Global equity markets have been drifting ahead of the much anticipated speech from Janet Yellen at the annual meeting of leading financiers in Jackson Hole, Wyoming. The Vix index, or fear and greed index, as it is often known has risen for 3 days on the trot. This speech is as anticipated as any, as the capital markets hope for some inkling as to what the Federal Reserve will do with interest rates in the coming few months. Those expecting some revelation may be once again disappointed, as the probability will be that she will dangle the rate rise carrot “data dependant”. No clear explanation was given why the FOMC did not think July was appropriate, leading to capital markets now focusing in on December for the next rate hike. Moving in September ahead of the presidential elections in November, with an uncertain outcome would make little sense. But that does not mean one can rule it out.
The latest macro data, alongside previously robust employment and consumer data records durables goods orders rose 4.4% month on month in July, ahead of expectations. The speech will take place post the release of the second estimate for 2ND quarter GDP as well as the latest Michigan consumer confidence report for August.
One is getting the sense that central bankers in Europe, need to take a calmer look at the current state of the European economy post the events in July.
We have discussed how Mark Carney, almost in an attempt to justify his speech’s before the vote has acted rashly by cutting interest rates, alongside introducing further quantitative easing measures earlier this month. Nothing so far has indicated these moves were justified at such an early point. What is also worth noting is that the Bank of England have released a paper produced by a group of economists within the Bank, suggesting that fiscal policies alongside tightening and loosening of banking buffers is more effective managing an economic cycle than interest rates. Backing up our view that these recent measures do little to boost the economy, but have other unintended consequences, for example on pension funding.
Likewise, at the last meeting of the ECB, in the following press conference the Chairman Mario Draghi talked about introducing further stimulus measures to boost the European economy. As with the UK economy there seems little evidence of a sign of a Brexit shock as the eurozone’s economic recovery gained a little speed in August. Business surveys taken during the eight weeks since the vote have registered little negative impact. Indeed, the composite Purchasing Managers Index, which combines both services and manufacturing rose to 53.3 from 53.2 in July, ahead of expectations of a small fall.