This week we discussed the dilemma the Federal Reserve keeps facing when coming to decide about when and if they want to raise interest rates. The Federal Reserve continue to use this phrase “data dependant” and how their rhetoric is more hawkish than their actions. After Thursday’s better than expected durable goods orders, Friday’s US payroll report failed to meet expectations, this led to analysts becoming less confident the Federal Reserve will not act in September. On the back of this news equity markets in Europe reached a four month high and US stocks eyeing up previous heights.
Equity markets in the UK were probably also boosted by the latest piece of economic data, further confirming that so far the prophets of doom are being proven wrong. August’s construction Purchasers Managers Index reading came in at 49.2, which is below the important 50 level, however is a sharp improvement from the previous months 45.9, and expectations of 46.6. The pound rose above $1.33 for the first time since the Brexit vote. Poor old hedge funds will be feeling the pain again.
The Vix index on Friday fell back below 12, once again suggesting confidence or complacency to equity markets, depending on your point of view. The lack of volatility in equity markets is demonstrated as US equity market has not seen an intraday move of greater than 1% since early July. If the AAII retail investor survey is any guide to the broader sentiment to equities, at 28.6 down a point from last week, suggests sentiment remains remarkably cautious. Usually at times equities reach new highs traditionally sentiment often becomes more positive along with it.
Looking to the week ahead, markets in the US are shut on Monday for labour day. For the rest of the world we get more Purchasing Manager (PMI) reports including Europe. We get the services PMI for the UK economy on Monday. As services is responsible for almost 80% of the UK’s GDP this figure will be considered important to further understanding the true impact of the Brexit vote.
One event on Wednesday that may draw some headlines is Mark Carney, along with other Bank officials, testimony to parliament on economic policy. I hope someone has the foresight to ask why Mr Carney and the rest of the MPC seem so unable to get any economic forecast right? Also why they acted in such haste at the start of August, without pausing to see the true impact of the vote on the economy?
For Europe the focus will be the monthly meeting of the ECB to decide any change in interest rate policy. At previous meeting Mario Draghi, the chairman, has suggested he might add further stimulus to the European economy if required. The likelihood is nothing will happen this Thursday from the ECB, however questions may be raised in the post meeting press conference about the current thinking.