The release of the minutes from the July meeting of the Federal Open Market Committee added little in the way of greater insights as to the path of US interest rates. In line with statements from previous month’s minutes the Fed remain “data dependant”, acknowledged the risks had diminished and left the door open to raising rates in September. What can materially change from one month to the next to suddenly make them act, is anyone’s guess? Having missed the boat last month, one has to think they will now wait to see the result of the US election in November. Stocks and bonds, not unsurprisingly, showed little reaction to the release of the minutes.
The latest UK inflation data for July came in pretty much in line with expectations, the core inflation rate that strips out the impact of fuel and food came in at 1.3%, 0.1% lower than the month of June. UK inflation will be closely followed by market analysts. If inflation picks up quicker than expected as a result of the fall in sterling, this will put the Bank in a difficult position after their actions earlier this month. To date sterling has been remarkably stable post the initial Brexit correction.
We have expressed the view that the Bank of England have acted in haste with their actions earlier in the month, and Moody’s latest assessment of the UK economy post Brexit reinforces that view. Encouragingly Moody’s believe that the UK economy “will go nowhere near recession as the global economy is stabalising”. By acting so quickly the Bank of England may not have added a great deal to change the economic outlook, what they have done is increased pressure on pension funds and reduced liquidity in certain asset classes, as well as bumping up valuations in risk assets. Bill Gross, Pimco’s erstwhile bond guru takes this point up writing the Financial Times in an article entitled “central bankers are threatening the engine of the global economy”. Thursday’s UK retail sales data also backs up the view that the UK economy remains more robust than many experts predicted.
Where does all this leave equity markets after the strong rise over the summer month’s? If the latest Merrill Lynch fund manager survey is any indication of the broader sentiment towards equities, they remain slightly less unloved than in the past month, but still enough to suggest that the risk rally may have a little more legs in it yet. Those investors who sold in May, and went away have so far had watched equity markets continue to climb the wall of worry.
Another indication that sentiment remains bearish enough for a bit more of a risk rally is from the release of the latest German ZEW survey. The ZEW Sentiment Index measures the level of optimism that analysts have about the current economic situation and expected economic developments for the next 6 months. The sentiment index tends to peak and trough in line with equity markets, currently sentiment remains subdued.