Global equity markets rallied last week as investors started to price in easier monetary conditions following the US Federal Reserve’s (Fed) decision to keep rates on hold in September citing weakness in China, followed by weaker than expected non- farm payroll numbers and confirmation last week from the minutes of the Federal Open Market Committee (FOMC) that external factors to the US are playing a significant part in the Fed’s decision process. This, along with increased expectations for further stimulus from both the European Central Bank (ECB) and the Bank of Japan (BoJ) led to a rally in equity markets with the harder hit commodity areas rallying the most as investors started to price in cuts in commodity production. The S&P 500 rallied 3.30%, its largest weekly gain this year, MSCI Europe ex UK up 4.52%, MSCI United Kingdom rising 4.93%, Hang Seng up 4.43% and Brent Oil up 12.32% closing at $52.65 a barrel.
The Reserve Bank of Australia left rates unchanged this week, but it was the lack of comments suggesting further easing on the horizon due to weakness in China that caught investors off guard with a statement saying “in Australia, the available information suggest that moderate expansion in the economy continues”. The BoJ also kept rates on hold as expected but analysts are pencilling in further easing measures in October following weak inflationary data and disappointing industrial production numbers. The Bank of England also maintained interest rates at 0.5% with a vote of 8 to 1 in favour as forecast despite signs of rising wage growth and strong consumer spending.
A series of weak economic data out of Germany increased expectations for the ECB to extend its quantitative easing programme beyond September 2016. German exports fell sharply in August, -5.2% versus July, their sharpest monthly fall since the financial crisis, imports also fell 3.1%. This data followed survey data suggesting a bigger than expected decline in industrial orders, particularly those from outside the Eurozone.
Investors are having to rationalise a lot of conflicting data at the moment, and the situation is very fluid and data dependent. Therefore, increasing expectations for US interest rates to stay on hold for the remainder of this year could just as easily switch back to an interest rate rise following more positive growth data or further stabilisation in commodity pricing pointing to economic stabilisation in the emerging markets. We continue to believe that an interest rate rise in the US for December is a real possibility even if the odds have declined. Following that, we struggle to believe that rates can ‘normalise’ without a significant pickup in global growth which we simply don’t see whilst the world remains so indebted. This remains a positive environment for equities and risk assets but one with much lower levels of return than we have experienced in recent years, and higher levels of market volatility as investors struggle to interpret mixed economic data.
Inflation data will be keenly awaited this week as investors continue to look for further signs of a US interest rate rise before the year is out. On Thursday, US inflation data is out which is expected to show that consumer prices are falling back into negative territory led by a fall in gasoline prices. Headline inflation (including food and energy) is expected to have fallen to minus 0.1% year on year for the month of September. Producer prices for September, due out on Wednesday are also expected to remain negative at minus 0.8% year on year. Other US data out this week includes September retail sales which will have been pushed down by gasoline prices but up by car sales which remain above pre-crisis levels, leading analysts to expect an overall gain of 0.2% versus August. US industrial production data has been slowing throughout 2015 having started the year close to 4% annualised, but August data having slowed to 1%. This is expected to have continued with headline industrial production falling a further 0.3% versus August, or 0.2% excluding oil producers.
September inflation data for the UK is due out Tuesday with no change in headline CPI expected having fallen back to zero in August. Three-month labour market data to the end of August is due out on Wednesday, with expectations that the data will remain firm since the unemployment rate fell to 5.5%, and earnings growth increased to 2.9%. Expectations are for earnings growth excluding bonuses to have accelerated to 3% year on year.
September trade data for China is due out on Tuesday which are expected to show a further worsening with export growth falling a further 0.5% to minus 6%, and import growth falling a further 2% to minus 16%. Much of this data is very much related to ‘old’ China, whilst the service sector within China is continuing to show encouraging signs of growth.