"No complaint.... is more common than the scarcity of money" Adam Smith

The minutes from the last Federal Reserve meeting appeared to give a more cautious tone to further rate increases in the coming year, however sentiment that the December hike, which most market analysts are forecasting, remains on the cards. Despite wage inflation creeping higher and the impact of the rising oil price, some members expressed the view that they were concerned that this period of low inflation may not be transitory, but may be more structural.

There is a view held by some economists that the levels of debt within the world, which continues to climb, is such that this will remain a barrier to inflation returning. Prior to 2007, central bankers around the globe set inflation targets around 2%, mainly as a tool to manage the threat of a rising inflation. Conversely now, Central Banks around the globe are desperately using it as a target rather than a ceiling. At least possibly in the short-term, there was further evidence that the Federal Reserve might meet their 2% inflation target as producer prices rose by the most in 6 months.

Two of the worlds leading banks JP Morgan and Citi kicked off the earnings season, with results that managed to beat analyst expectations, but probably not the investors so much. The shares were little-changed post the Q3 earnings reports from both companies. Banks rely on part of their revenues from trading, and for this they need volatility. Both companies reported that revenues from their trading divisions were weak. JP Morgan’s earnings report beat analyst’s forecasts by what was described as a healthy amount, yet the shares traded lower. As a lot of the returns from equities this year has been driven by improving earnings and not a rerating as has been the case in some other years. Earnings beats may not be enough to drive prices further forward.

Not much seems to phase equity investors at present as volatility in the developed indexes remains close to historic lows as the MSCI All Country World Index hits a new record high. With the S&P 500 currently trading around 2550 the previous high for the S&P 500 made in 2007 of circa 1550 is but a distant memory. As we mark 10 years on from the 2007 crash, it took just 4 years for the S&P 500 to recover back to the previous high, the Japanese equity market has just this week managed to reach its previous peak from 20 years ago.

Posted on October 12, 2017 .