The US and China seem a good starting point. Given that these are the two largest economies, trends in data here play a key role in investor perceptions. In the US, we have had to downgrade our GDP forecast for 2014 substantially, however underlying momentum in the economy has been close to our expectations, with the most recent Labour Market Report suggesting that growth has picked up in the second quarter, following an unusually severe winter. Likewise in China, economic growth looks to have stabilised at or around 7%, which was our base case expectation for the year.
Closer to home, in the UK and Eurozone, things have turned out a little different to our expectations. We expected UK growth to be above trend this year, but the economy appears to be growing even faster than we anticipated in January. In the Eurozone, economic growth has turned out close to our very modest assumption, however inflation has been lower, and it is this latter factor which prompted the ECB to loosen policy in June.
In financial markets, the news from Europe and the earlier question marks about the health of the US and China economies were key factors driving bond yields lower since the start of the year, whereas we had expected yields to move a little higher. We still expect US Treasury and Gilt yields to move higher in the second half of the year, as global economic data improves, led by the US and China, while we move even closer to Fed and Bank of England rate hikes. Our asset allocation policy still favours equities over bonds.
Ian Kernohan is an Economist at Royal London Asset Management
