Listening to the news or reading the press one would be surprised to know that the advanced equity markets of Europe and the US finished the week marginally ahead of where they started them. The Vix index, or fear and greed index as it can be known, in other words, the cost of insuring or leveraging your portfolio rose slightly over the week. The release of the Federal Reserve minutes on Wednesday, which was generally considered to be slightly hawkish in tone, received little in the way of reaction in the capital markets. The recent bout of better than expected economic news from the United States continued Friday as payroll employment growth rose to 222,000 last month from an upwardly revised number 152,000, comfortably beating expectations. The jobless rate rose modestly to 4.4% from 4.3% in the previous month. Wage growth remains soft, despite the economy apparently close to full employment. Wages grew by 2.5% year on year.
Central banks around the world are now providing a more hawkish tone, yet so far bonds to a modest degree and equities likewise have seen a balanced reaction. Yields on bonds have risen recently, however, the ten-year US treasury remains close to where it started the year, ten year German Bunds still only yield just over half of one percent, so far hardly the taper tantrum some have anticipated. Alan Ruskin, strategist at Deutsche Bank is quoted in Saturday’s Financial Times that Friday’s employment data will reinforce the belief that economic growth is strong and inflationary pressures weak. This remains a good cocktail for risk assets. Low-interest rates, low inflation and modest economic growth.
The G20 meeting concluded with the traditional “common communique” excluding climate change. The meeting of the G20 is designed as a forum to show unity among major nations with common interests, mutual security, prosperity and economic integration. What this meeting appeared to do was highlight the tensions, particularly involving the new President, that exist between some of the major powers. Sending in a member of the family during the summit did nothing to enhance international relations.
The week ahead sees the start of the US earnings season, which will swiftly be followed in the coming weeks by Europe. The earnings season is now kicked off by the US banks, and Friday we see JP Morgan along with Citigroup report. After strong first quarter expectations remain optimistic for the second quarter. Janet Yellen, who seems to spend most weeks testifying to somebody, is once again in the spotlight as she begins her two-day semi-annual testimony before Congress.
On Thursday Germany releases inflation data which is expected to confirm price pressures remain below the ECB’s target of 2%. However, with the German economy still running ahead of that of the rest of Europe tensions are likely to remain over the pace of monetary tightening in the coming year. Any unexpected jump in inflation will increase those tensions. At the start of the week, a few members of the Bank of England are speaking publicly, markets will be interested to see where the speakers put themselves in the interest rate camp.