Enness Market Update - 17th January 2011

Eurozone The sun was shining in the Algarve this week as Europe avoided an escalation in its sovereign debt woes. Portugal managed to attract strong demand for its benchmark 10-year bonds, so much so that despite the country being seen as a candidate for a bailout, Lisbon's borrowing costs eased to 6.7 per cent, down from 6.8 per cent at its last bond sale in November, and well below the 7 per cent threshold analysts deem unsustainable. The European Central Bank (ECB) also kept eurozone interest rates unchanged at the record low of 1.00% for the 20th month in a row. The news, which was widely expected, comes as annual inflation in the eurozone area rose from 1.9% in November to 2.2% in December 2010. Shehan Mohamed, economist at the cebr, said concerns over divergent growth in the region, particularly amongst peripheral economies, and the impending fiscal austerity measures, mean the prospect of an interest rate hike in 2011 remains slim. "We expect the ECB to keep rates on hold over this year in order to support business investment as economies begin to rebalance towards the private sector," he added. rnShrinking welfare benefits reserve fund Rising unemployment has cut the amount of money the government holds in reserve to pay out-of-work benefits, new figures reveal. The National Insurance Fund lost £4.5bn in the year to March 2010 - the first time since 1993 it has gone down. But it still stood at £48.5bn - well within what is considered prudent by government accountants. All UK workers pay into the fund - sickness benefits and jobseekers allowance are paid from it if needed. According to the accounts for last year, £4.9bn of the decrease was down to rising unemployment claims and a £663m reduction in National Insurance contributions. Interest earned on the fund "also decreased significantly due to the historically low interest rates", the accounts say. In 1992, the government actuary set a rate of 16.7% of annual expenditure on benefits as a prudent level for the fund to hold. It currently stands at 64% of the annual welfare bill and is expected to remain at that level next year. This suggests the government will have enough in reserve to carry on paying benefits if unemployment continues to rise as some economists have predicted. According to figures released by the Office for Budget Responsibility (OBR) at the end of last year, rising unemployment will cost the government £1.5bn more than expected in welfare benefits, over the next four years. The OBR also calculates the government will have to pay out £700m more in unemployment benefit than previously forecast. Official data showed 2.5 million people were unemployed last month - compared with 1.63 million in the same month in 2009. But a survey released this week suggests the jobs market is "on the road to recovery", with a strong rise in demand for staff. The survey of recruitment consultants and employers in December found permanent staff vacancies rising at their fastest level in four months. rnProperty market trend Property market transactions continued to decline in December, as prices also slipped lower, according to the latest LSL Property Services/Acadametrics survey. The number of transactions was 5% down on the levels seen in November and 33% lower than in December 2009. Meanwhile, average house prices recorded a marginal drop of 0.2% over the month to stand at £222,827. "While average house prices are falling, the steady rate of the decline indicates a degree of resilience in the market," said David Newnes, estate agency managing director of LSL Property Services. "While it is true that there is a shortage of buyers seeking new properties, this is largely driven by the continuing drought in mortgage finance." Growth in the economy slowed as 2010 drew to a close, according to the latest estimate from the National Institute of Economic and Social Research (NIESR). The think tank suggests that output grew by 0.5% in the three months ending in December, after growing by 0.6% in the three months ending in November. The figures mean growth has softened since the summer of last year, when an expansion of 1.1% was reported in the three months to July. As a result of the slowdown, NIESR called on the Bank of England to begin 2011 by choosing to maintain its current monetary policy stance and leave base rate at 0.5%. Overall, NIESR estimates the economy expanded by 1.6% during 2010. rnLoans to first time buyers parents Hitachi Capital is going to offer loans of up to £50,000 to the parents of first-time home buyers in an innovative attempt to boost Britain's flagging housing market. The financial services group has teamed up with Britain's biggest house builder, Barratt, to offer financial support to parents trying to help their children get on the housing ladder. Its £1bn fund will offer 12-year unsecured loans for parents to use as part of the deposit for their child's new home. The scheme aims to bring back to the market first-time buyers, who have been priced out by mortgage lenders requiring deposits of up to 20pc. rnAnd finally the Bank of England base rate didn't move again, the same statement since the 5th April 2009