Markets end week at a gallop ... following US Data

“Markets end week at a gallop” the headline in the Times today.  Global markets rallied at the end of a tough week. Revisions to US growth data boosted confidence and offset fears about the slowing economy in China.

“Stock markets across Europe and the United States rallied following the Bureau of Economics Analysis upward revision to US Q2 growth from 3.7 per cent to 3.9 per cent. Economists claimed the GDP upgrade would calm anxiety about the economy in the wake of the recent financial market turmoil.

Much ado about nothing - really. The 3.9% growth rate is one of those US quarter on quarter annualised numbers which can flatter to deceive. The underlying year on year growth rate, (our preferred measure) in the second quarter was actually unchanged at 2.7%.

Not bad though … with US growth averaging 2.8% in the first half of the year, we expect the out turn for 2015 to continue. Growth of 2.8% in 2015 and 2.9% next is our outlook. Given the strength of US consumer spending, investment and the jobs markets, the Fed will move soon to hike rates.  

Janet Yellen Speech …
Janet Yellen struggled this week to conclude a speech on inflation and monetary policy at the University of Massachusetts on Thursday. The head of the Fed appeared to suffer from a slight dizzy spell towards the end of her address.

Later receiving medical attention, a Fed spokeswoman confirmed Yellen “felt fine and was able to resume her schedule for the evening”.

With Fed policy moving in ever tightening circles, a bout of presenter and market nausea is inevitable. Last week the Fed confirmed no change in monetary policy in September. In the speech this week, Janet Yellen confirmed a rate rise before the end of the year was still on the agenda.

“Most FOMC participants, including myself, currently anticipate that achieving these conditions [inflation target and growth] will likely entail an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter.” So expect a rate rise in December?

China Data …
Misery in the Middle Kingdom continued this week, with news the Caixin Flash China General ManufacturingPMI™ declined further to 47.0 in September from 47.3 prior month. The index slumped to a six year low as total new orders fall at faster pace.

Commenting on the data, Dr. He Fan, Chief Economist at Caixin Insight Group said: “The decline indicates the nation’s manufacturing industry has reached a crucial stage in the structural transformation process. Overall, the fundamentals are good.” Particularly in view of government fiscal measures to boost growth and stimulate expansion. Markets still expect growth of 6.5% to 7% in the current year.

UK Borrowing ...
Bad news for the Chancellor this week as borrowing figures in August appeared to drift off track. The Government borrowed more in August 2015 than prior year.

Public sector net borrowing increased by £1.4 billion to £12.1 billion in August 2015 compared with August last year. For the year as a whole, public sector net borrowing fell by £4.4 billion to £38.4 billion compared with the same period in 2014.

The OBR has set a target forecast reduction on £20 billion in the financial year, from the £90.2 recorded last year. A reduction of just £4 billion in the first five months, suggests there is much to do, to hit target.

With revenues up almost 4% in the year to date and spending held below 1%, the reduction remains a possibility. The vagaries of local government spending and August anomalies may be offset by the underlying strength of the economy in the months ahead.

With total debt of £1.5 trillion (80% of GDP) the odd £10 billion shortfall in the year wouldn't present a funding challenge. It would however challenge the credibility of Treasury and the OBR for that matter.   

The Great Manchester Economics Conference …
Just ONE weeks to go to the Great Manchester Economics Conference on the 2nd October. A great line up. Don’t miss this chance to see some of the great UK economists and commentators, together in Manchester in our fast paced “News Style” show. Chris Williamson from PMI Markit will comment on the Caixin index and much more.

If you enjoy the Saturday Economist - Book Your Tickets NOW!

So what happened to Sterling this week?
Sterling moved down against the Dollar to $1.522 from $1.556 and moved down against the Euro to €1.363 from €1.371 The Euro moved down against the Dollar to €1.1175 from 1.135.

Oil Price Brent Crude closed at $48.34 from $48.15. The average price in September last year was $97.09. The deflationary push continues. A $75 - $80 recovery by Q4 remains the base case in our outlook forecast. This appears unrealistic against the EIA STEO backdrop and OPEC stance on output.

Markets, mixed this week! The Dow closed at 16,315 from 16,420. The FTSE closed up at 6,113 from 6,104

Gilts - UK yields steadied. UK Ten year gilt yields were at 1.835 from 1.85. US Treasury yields were unchanged at 2.16.

Gold moved up to $1,149 ($1,137).

John
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