Weekly Market Review - 5 October 2015

Last week...

The much anticipated US non-farm payrolls added a further 142,000 jobs in the month of September but fell way short of market expectations of 200,000. That combined with flat hourly earnings and the unemployment rate remaining at 5.1% due to the US labour participation rate falling again to its lowest level since 1977, left investors less certain about the prospects for a December 2015 US interest rate hike. Most equity markets ended the week in positive territory as investors priced in lower future interest rates in the US with the S&P 500 returning 1.10%, the MSCI United Kingdom 0.53%, the Hang Seng rose 1.51% whilst domestic ‘A’ shares in China continued their decline falling a further 1.01%, and the MSCI Europe ex UK fell 0.37%. India’s central bank unexpectedly cut interest rates by 0.50%, and the Indian S&P BSE Sensex responded by rising 2.44% over the week. US 10 year treasury yields fell beneath 2% and investment grade and high yield credit spreads widened further signalling either growth headwinds or excessive bearishness by investors. Performance for the quarter ending 30th September was the weakest since 2011, with the MSCI AC World falling 8.08% in local currency terms.

Although employment data from the US was weaker than anticipated, which has without a doubt reduced expectations for a December lift off in interest rates, it was still a substantial amount of jobs created indicating economic expansion and our central case expectation remains for an end of year rate increase. More significantly for markets, expectations for future interest rate increases are being ratcheted down, with some commentators suggesting the peak in the next interest rate cycle may be closer to 1%, which is significantly lower than the US Federal Reserve is currently forecasting.

Year-on-year inflation in the Eurozone to the end of September fell 0.1%, raising expectations for further quantitative easing from the European Central Bank, though core inflation i.e. excluding food and energy, rose 0.9%. In other news out of Europe the “Forward Portugal” centre-right coalition became the first coalition to become re-elected in the Eurozone having stood over a punishing bailout.

Weak data out of Japan also led to expectations for greater stimulus as industrial production fell 0.5% versus expectations of a 1% rise. Though core inflation is weak it is trending higher suggesting that any further action from the Bank of Japan (BoJ) may be a little way off.

UK GDP was confirmed at 0.7% quarter on quarter, whilst the Markit manufacturing PMI leading indicator came in at 51.5 as expected, a figure above 50 still indicating expansion though undoubtedly held back by lacklustre growth in Europe. Mortgage approvals also came in at 71,000, the highest for 18 months though well below the long term average.

This week...

Interest rate decisions are due from the central banks of Australia (Tuesday) and Japan (Wednesday) this week, both economies having been impacted by the slowdown in China. Rates are expected to remain where they are and at this juncture analysts are not expecting further quantitative easing in Japan, believing that the BoJ would prefer to wait for rates to increase in the US before taking any further action.

On Thursday the Bank of England will also announce its decision on interest rates with expectations for rates to stay on hold despite a robust labour market and early signs of wage pressures balanced against weakness in emerging markets and Europe. UK industrial production data for August and services activity for September are due out this week.