Last week started reasonably strongly, though equity momentum later faded. US employment numbers were much weaker than expected, wage growth slipped, while inflation remained below their 2 per cent target providing some ammunition to underpin expectations of an interest rate cut soon.
The US Federal Reserve meets this week and it will be more about language than policy change. Analysts are forecasting a 95 per cent chance of an interest rate cut by December. How the Fed guides these expectations will be the key driver for market direction in the short term. However, the recent US retail sales numbers suggest consumers are shrugging off the negative trade headlines and support the view that markets may be too aggressive in their interest rate cut expectations.
In the UK, there has been nothing substantive on Brexit with the immediate focus on the Conservative party leadership contest, for which the first round of voting took place. This showed Boris Johnson as the clear frontrunner. Politics aside, the unemployment rate remained unchanged at 3.8 per cent, while wage growth accelerated to 3.4 per cent, something that will have been noted by the Bank of England.
Global government bond yields continued to fall. In particularly, the yield on the 10-year Greek government debt fell below 3 per cent mark. In contrast, Greek bonds were yielding 37 per cent in 2012. Falling yields across Europe is recognition of falling inflation expectations and this has enhanced the belief that the European Central Bank will, in due course, announce further measures, including more quantitative easing, to increase inflation back towards their target of around 2 per cent. For the moment though, eurozone government bonds continue to trade at record low yields. Germany was able to issue €22bn of 10-year debt at a yield of minus 0.24 per cent last week. Issuance at these levels suggests that bond markets are very much of the view that all is not well with the world.
Amidst the ongoing uncertainty of Brexit and the bid for the Tory leadership UK domestic equity funds had a tough week. The UK economy continues to provide mixed signals. While unemployment remains low and the labour markets is in good shape, GDP growth is faltering, and manufacturing data is weaker with companies continuing to hold off on spending plans.
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