Chinese bricks replace Greek ones in the wall of worry

Chinese equity movements have replaced the concerns over what may or may not happen with Greece. Chinese equities rose in the first part of the year by 60% only to give half of that rise back in the past couple of months. This rapid fall has raised some further fears of the state of the Chinese and therefore the global economy, further compounded by the fall in commodity prices.

Equity markets and the health of a country’s economy don't necessarily go hand in hand. Second quarter growth for the UK was revised up to 0.7%, if you annualise that it would suggest economic growth this year in the region of 2.5-3%. With inflation running at next to nothing that growth is all-real. The FTSE 100 on the other hand is down approximately 4% in the past year. The FTSE 250 index, which arguably has a better correlation to the strength of the economy, has fared better in the past year.

The two-day Federal Reserve interest rate-setting meeting started on Tuesday, and no press conference is to accompany the rate decision announcement. Tuesday also saw the release of the latest US consumer confidence data. The Conference Board’s consumer index fell to its lowest level since this time last year. Hourly average earnings have picked up this year in the States as well as the UK. Expectations are that higher earnings will lead to a pick up in inflation- one of the reasons that economists are starting to price in a rate rise in the coming months.

Economic textbooks will tell you that an increase in hourly wage rises and rising house prices should boost consumer confidence and spending. At the same time you also have the added boost from lower prices at the petrol pump, increasing inflationary pressures. Although it is true that consumer confidence in the UK has picked up recently, retail sales data in the UK and the US continue to fail to meet expectations. Post 2007 consumers may well be far more cautious than they have been in the past and are far more reluctant to spend than they have been, preferring to save the boost to income rather than spend.  If that is the case those inflationary pressures may take more time to come through.

It was interesting to read in the Financial Times today that on one side of a page an article suggested that the ECB might be forced to boost their QE program, despite Germany’s opposition to the idea at all. On the other side of the page the article discussed the timing of rate rises in the UK and US. The Federal Reserve must be champing at the bit to start the rate rise process, and in theory should they do so it should demonstrate a confidence in the recovery. Whether they will pull the trigger in September still rather remains in the balance one feels. 

Posted on July 28, 2015 .