In the face of a respectable flow of macroeconomic data and the aftermath of the Jackson Hole symposium, on which the markets were still ruminating, the financial markets were pretty calm this past week. The data were in fact a little confusing in places.
The International Monetary Fund would appear to have come down on the rather gloomier side of the fence, as it’s considering downgrading its forecasts for the global economy.
Ben Steinebach Head of Investment Strategy
We can draw two conclusions from the Jackson Hole meet – and from Fed Chair Janet Yellen’s speech in particular. The first is that the US economy is in fairly good shape and that a rate hike is liable to materialise in the rather shorter term. Our second conclusion would be that, at this point in time, the Federal Reserve has a toolbox suited to take on future developments and risks. Before the financial crisis hit, this toolbox contained only a few tools for the Fed to work with, such as interest rates and open-market transactions – enough at the time. However, the sharp increase in bank reserves post-crisis called for a much wider range of tools, and these arrived in the shape of deposit interest rates and the possibility of quantitative easing (asset purchase programmes). Yellen reckons these will suffice for now. The sanguine outlook for the US economy has made a fresh US rate hike likely – the timing of which we’re currently putting at December. Multiple factors would appear to stand in the way of an earlier move in September: too close to the imminence of the US elections and the absence of full consensus within the Federal Open Markets Committee (FOMC). Neither do today’s inflation trends call for any urgent moves, and the Fed will probably want to wait and see what the implications are of the disappointing PMI numbers released this week.
Macroeconomic data confuse
In the United States, the manufacturing PMI contracted in August to 49.4 from 52.6 in July. The PMI dipping below 50 typically implies a fall in future production, which is somewhat at odds with the picture of US economic health that had emerged in the past two months. The US Federal Reserve may well wait to see if the country is looking at a one-off or the start of a trend before it raises interest rates. The International Monetary Fund would appear to have come down on the rather gloomier side of the fence, as it’s considering downgrading its forecasts for the global economy. We reckon we’re looking at a one-off, though. The United Kingdom also released quite remarkable data: purchasing manager sentiment improved from 48.3 to 53.3, probably a correction after the shock of the Brexit vote. The same was true for consumer confidence, if to a lesser degree. Any sound assessment of the effects of Brexit on the UK economy will require more time and a much broader set of economic indicators painting a consistent picture. In the Netherlands, the week also saw the release of two apparently conflicting sets of business confidence data: Statistics Netherlands’ confidence indicator for August recorded its biggest drop in five years, while purchasing managers’ sentiment bucked the European trend and improved markedly. Let’s just assume this is a one-off as well.
Equity markets shrug off macroeconomic data
There was little corporate news to move the markets in the week that was. That said, the Apple tax ruling caused a bit of a ripple, while banking shares continued to recover. Oil prices reverted back down to USD 45.50 a barrel. This fall in oil prices comes at a time when a gaggle of indicators are pointing to an improving global economy (unless, of course, the one-offs turn out to be the start of a trend) and was a fresh disappointment for the US energy sector in particular. Banking shares, by contrast, performed surprisingly well in the week after interest margin pressures had kept them well down in the first six months of the year. This would appear to be something of a correction, possibly because Deutsche Bank is rumoured to be eyeing Commerzbank as potential takeover prey – although this is being vigorously denied by both banks.
The week’s biggest news came from the European Commission. The EU’s Competition Commissioner Margarethe Vestager delivered the ruling that Apple had received illegal state aid in Ireland and had paid too little in tax. Apple was ordered to pay the Irish state no less than EUR 13 billion, excluding interest. The ruling was met with vociferous dissent from the parties concerned – the United States, Ireland and Apple. All three will appeal. Share price changes in the global equity markets varied from subdued gains in the United States and a few European markets to minor losses in the United Kingdom (1.35%) and a couple of other European countries. On Thursday, the AEX closed 0.2% up on last Friday, at 453.87, and it was trading around 456.50 this Friday morning.
Eyes trained on the ECB
The results season is well and truly over: only Hewlett Packard will release its corporate results in the week ahead. What’s left is macroeconomic data as the only indicators likely to influence share prices. Perhaps the two-day G20 summit, starting in China on Sunday 4 September, will set off a few ripples. Taking over from purchasing managers in manufacturing, PMI sentiment for services looks set to hog the limelight in most countries next week. July figures for industrial production are due out in Germany, France, the Netherlands and the United Kingdom, while we can also look forward to Germany’s industrial orders. Also slated for release are fresh French and German figures on the balance of trade and on July export and import developments, while China will report the same data for August. August inflation numbers are expected from China and the Netherlands. As for Europe-wide inflation (a mere 0.2% in August), we’re eagerly awaiting word from the ECB press conference on Thursday. We expect it to extend its asset purchase programme up to and including September 2017. In addition, we’re looking forward to revised economic growth figures for this year’s second quarter in both the European Union and Japan. The last of next week’s crop of economic data will concern the French labour market in July (employment and unemployment). But first, we await the same figures for the US labour market, due out this afternoon. By the time you read this, these will no doubt be in the public domain and we’ll know whether US employment growth has kept up its June and July clip. Monday is Labor Day, by the way, and US markets will be closed.