Head of Fixed Interest Research
The highlight of last week on the macro front was the Bank of England meeting and accompanying Inflation Report. As expected, the MPC voted 6-2 in favour of leaving interest rates unchanged but the overall tone of the statement was quite dovish, with modest downgrades to wage and growth forecasts and somewhat superfluous warnings about the impact of Brexit on business investment. The tone from the MPC is likely to ebb and flow over the coming months and they will seek to avoid any complacency amongst consumers and investors about the potential for rate hikes, but overall we expect them to remain on hold for the foreseeable future.
Elsewhere, Friday’s US nonfarm payrolls report was unreservedly upbeat with strong job creation, falling unemployment and better than expected wage growth but it doesn’t materially alter the outlook for the Fed. They are likely to start winding down their balance sheet in September and will probably wait until December to raise rates again, unless inflation picks up unexpectedly. One potential issue that is starting to gain attention is the need for Congress to raise the US debt ceiling by early October. Usually this slightly arcane process is managed without too much trouble even if accompanied by a certain amount of political point-scoring but there is always the scope for mishap with the Trump administration running the show.
The week ahead looks to be fairly quiet on the macro front with the main data release, US inflation, not out until Friday lunchtime. UK manufacturing output and Chinese CPI are out in the meantime but the next main event is probably Draghi’s speech at the Jackson Hole conference, taking place between 24th and 26th August.
US stocks registered another all-time high last week, with the Dow Jones Index closing above 22,000 for the first time ever. There is much talk about the US stockmarket and why it continues to plough ahead despite US President Donald Trump’s inability to push through any of the reforms that he promised on his election campaign. A number of factors continue to support the recent rise in share markets. First, you can’t just isolate the US from other regions. All major stockmarkets have been rising. For the first time in many years, all of the important economic regions in the world are showing positive economic growth. This is supportive of rising share prices.
In the specific case of the US, the recent fall in the dollar (down 10% on a trade weighted basis in the year to date) is providing a helpful tail wind for US multinationals. Add in the recent improvement in the eurozone economies and this gives another fillip to demand. The US has just delivered the second best quarter for corporate earnings in six years (Q1 was the best) and if the dollar remains weak, this momentum should continue into the second half of the year. Should Donald Trump succeed with any of his promised tax reforms, then this will add some icing to the cake. But as we stand, the cake is in pretty good shape as it is!
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