Idea Transcript
Last week, Mario Draghi, the president of the European Central Bank (ECB), announced the central bank’s intention to reduce its asset purchase programme. The ECB voted to extend the programme by nine months, at a reduced monthly pace of net purchases of EUR30bn from EUR60bn currently. Notably, the formal forward guidance suggested that principal payments from maturing securities will be reinvested “for an extended period of time after the end of its net asset purchases, and in any case for as long as necessary”. Furthermore, no definitive date for the end of quantitative easing was provided, with Draghi arguing that there is a large amount of uncertainty, so it is prudent to keep options open beyond September 2018. He also reaffirmed that interest rates will remain “at the present levels for an extended period of time and well past the horizon of our net asset purchases”, providing clear indication that the governing council intends to maintain accommodative monetary conditions for longer than the market expected. The event had been clearly signposted, however hawkish rhetoric regarding the health of the European economy in advance of the October meeting saw expectations rise ahead of the announcement and causing the programme adjustment to disappoint the more hawkish market participants. Indeed, core 10 year-bond yields in the region fell on the news with the German Bund down -6.6bps on the day. The Stoxx 600 and the DAX gained +1.07% and +1.39% respectively, marking a record high for the latter index. The indices were driven by the euro’s decline, falling -1.37% against the US dollar for the day. Separately, The ECB commented that economic conditions continue to improve across the region, with growth strong and becoming self-sustaining. A moderate improvement in underlying inflation and increase in wage inflation were also noted, however their outlook remains muted with expectations for headline inflation to stabilise at just 1.5% by 2019.
Positive UK Q3 GDP data saw the market implied expectations for a 25bps hike in the UK base rate scheduled for this Thursday, increase 10% to 88.4%. Encouragingly, GDP grew 0.4% in Q3 following growth of 0.3% quarter-on-quarter (QoQ) in Q2 and crucially ahead of the Monetary Policy Committee’s (MPC) estimate of 0.3%. However, over the past 12 months, GDP has grown at a rate of just 1.5%, below the rate of expansion recorded in the 12 months to the end of 2016, marking the weakest expansion for the UK economy since 2009. Nevertheless, expectations were low and sterling gained +0.44% and +0.97% against the euro and the US dollar on the day. Although it remains the most likely case that the MPC will seek to raise rates on Thursday, recent forward looking data suggests that the economy is only supportive of moderate monetary tightening. Indeed, wage growth remains relatively subdued despite high levels of inflation and below target unemployment, while the latest CBI survey suggests that retailers are beginning to feel the impact of higher inflation. The report revealed a net 36% of retailers reported a decline in sales from a year earlier, the worst result since 2009, while expecting orders to decline further from here, however at slower pace. Historically, the survey has reasonably strong correlation to retail sales, suggesting that the UK retailers, in particular department stores and specialist food and drink retailers, could come under further pressure as consumer spending becomes more squeezed. As such, a rate move could signal that the MPC is more concerned about imported inflation as a result of the fall in the value of sterling rather than reacting to evidence of underlying strength in the economy. Should the MPC vote in favour of raising interest rates then this will mark the first time that the committee has sought to tighten monetary policy in a decade and since the financial crisis.
The trade-weighted dollar gained 1.3% over the week and c.1.0% against the euro, following news that progress had been made on US tax reform. Last week, the House of Representatives voted to adopt the 2018 budget, paving the way for tax cuts that could increase the federal deficit by up to $1.5 trillion over the next 10 years. The currency moves were also supported by positive forward looking economic data including strong September durable goods orders which rose by 2.2% month-onmonth (MoM), significantly above the consensus estimate of 1.0%. Meanwhile, new home sales for September surprised sharply to the upside, rising 18.9% MoM, well above expectations, with the highest gains recorded in the hurricane effected regions. Solid growth as captured by the positive GDP surprise, also contributed to the gains made over the week. The advanced estimate of Q3 GDP showed that the economy grew at a 3.0% annualised pace in the quarter, above 2.6% predicted. The positive surprised was attributed to much quicker than expected restoration of normal activity following the September hurricanes as well as positive support from the current strong and stable global growth. Elsewhere, news that John Taylor was favourite to become the next chair of the Federal Reserve (Fed) provided a currency boost mid-week, however such expectations have subsided. With current Fed chair, Janet Yellen, now out of the running, Jerome Powell appears to be the most likely candidate. Powell’s appointment is largely expected to mean a continuation of current monetary policy, which should prove supportive for both the fixed income and equities markets. He typically sides with the more dovish committee members including Yellen, while Taylor is expected to be significantly more aggressive with the tightening of monetary policy conditions and rate hikes should he become chair. The announcement of the new Fed Chair is imminent and expected this week. The market implied expectation of a rate hike in the US at the December meeting, which has been previously flagged by the FOMC, currently stands at 85.3%.
In the US, October’s flash Purchasing Managers' Indices (PMIs) all proved strong, recording gains above consensus estimates. Indeed, the manufacturing PMI rebounded to January highs, improving to 54.5, compared to 53.4 expected, while the services PMI rose to 55.9, compared to the consensus estimate of 55.2. Overall, this led to the composite PMI reading beating expectations, rising to 55.7 versus 54.8 in September and to the highest level since November 2015. However, the eurozone readings disappointed, with the headline composite index falling from September’s four month high of 56.7 to 55.9. Positively, the manufacturing PMI was above consensus at 58.6, marking a 10-year high for the sector, although the services reading of 54.9 compared to 55.7 previously and 55.6 expected, weighed on the headline number. Within composite PMIs, the drop was led by future output expectations, yet demand remained elevated, as foreign orders rebounded after last month’s weakness, suggesting that concerns over past euro appreciation have waned. With regards to specific countries within the region, all French PMIs beat expectations with the composite rising to 57.5 versus 57 expected, while the German economy underwhelmed falling -0.8pts to 56.9 compared to a slight moderation to 57.5 expected. Given the pivotal role that German plays in the eurozone’s economy, this correction could prove concerning should it become a trend. Overall, the correction in the headline number is minimal and positively remains above the 50, the level indicative of economic expansion.
Following the end of the 19th National Congress of the Communist Party of China, President Xi Jinping provided little indication as to his next successor. Indeed, the scheduled reshuffle of the Politburo Standing Committee (PSC) failed to appoint any members young enough to be his successor when the next National Congress occurs in five years time, suggesting that Xi plans to lead his country for longer than the traditional ten years. Positively, this lends itself to a continuation of current policy direction and thus provided Xi with much greater political power. Supply side reform is likely to be key on the economic policy agenda along with more anti-corruption measures. Stronger political power is a necessary condition for faster structural reforms, however it remains to be seen how effective the reforms will be implemented, particularly regarding state owned enterprises, fiscal and property market issues.
The number of US companies reporting earnings ramped up last week and to date, 55% of the companies in the S&P 500 have reported actual results for Q3 2017. With regards to earnings, 76% of the companies who have announced results, reported positive earnings per share (EPS) surprises and 67% have reported positive sales surprises. The blended earnings growth rate (constructed using the actual results of companies who have reported and estimates for those who haven’t) for the S&P 500 is 4.7%, and should this prove to be the actual earnings growth rate for the quarter, it will mark the lowest earnings growth rate for the index since Q3 2016. Significantly, the reading appears to be weighed down by just one sector, Insurance, who have so far reported substantial losses caused by the recent hurricanes and the earthquake in Mexico. Overall, the sector has reported a -$6.9 billion fall, translating to a -66% decline in total earnings thus far. Removing the sector from the blended earnings growth rate, demonstrates that the majority of other US corporates appear to be in much better health, with the reading up 7.4%. Overall, six sectors are reporting earnings growth for the quarter driven by the Energy sector who have significantly benefitted from the stabilisation of the oil price this year. Day
Data Release
Consensus
Prior
Monday
Japan Industrial Production MoM Sep P Japan Jobless Rate Sep Japan Job-To-Applicant Ratio Sep United States Personal Income Sep United States Personal Spending Sep United Kingdom Mortgage Approvals Sep Eurozone Consumer Confidence Oct F United States Conf. Board Consumer Confidence Oct Eurozone GDP SA QoQ 3Q A Eurozone GDP SA YoY 3Q A China Manufacturing PMI Oct United States Chicago Purchasing Manager Oct United States FOMC Rate Decision (Upper Bound) Nov United States ISM Manufacturing Oct United States MBA Mortgage Applications Oct Japan Nikkei Japan PMI Mfg Oct F China Caixin China PMI Mfg Oct United Kingdom Markit UK PMI Manufacturing SA Oct United States Markit US Manufacturing PMI Oct F United Kingdom Nationwide House PX MoM Oct United Kingdom Nationwide House Px NSA YoY Oct United States ADP Employment Change Oct United States Construction Spending MoM Sep United Kingdom Bank of England Bank Rate Nov United States Initial Jobless Claims Oct Eurozone Markit Eurozone Manufacturing PMI Oct F United States Change in Nonfarm Payrolls Oct United States Durable Goods Orders Sep F United States Unemployment Rate Oct United States Factory Orders Sep United States Trade Balance Sep
-1.60% 2.80% 1.5 0.40% 0.90% 66.0k -1 121
2.00% 2.80% 1.5 0.20% 0.10% 66.6k -1 119.8
Tuesday
Wednesday
Thursday
Friday
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The information in this document does not constitute advice or a recommendation and investment decisions should not be made on the basis of it. This document is intended for 0.60% professional advisers 2.30% only and should not 52.4 be relied upon by any 65.2 persons who do not 1.25% have professional experience in matters 60.8 relating to -4.60% investments.
-51 55.9
52.5 51 55.9
54.5
54.5
0.20%
0.20%
2.20%
2.00%
200k
135k
-0.20%
0.50%
0.50%
0.25%
235k 58.6
233k 58.6
310k
-33k
-4.20% 1.20% -$43.3b
2.20% 4.20% 1.20% -$42.4b
0.50% 2.30% 52.1 60 1.25%