Stock market has overreacted to March industry data | Business …
Will one month’s manufacturing data really prompt the Bank of England to raise rates? Photograph: ANDY RAIN/EPA
Financial markets can be utterly perverse. To any normal person, news that industrial production recovered in March would be seen as good news, tentative evidence that the economy is emerging from a soft patch in early 2015.
But not if you are someone dealing in shares in the City. Here the message from the modest improvement in the outlook for UK manufacturing is that the Bank of England will respond by jacking up interest rates sooner than they would otherwise have done.
Bringing forward the timetable for a tightening of policy means there is a risk that the brakes will be put on the economy, leading to a squeeze on corporate profits. Hence the slump in share prices that resulted in the FTSE 100 being 140 lower shortly after the release of the industrial production data.
The markets are getting well ahead of themselves. Industrial production, even after the improvement in March, was still only 0.1% higher in the first quarter than in the fourth quarter of 2014. Manufacturing output – a subset of industrial production – was up by a similar amount.
This hardly constitutes a boom. What’s more, forward-looking surveys suggest that industry is struggling to secure new orders as a result of a rise in the value of the pound against the euro. Business investment has been weak, which is why growth in manufacturing according to Cips/Markit has been concentrated in the consumer goods sector.
So will this one piece of data really make the Bank’s monetary policy committee trigger happy? It seems unlikely. The economic data in the run-up to the election hardly suggested that the Bank would feel the need to move quickly.
Sure, unemployment is continuing to fall, but there is no evidence of upward pressure on wages. Inflation as measured by the consumer prices index is zero and the economy’s growth rate halved to 0.3% in the first quarter.
This is a classic case of the need to heed the warning about not reading too much into one month’s figures. The City fell into that trap. The Bank of England won’t.
View original post here:
Stock market has overreacted to March industry data | Business …
