Global Markets Weekly - 10 August 2009
- Riskier assets built on their recent strong gains, thanks to encouraging economic data.
Last week’s activity data continued to paint a picture of a global economy that is being dragged out of recession by the emerging and Asian economies. Equity and commodity markets hit new highs for the year, building on their strong gains over the previous three weeks. Bond markets diverged sharply, with yields continuing to rise in the US because of encouraging economic data but falling sharply in the UK as the Bank of England expanded its bond purchase programme. The dollar hit a new low for the year on a trade-weighted basis and is likely to fall further in the years to come as Asian and emerging economies allow their currencies to appreciate in a bid to avoid asset price bubbles.
- PMIs rose - and not just thanks to inventory rebound - heralding a return to growth.
Purchasing managers’ indices (PMIs) rose in July, for the fifth month running. The global composite index (which covers both manufacturing and services) suggests that the major developed economies, after contracting by 2.2% in the first quarter (Q1), shrank far less in Q2 and should return to growth in Q3. Encouragingly, the rise in the PMIs has been driven mainly by a pick-up in order books and production and slower labour shedding, not a rebuilding of inventories - this is more than just an inventory rebound. If the usual link between orders and the other components holds, these indices will rise further in the coming months.
- Although the UK recession appears to have bottomed in May...
The UK composite PMI for July came in well ahead of expectations. The current index level is consistent with annualised GDP growth of nearly 2% in Q3, compared with Q2's 3.1% contraction. The industrial production data for June also surprised on the upside, rising 0.5% on the month, helped by the car scrappage scheme. Judging by this and other high-frequency data, May probably marked the bottom of this UK recession. The PMI survey and the 20% fall in sterling suggest that industrial production should rise further as the global recovery gathers steam.
- ...the Bank of England extended its quantitative easing, driving gilt yields down.
The Bank of England shocked markets by extended its programme of purchasing government and corporate debt by £50 billion, to £175 billion. This bold move shows that the Bank is willing to do whatever it takes to overcome the deflationary pressure from excess capacity and the headwinds to the pace of recovery from bank and household deleveraging. As if to emphasise the headwinds faced by developed economies, the US savings ratio dipped back from 6.2% in May to 4.6% in June. Unless equity and house prices rise markedly over the next couple of years, the savings ratio is likely to rise to 8-9% as households struggle to rebuild their balance sheets the hard way, out of labour income.
- Positive US labour-market figures gave markets a late boost.
The other big surprise for markets last week was a better-than-expected US non-farm payrolls report. At 247,000, July's fall in employment was 78,000 less than markets expected, and June’s figure was revised down by 24,000. Over the past three months, the fall in employment has averaged 331,000 – less than half its peak of 701,000 in the three months to February. The question now is: can it last? Jobless claims suggest it can. In fact, payroll losses could slow to only 150,000 in the next few months. Yet the final peak in unemployment – and so the first US rate rise – remains many months away. With earnings growing at an annualised rate of just 1.2%, there is no inflation rationale for a rate rise at present.
Indices, Interest rates and Inflation
|
Close - 07 Aug 09 |
1 Week% |
1 Month% |
3 Months% |
YTD
% |
|
FTSE ALL Share |
2,425 |
3.0 |
13.3 |
7.7 |
9.8 |
|
FTSE 100 |
4,732 |
2.7 |
13.0 |
7.6 |
6.7 |
|
S&P 500 |
1,010 |
2.3 |
14.7 |
11.4 |
11.9 |
|
Nasdaq Composite |
2,000 |
1.1 |
14.6 |
16.6 |
26.8 |
|
DJ Stoxx (Europe) |
250 |
2.4 |
15.5 |
10.8 |
12.2 |
|
Nikkei 225 |
10,412 |
0.5 |
7.9 |
10.9 |
17.5 |
|
Hang Seng |
20,375 |
-1.0 |
14.1 |
18.3 |
41.6 |
| Official Rates (%) |
Inflation (%) |
Rate announcement |
|
Current |
Sep-09 Forecast |
Dec-09
Forecast |
Current |
Next Date |
|
US (Fed Funds) |
0-0.25 |
0-0.25 |
0.25 |
-1.4 |
12-Aug |
|
UK (Base rate) |
0.50 |
0.50 |
0.50 |
1.8 |
10-Sep |
|
Euro-zone (Repo Rate) |
1.00 |
1.00 |
1.00 |
-0.1 |
03-Sep |
|
Japan (Call rate) |
0.10 |
0.10 |
0.10 |
-1.8 |
11-Aug |
View the full Global Markets Weekly report (pdf).
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