Week in Review: Fed Says It’s Getting Close to Targets
Review of the week ended 21 October
- Fed: Employment and inflation targets almost reached
- UK September CPI surges as pound slides
- China’s Q3 economic growth steady at 6.7%
- Saudi Arabian debt deal well received
- UK unemployment holds at 11-year low
Global equities advanced modestly this week. While it is early in the Q3 earnings season, reports so far suggest that the earnings recession of the past four quarters may be about to come to an end, with S&P 500 Index earnings expected to eke out a 0.5% advance this quarter. Revenues are also expected to rebound, by 2.5%, according to Thomson Reuters. Volatility, as measured by the Chicago Board Options Exchange Volatility Index (VIX) dipped to 14 this week from 15.2 a week ago. US oil prices edged higher, with West Texas Intermediate crude advancing to $51 from just above $50 last week, while global Brent crude was stable at near $52 per barrel. The yield on the US 10-year Treasury note was steady at about 1.75%.
GLOBAL MACRO NEWS
Fed’s Fischer: We are very close to targets
US Federal Reserve Vice-Chair Stanley Fischer said this week that the central bank is very close to achieving its twin goals of full employment and inflation near 2%. The comment comes amid anticipation of a hike in the federal funds rate at the December meeting of the Federal Open Market Committee (FOMC). However, Fischer warned the Economic Club of New York that it is not that simple for the Fed to hike interest rates in a world where aging demographics, weak demand and low investment have trimmed global economic potential. Meanwhile, the Fed’s Beige Book, prepared in advance of the November FOMC meeting, said that economic activity increased at a modest to moderate pace in most US regions.
UK inflation on the move
Inflation in the United Kingdom rose 1% in September, the fastest annual rate in two years. While the Office for National Statistics said there was no explicit evidence that the fall in the pound’s exchange rate had pushed up prices, economists expect higher import costs resulting from the currency’s post-Brexit depreciation to underpin inflation in coming months.
China’s growth holds steady
The Chinese economy continued to grow at an annual rate of 6.7% in the third quarter, unchanged from the prior two quarters. The economy appears to have stabilized after turbulence in late 2015 and earlier this year, but economists worry that much of the growth is being driven by an unsustainable credit surge.
Saudi Arabia launches largest EM bond issue
The Kingdom of Saudi Arabia this week sold a total of $17.5 billion 5-, 10- and 30-year bonds, the largest single bond sale ever for an emerging market. The issue was heavily oversubscribed, with $67 billion in orders received.
UK unemployment stable at 11-year low
Matching an 11-year low, the UK unemployment rate held steady at 4.9% in the three months ended 31 August. Labor markets have largely shrugged off Brexit concerns thus far, though the process of leaving the European Union has yet to officially begin.
ECB leaves rates unchanged; no QE extension
The European Central Bank left monetary policy unchanged at its 20 October meeting and did not extend its quantitative easing program, which is scheduled to expire in March 2017. An extension could come at its December meeting, when the Governing Council will have updated economic projections from its staff. The Bank of Canada met this week as well, and it too left rates unchanged. The BOC lowered its outlook for economic growth for the balance of 2016 and for 2017, citing weak exports to the United States as a result of low US business investment and on increased global competition.
Mixed bag of US data
What little data there was from the US this week were decidedly mixed, making it unlikely that the Fed will be dissuaded from nudging interest rates higher at its December meeting. The week’s highlights included an uptick in the Philadelphia Fed Manufacturing Index (9.7 versus 5.3 expected) and existing home sales (3.2% versus 0.4% expected). Lowlights included a drop in Empire State Manufacturing Index (-6.8 versus 1.0 expected) and a decline in housing starts (-9%, on a decline in multifamily units. Single- family starts were solid).
GLOBAL COPORATE NEWS
BAT offers to acquire Reynolds
British American Tobacco has made a $47 billion offer to acquire the 58% of Reynolds American, Inc. it does not already own. The deal would create the world’s largest publicly traded tobacco company.
Gambling business merger not a safe bet?
Bookmaker William Hill and Amaya Gaming of Canada, owner of PokerStars, have ended merger discussions without a deal. The proposed agreement, which would have created the largest global online gambling business, was opposed by a number of William Hill’s major shareholders, according to Bloomberg News.
THE WEEK AHEAD
- Flash purchasing managers’ indices are released globally on Monday, 24 October
- September US durable goods orders are reported on Thursday, 27 October
- Japan reports its September consumer price index on Friday, 28 October
- US preliminary Q3 GDP is released on Friday, 28 October
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Sources: MFS research; The Wall Street Journal; The Wall Street Journal Online; Bloomberg News; Financial Times; Forbes.com; CNNMoney.com; NBCNews.com.
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