Capital markets continue to wrestle with the effects of 2008, as central banks continue to manipulate asset prices attempting to maintain economic growth, create a little inflation, but not too much, prevent encouraging reckless risk-taking and so on. So far one could argue they have done a pretty good job. The US economy is now in its tenth year of expansion, the Federal Reserve has managed to start the process of normalising interest rates without causing bond and equity markets to collapse as many had predicted. Europe has so far seen of the threat of Greece and Italy breaking up the union. Currently, they wrestle with Theresa May’s attempt to do the balancing act of Brexit and not do Brexit at the same time.
The Federal Reserve has now said they plan to do four rate hikes this year, partly encouraged by the current strength of the US economy and partly as they fear the tax cuts earlier this year could create further inflationary pressures going forward. Friday's US job data reported that the unemployment rate had risen back to 4%, as 213,000 jobs were created last month.
We will soon be entering earnings season for the second quarter after the strong earnings growth in the first quarter analysts is preparing for another strong quarter of year on year earnings growth. Trade war threats may well feed into forward-looking statements from CEO’s, which may also tempt them into holding a little back for the next quarter. US equities, like most global equity markets, have done little so far this year, as earnings have caught up with valuations.
The S&P 500 gained 1.5% in the past week, as did stocks in Europe however the FTSE 100 lost a little ground over the past five days. Industrial stocks continue to underperform, technology continues to outperform. The US yield curve continues to flatten, at present, it appears equity markets consider this is more for technical reasons, rather than recessionary concerns.
The week ahead has plenty to offer capital markets, US inflation data, the preliminary Michigan consumer sentiment report and the ECB will release the minutes of the June meeting. This release may give further insights into the members view on the timing of a further reduction in the bond purchase program, and the timing of the first interest rate rise. We also get the latest Chinese inflation data on Tuesday. For the UK on Tuesday we get Industrial and Manufacturing data for May, analysts have forecast something of a recovery. Other noteworthy releases will be the German ZEW economic sentiment survey on Wednesday. The sentiment is forecast to fall again and is now back to early 2012 levels. Brexit and trade wars will continue to dominate the printing presses this week as well.