UK leading indicator confirms positive monetary signal
Simon Ward
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Yesterday’s post explained that the global short-term leading indicator employed here fell at a slower pace in June, consistent with it approaching a late summer trough. The global measure, however, conceals notable divergences across countries. Among the major economies, the UK indicator has firmed while Japan’s has weakened sharply – see first chart.
The suggestion of an improving UK outlook accords with recent stronger real money expansion – six-month growth of real “M4ex” rose to 1.9%, or 3.9% annualised, in June, the highest since April 2009, ahead of a pick-up in economic activity.
The leading indicator implies that manufacturing output will recover during the second half of 2012 – second chart. (Note: May output strength and June weakness reflect bank holiday effects.) This forecast predates the Bank of England’s July decision to expand QE by £50 billion and launch a “funding for lending” scheme on unexpectedly generous terms – these actions will further enhance economic prospects for 2013, though with an associated future inflation cost.
Such considerations may warrant overweighting UK equities in a global portfolio, with a bias towards domestically-orientated FTSE 250 stocks, which usually outperform larger caps after the leading indicator rises – third chart.
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