Leading indicators fall, will the Fed still act?

The FTSE 100 had a decent day, helped mainly by the strength in the financials. Banks shares were boosted as RBS and Standard Chartered Bank passed the latest stress tests. The start of the month sees the release of the Purchasing Managers surveys. The index reading for Chinese manufacturing came in at 49.6, slightly below expectations, suggesting the manufacturing base is continuing to contract. The service sector however at 53.6, came in ahead, according to trading economics.

Slightly more surprisingly, the world’s largest economy, the US, according to the Institute for Supply management the manufacturing sector index fell to 48.6. These index readings have been falling all year, the last time the index fell below 50 was in 2013. Whether this news will be enough to move the Fed away from their expected path, only time will tell. The US dollar weakened modestly, as did the yield on the 2-year treasury, this is the one most sensitive to a change in interest rate sentiment. There has been some recent strength in US longer dated US treasury prices, yields which hit 2.34pct not so long ago have once again fallen back. US equities did not seem to take this weaker than expected manufacturing data too badly, as the S&P 500 climbed close once again to the top of its trading range.

In contrast to the US, Euro area PMI index readings came in line with expectations, the unemployment rate remained remains stubbornly high at 10.7pct. Tomorrow we will hear whether the much anticipated move by the ECB to further expand its bond buying program will be announced, at the monthly rate setting meeting.

There remains a large degree of bearish sentiment towards emerging markets, fund manager surveys suggest that investors remain underweight. Citi produce an economic surprise index; these indexes look at how economic data is coming in relative to expectations. Most indexes, including the US suggest that overall economic data is coming in below expectations. The exception is the emerging markets where the index troughed mid-September and has been generally picking up.

Should the Fed raise interest rates on the 16th, they will be doing so as leading indicators, earnings revisions, industrial production are falling. Historically these are times the Fed are normally looking to ease monetary policy, not tighten it.  

Tomorrow Janet Yellen appears before the Congressional Joint Economic Committee, we shall see if any of those asking the questions will make this observation.

Posted on December 2, 2015 .