It would appear that the slowdown in global manufacturing is at least stabilising. There have also been slightly more encouraging signs from some parts of the euro area that the economy is likewise finding a base. On a different note, the start of the week saw the release of the estimate for growth in the Chinese economy in the second quarter come in at 6.2%. The slowest year on year growth estimate in 27 years. As there was little reaction to the news from equity markets, it further goes to prove that again; bad economic news is once again positive for risk assets.
The expectation the Fed and the ECB will continue to stimulate the global economy resulted in the S&P 500 breaking through a new barrier of 3000. The Vix index falling back close to historic lows. The equity market appears to be buying back into the Goldilocks world of low inflation, modest growth and supportive monetary policies. The latest stronger than expected jobs report from the previous week and Friday's core Consumer Price Inflation coming in above expectations and above the Fed's 2% target, failed to knock equity investors confidence.
Jerome Powell and the Federal Reserve maintained its dovish stance in his testimony to Congress on Wednesday, in the face of the stronger than expected employment data at the end of last week. Whether the continued pressure from the Whitehouse to maintain this stance influenced this view, we can only speculate. Donald Trump obviously wants the Fed to help prop up the US economy ahead of the election year. The S&P 500 hitting 3000 at one point before retreating somewhat. Powell’s statement was described in some media reports as the most dovish comments for over a year. A chart reproduced in this piece from the Wall Street Journals Daily Shot illustrates possibly why central banks remain prepared to stimulate the global economy.
Post last Friday's strong US employment data the focus for equity and bond markets has turned on the Fed Chairman Jerome Powell's congressional testimony over the next two days. The optimism the Fed would cut rates by 50bp at the July meeting has been part of the reason equity and bond markets have been rising in the past month. The expectation is now for the Fed to cut by 25bp at the July 31st meeting. Equity markets have taken this news better than bond markets as yields have risen sharply. The two asset classes performance has been highly correlated over the past months; that correlation has broken down in the past few days. This relative move possibly reflects the level of sentiment that had become towards the two asset classes.
those more sensitive to changes in interest rates. Some economists have moved expectations for a rate cut this month to expect the Fed to wait till autumn. Underlining the view that gold is merely a play on US interest rate expectations that asset too fell sharply on Friday. The Financial Times at the weekend recorded that there had been thirty interest rates cuts this year so far, although only three have been in developed economies.