Friday 24 November 2017

Daily Market Update: Yellen talks up a Fed rate hike this year

In recent weeks an increasing amount of economic data has been signalling a global slowdown. This theme has been apparent this week with weaker than expected manufacturing PMI surveys for China, the Eurozone and Japan.

These surveys can be viewed as somewhat abstract. However, yesterday’s announcement by Caterpillar Inc. highlighted what slowdowns in these surveys mean at a company level. The world’s most valuable machinery producer announced a plan to cut up to 10,000 jobs, or 9% of its workforce, by 2018. This news pushed the company’s share price down some 6.5% during yesterday’s session. Caterpillar, which is viewed as a barometer of global economic growth, has been feeling the impact of a slowdown in China’s voracious appetite for commodities. This has created a glut of metals and coal which has left Caterpillar’s mining customers with idle equipment. More recently, the tumbling oil and gas prices has hit Caterpillar’s customers in the drilling business.

Caterpillar’s news provided investors with fresh evidence of a global slowdown which triggered a selloff in industrial stocks. In Wall Street, the S&P 500 Industrial Index fell for a third consecutive day with the overall S&P 500 closing just 0.3% lower in yesterday’s session. Wall Street’s modest declines contrasted with hefty falls in European equities with the Euro Stoxx down 2% at yesterday’s closing bell. This morning, however, European equities have rebounded the most in two weeks with the Euro Stoxx index up around 2% in early trading.

Yesterday’s influential IFO survey revealed that business confidence in the Eurozone’s largest economy is holding up better than expected. The overall business climate index climbed to a four month high in September. Interestingly, the current assessment index fell and the forward looking expectations index rose. This was the opposite of what had been expected. It is worth remembering that this survey pre-dates the recent VW scandal. Given the significance of VW to the German economy this is expected to feature prominently in next month’s survey. In the UK, yesterday it was revealed that mortgage lending has increased at its fastest rate since the financial crisis began. The number of mortgage approvals was up 23% y/y in August with remortgaging up 38%. Homeowners are eager to lock in cheap deals ahead of the Bank of England raising interest rates. However, yesterday Deputy Bank of England Governor, Ben Broadbent, says he is not “on the brink” of raising interest rates despite “stellar” growth in the UK.

In the US, the latest batch of economic data was somewhat mixed. On a positive note, new home sales increased by 5.7% m/m last month. This took the annual pace of sales to 552k – the highest level since 2008. Meanwhile US business investment fell by 0.2% in August. This compared with an anticipated rise of 0.5% m/m. The main US interest yesterday, however, was not on the economic data but on Janet Yellen. The Fed Chair took the opportunity last night, when she was delivering a lecture, to clarify the Fed’s thinking on interest rates. Janet Yellen said that she (and most of her FOMC colleagues) is ready to raise interest rates for the first time in almost a decade later this year.

The Fed Chair added that recent global economic and financial market developments do not significantly affect the US central bank’s policy.

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