Matthew Bennett, head of international equities at NFU Mutual, reviews the markets and economic announcements for the week commencing 21 March 2011.
 
Inflationary pressures mount further

While the events in Japan and Libya and the chancellor George Osborne’s Budget speech were dominating headlines last week, the latest inflation numbers grabbed the attention of investors and consumers.

Consumer Price Inflation (CPI) rose to 4.4 per cent in February, double the government’s 2 per cent target for the second month running. The Retail Price Index (RPI), which includes mortgage interest payments, increased to 5.5 per cent. CPI and RPI had stood at 4 per cent and 5.1 per cent respectively in January.

If inflation continues to run at more than twice its target then it is possible that markets could lose confidence in the Bank of England if it fails to act in raising the base rate from 0.5 per cent. This is despite the risks of denting the fragile recovery.

The cost of food, fuel and clothing were the main drivers behind February’s price increases and the possibility of no swift end to the conflict in Libya has meant the oil price has remained elevated throughout March.

Economic and stock market update

Markets enjoyed their best week since November as progress was made in cooling the reactors at Japan’s Fukushima nuclear power plant.

Retailers in particular enjoyed an excellent week. Kingfisher and Next announced results which beat analysts’ expectations and a report from Deutsche Bank recommended buying the shares of UK retail companies.

On Wednesday George Osborne announced the Coalition Government’s Budget. Financial stocks reacted negatively to the news that banks would be excluded from a cut in the corporation tax rate, while the share prices of oil majors were broadly unsettled by news they would be targeted for tax rises.

Amongst the winners from the Budget were homebuilders. Proposed measures to help first time buyers meant that, to mention just two, Taylor Wimpey and Barratt enjoyed gains in their share price.

Away from the UK, debt concerns in the eurozone remain. Portugal’s Prime Minister resigned on Thursday after austerity measures were rejected. Ratings agency S&P downgraded Portugal and speculation intensified that Portugal would be the third country, after Greece and Ireland, to require assistance from the EU bailout fund.

Across the pond, stronger exports and consumer spending meant US GDP numbers for the fourth quarter of 2010 were revised upwards from 2.8 per cent to 3.3 per cent. It wasn’t all good news though as consumer confidence declined sharply and durable goods orders fell.

The week ahead

Investor risk appetite returned last week and hopes will be high that markets can consolidate their gains at above their pre-Japanese earthquake and tsunami levels.

There are a number of economic announcements to digest. UK PMI manufacturing data will provide a useful indication of the health of the economy, while there are also retail sales and housing numbers to digest. In the US the closely watched monthly employment figures are released on Friday.

A close eye will also be kept on a raft of corporate news set to be released, while it’s hoped there will be no significant deterioration to the situations in Japan and Libya.