Weekly Market Review - 29 September 2015

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Last week...

Markets ended the week broadly lower as investors continued to fret over global growth, further emphasised by the US Federal Reserve’s (Fed) decision to keep rates on hold the prior week citing weakness in China. This was particularly noteworthy as previously the Fed has ignored external factors, focusing on the domestic economy for which many investors believe an interest rate rise is warranted. On Thursday Janet Yellen, the Fed chair, reaffirmed their view that rates will rise before the year is out, notwithstanding a significant deterioration in the global economy. This has probably only served to further muddy the expectation for interest rate rises in the eyes of investors. The S&P 500 closed down 1.35%, the MSCI Europe ex UK fell 1.92%, the Nikkei fell 1.05%, and MSCI Emerging Markets fell 3.27%.

2nd quarter US GDP was revised up to a very robust 3.9% annualised quarter on quarter by the week end but the market is expecting this to have weakened during the third quarter led by China and the strength of the dollar. European PMI data was broadly supportive of an ongoing recovery in Europe though the Volkswagen scandal over diesel emissions has no doubt dented confidence in Germany. Only time will tell whether Volkswagen are able to act quickly and decisively to save their reputation.

The Chinese Manufacturing PMI index declined further to 47 (anything below 50 indicating contraction) denting confidence that China has turned a corner. The Chinese are transitioning from an export led model to a domestic consumption one. This is not an easy task and will no doubt throw up challenges along the way. To us, a deterioration in industrial survey data is what you would expect during this process. Recent service sector PMI data has been more constructive, though we still expect further support from the authorities in China.

The market continues to believe that a December 2015 interest rate hike in the US is likely, but if the Fed feels unable perhaps due to external weakness, the seasonal slowdown in US growth is likely to mean that an interest rate rise will not be possible until June 2016 at the earliest. At the margin, some commentators are beginning to question whether the Fed has missed its opportunity to raise rates, and whether it is further easing and not tightening that investors have to contend with.

This week...

The focus remains on data that might or might not lead to a US interest rate rise. On Friday the US non-farm payroll employment numbers are expected to have risen by 200,000 in September. A number significantly weaker will put further doubts on a December rate rise. Unemployment is expected to remain at 5.1% and average earnings are forecast to have risen by only 0.3% on August. The US manufacturing PMI is due out on Thursday, expected to come in at 50.6 but a figure beneath 50, demonstrating contraction, would not be entirely unexpected. Although this wouldn’t support the case for an interest rate rise, remember that manufacturing only accounts for about 15% of GDP.

Initial estimates of Eurozone inflation for September are released on Tuesday and Wednesday. No change is expected year over year, though stripping out food and energy inflation of 0.9% is forecast.

The final estimate for UK second quarter GDP growth will be released on Wednesday with the headline growth expected to remain at 0.7% quarter on quarter. On Thursday the Markit manufacturing PMI is expected to show little change from 51.5 in August, though still expansionary. Mortgage and lending data is due out on Tuesday with mortgage approvals at 70,000, the highest for 18 months though well below the long-term average of 83,000.

Finally, in China, the final reading of the Caixin manufacturing PMI for September is expected to confirm last week’s preliminary number of 47.0, the fastest pace of contraction since 2009.