Is bad news good news again?

Just as the Federal Reserve has moved away from the idea of raising rates on concerns that the weakness in China and other emerging markets will slow growth in the US economy, the latest UK data may well have a similar impact on rate expectations.

We highlighted at the start of the week, the release of the Purchasing Managers surveys for September. The service sector index reading for the UK for September fell again. The service sector index covers amongst other things, employment, business activity, input costs, and incoming new business. September's reading was 53.3, this is against a 2015 first half average of almost 58. On a slightly more positive note business expectations and the employment index remained closer to first half levels. Central banks take these reports into account as they try to predict inflation expectations and therefore interest rate policy.

The recent global uncertainty has, according to Markit (the survey author), led to a hesitation on the part of clients in placing new orders. UBS in their review of the report believe that productivity growth remains challenged. UBS conclude that they believe that the global uncertainties may mean that the Monetary Policy Committee will remain cautious before moving to start the normalisation of interest rate policy. On Thursday we see the minutes of the September meeting, this may give us a further insight as to when the Bank believes it may start the normalisation process.

Equities around the globe rallied surprisingly sharply on Monday, in spite of the much weaker than expected employment data in the US on Friday. This rise was put down investors now taking the view that rates will not rise in the US this year on the back of this weak employment report, that would suggest we are back to a market where bad economic news is good news for share prices. Sentiment, as we pointed out became very negative towards equities, so bounce in prices was not entirely surprising. Citi continue to believe that investors should buy the dips, as we are not at the end of the bull run yet. A correction of this nature is not entirely surprising after such a bull run, and is not out of keeping with historical corrections at this point.

The IMF lowered its forecast for global growth in 2015, a well flagged move in July. The cut is from 3.3% to 3.1%. They also cut global growth expectations for 2016 from 3.8% to 3.6%. Equity markets continued to climb on Tuesday post this report. Taking the positives, the expectations for global growth this year have not weakened since July, and IMF still expect global growth to accelerate modestly next year. This would suggest the IMF are not predicting a global recession, and on that basis if cash remains cheap relative to history and inflation modest, companies could still eke out profits and pay dividends to its shareholders. 

Posted on October 7, 2015 .