentals to pull back with the withdrawal of stimulus.   With the TREND line of the FTSE broken at 5284, the UK (via the etf EWU) will be one of the countries in Europe we’ll be considering on the short side. Stay tuned.

Matthew Hedrick

Exceptional Uncertainty - ukunempl