Janet Yellen’s much anticipated speech from Jackson Hole Wyoming turned out pretty much as we predicted. Ms Yellen reiterated the US economy has strengthened, and therefore so has the case for a rate rise in the coming months. She then qualified these comments with “of course our decisions always depend on the degree to which the incoming data continues to confirm the committee’s outlook”. Equity markets in the US rose initially, then sold off by the end of the day to leave the S&P 500 lower by just less than one percent on the week. US treasuries likewise fell as yields rose. 10 year US treasury yields have been steadily rising from the lows of the early summer months. Two year yields which are considered the most sensitive to changes in interest rate sentiment rose to a high for the year of 82 basis points.
The US dollar also jumped on the back of the speech. Despite the fall in equities on Friday late on, the Vix index hardly moved, suggesting at least for now that investors were not overly spooked by the speech.
The second estimate for the UK second quarter UK economic GDP was released on Friday. The economy grew 0.6% in the second quarter, which equates to an annualised growth rate close to 3%. The UK economy probably will not grow at that rate by the year end but it does once again suggest that Mark Carney was too quick to pull the trigger.
The lack of love for equities appears to be continuing as the AAII weekly retail investor survey reported a fall by 6pct in those retail investors who believe the equity market will be higher from where it is now in 6 months’ time. The weekly Lipper fund flow data also reported that $4bn was withdrawn from US equity mutual funds. Despite the unattractive yields bonds offer money continues to flow into mutual bond funds.
Looking to the week ahead there is plenty of data for Janet Yellen and her committee to focus on to confirm or otherwise the strength of the US economy. We have a combination of employment, housing, Purchasing Managers Surveys, factory orders and inflation data in the form of Personal Consumption Expenditure Price Index.
As for the UK the focus will be Thursday post the release of Markit Research Manufacturing Purchasing Managers surveys for August. The flash estimate came in at 48.2, forecasts are for a small improvement to 48.8.
The start of every month sees the release of the previous months Purchasing Manger’s Surveys. Over the last couple of months, the global Composite Purchasing Managers index has been ticking higher. Expectations will be for this trend to have continued in August.