The Chinese government released its latest estimate for second quarter growth on Monday morning, the estimate came in at 6.9%. This was ahead of forecasts of 6.8% and well ahead of the Chinese government’s target of 6.5% for the year overall. Retail sales, investment and industrial production all also rose. This good news led to the world MSCI index reaching new highs on Monday morning.
Also released on Monday was the latest inflation data for the eurozone, this came in weaker than expectations at 1.3% year on year. We have been arguing for some time that the inflation data was likely to soften in the coming months, there is now evidence that this does appear to be the case. Mario Draghi meets the press on Thursday after the latest ECB rate announcement. He recently made remarks to the effect that deflationary pressures were being replaced by inflationary ones. These comments sent yields in the bond market higher as prices fell. After Monday’s inflation data, he may face further questioning as to where he sees the inflationary pressures coming from.
Likewise, on Tuesday the annual rate of inflation in the UK economy fell from 2.9% in May to 2.6% in June. Who knows how the Bank of England’s combined brains works but one must assume Tuesday’s inflation report will reduce the likely hood of a vote in favour of a rate rise at the next meeting.
Weaker inflation data will become a double edge sword for equity investors. The negative for equities it may be an indication of weaker economic growth to come. The more positive take it takes away the need for central banks to continue to remove liquidity from the global economy.
Forecasters keep looking for reasons for the stock market to fall, the valuation seems to be the main thrust, and longevity seems to be the other, often a combination of both.
Lower for longer seems to be the theme of our time. The lack of volatility in asset prices is something that has been commented upon by most financial journals. However according to a research report from Goldman Sachs currently we are nowhere near the longest period of low volatility, which lasted from 1958 to 1962. Interest rates have stayed lower for longer than many predicted, 9 years ago. We ascribe to the view as do many others that the biggest risk to equities is a fall rise in bond yields. However, historically it has been a shock event that few appeared to predict that in the end added volatility.