US rate hike increasingly less likely to happen this year

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As explained in the previous edition of Investment News, macro data dominated the markets last week. The principal monthly employment figure from the US was announced on Friday, 2 October.

The disappointing employment data and other news have reduced the likelihood of an imminent US rate hike Ben Steinebach Ben Steinebach Head of Investment Strategy

This figure revealed that the situation on the US labour market had worsened significantly in September and August. Employment growth rose by the slowest rate over two consecutive months since mid-2013, breaking away from the upward trend of previous quarters. US trade balance figures also pointed toward a slowing-down of economic activity: the strong dollar is hurting US export companies – in dealings not only with the euro, but also with the Japanese yen and the currencies of emerging economies such as Brazil. In light of these developments, we feel that the Federal Reserve (Fed, the central bank of the USA) will not have sufficient basis for raising interest rates this year, though the latest minutes released by the Fed offer no confirmation either way. Nevertheless, we have adjusted our expectation for the timing of the rate hike: where initially we assumed that the Fed would raise interest rates in December, it is now our belief that this will happen in June of next year.

Possibility of action from the ECB

Germany also announced some disappointing data last week. Factory orders dropped by 1.8% in August, where analysts had predicted 0.5% growth, while July’s factory orders were also adjusted downward. Other disappointing figures emerged from Germany too, with industrial output and the import and export data falling short of expectations. These disappointments have revived speculation that the European Central Bank (ECB) will seek to boost Europe’s economy by enlarging its bond-buying programme. We expect the ECB to announce in December that it will raise the volume of the programme by 20 billion euros a month. We also believe that the ECB will push back the end of the programme and not, as previously announced, stop buying bonds in September 2016.

Bad news is good news

Normally the sentiment on the markets is boosted by favourable economic data. Sometimes, however, the opposite is true, as was the case last week. The disappointing employment data and other news have reduced the likelihood of an imminent US rate hike: when interest rates are low, investors turn to other investments such as equities, and the increased demand for equities in turn boosts the sentiments on the markets. Last week the US markets climbed around 3%, with one trading day yet remaining, while the AEX was up by around 5% (when this publication was written). Stocks that performed well last week included Monsanto, SBM Offshore and Deutsche Bank. As has become tradition, aluminium producer Alcoa kicked off the earnings season.

Monsanto, which produces seeds and weed-control products (and whose financial year does not coincide with the calendar year), announced its Q4 and full-year earnings. The results fell significantly short of expectations: the company has been hit by currency effects, higher costs and lower prices for the herbicide glyphosate . We believe that some of these short-term problems will eventually pass. Monsanto’s stock price was barely affected by the results, however, as the company announced a share repurchase programme of 3 billion US dollars at the same time. Reports released last week announced that SBM Offshore has reached a settlement with the Brazilian authorities. With investors hopeful that the company can now put the Petrobras corruption scandal behind it and move on, the company’s stock climbed 5%. Deutsche Bank’s new CEO cleaned house last week, announcing write-downs worth billions. This triggered a record Q3 loss of 6.2 billion euros. The dividend will also be cancelled. Investors hope that these measures will be adequate and that Deutsche Bank will not be forced into a rights offering to raise more funds from its shareholders. The stock responded to the news by climbing a modest 1%. Alcoa opened the publication season for Q3 corporate earnings, and hopefully the company is not an indication of how earnings season will unfold. Its earnings and its turnover have both plummeted, with net earnings in fact plunging from 149 million dollars to 49 million dollars. The lower aluminium price has hit Alcoa hard, having more than halved since peaking in July 2008. Last month Alcoa announced plans to separate into two companies: one focusing on the metal and mining operations, and another holding the automotive and aerospace parts operations.

What to expect the coming week

The earnings season will begin in earnest on Tuesday, when computer chip manufacturer Intel, Johnson & Johnson, Procter & Gamble and JPMorgan Chase will announce their results. On Wednesday it will be the turn of two other US banks: Bank of America Corporation and Wells Fargo. On Thursday a number of companies including Schlumberger, Occidental Petroleum, Citigroup and Unilever are set to announce their results.

In macro news, China is expected to release data including its import and export figures and consumer and producer price indexes, which should show where the country’s economy currently stands. From the US, data are expected about the consumer price index and retail sales, which give an indication of the confidence in the US economy. Consumer price index data for the eurozone will also be announced this week.

Ben Steinebach’s blog was written by Jacqueline van der Neut this week.

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