The FTSE 100 and the S&P 500 rose again last week, 1.3% and 1.7% respectively, as both regions posted weaker than expected inflation data. The ongoing lack of inflationary pressures in these two economies continues to help keep the pressure off rate expectations. As we discussed during the week, the views coming from the minutes of both rate setting committees were considered slightly more hawkish, particularly in the UK as two members voted in favour of a rate rise. We stick to our view that there will be no rate rises in the near future in either region.
The focus on interest rates remained into the end of last week as the world's central bankers came together in Jackson Hole for their annual symposium. US Federal Reserve Chair Janet Yellen's speech on Friday afternoon made the timing of a Fed rate rise ambiguous as she focussed on labour markets and the amount of underemployment in the US. Her speech did appear to encourage a little profit taking in the US as equity markets fell back slightly on her comments. The longer-dated treasury yields crept slightly higher, but the 10-year yield remains close to recent lows at 2.4%. Mario Draghi's speech appeared to give further hints that the members of the ECB council are getting more concerned with the state of the economy and the lack of inflationary pressures and may be coming closer to using additional stimulatory measures so often referred to. The FT picked up on this point in an article entitled “Eurozone inflation trend raises alarm at ECB” over the weekend, in which they report that the sharp fall in inflation recently has taken aback experts.
Following these speeches, the dollar rallied strongly and reached its highest level since last September, now at $1.65 to the pound and $1.32 to the euro.
Sentiment on the week improved sharply as the Vix is now back at low levels (11.5 points) suggesting a lot of the fear of a week or so ago has dissipated. The AAII sentiment index shows even more bulls than last week (at 46.1% of people vs the long-term average of 39%) and with only 24% (vs the long-term average of 30.5%) of people believing the market with decline in 6 months. The weekly fund flow data continues to show investors selling the dips and chasing the rallies as large flows were reported back into equities. Bonds funds, as they have done consistently over the past months, continue to attract investors
For the week ahead the main focus for investors will be the inflation and unemployment data for the eurozone. Analyst's consensus expectations for the region are for the unemployment rate to remain at 11.5% and inflation will fall further to 0.3%. The housing market in the UK will receive the Nationwide report on Friday and mortgage approvals data on Tuesday, while the US reported new home sales on Monday that were below expectations with further housing data being reported later in the week as well. The UK is expected to show house price growth has stalled in August, so far taking the annual growth rate to 10.1%, while mortgage approvals are expected to show an acceleration in July to 44,000, up 2% from June.