Weekly wrap: The Fed is from Venus, the ECB from Mars: central bank policies look set to diverge – 11.11.2013
Source: Henderson Global Investors
After a bright start to the week global equities relinquished their gains. Stronger than expected US data raised the spectre that the US Federal Reserve (Fed) might consider tapering its asset purchases sooner rather than later. The Commerce Department reported that US gross domestic product (GDP) had expanded at an annualised rate of 2.8% quarter-on-quarter (qoq) in the third quarter, the highest reading in a year. Although expansion was partly down to a one-time build-up of business inventories, it was still higher than the 2% analysts had forecast. Friday’s US Employment Report compounded the equities sell-off when it was revealed that 204,000 additional non-farm jobs had been created in October, trumping estimates of 125,000. In the bond markets, 10-year treasury yields surged (prices fell), with similar moves seen in UK gilts and German bunds.
In currencies, the dollar strengthened considerably against the euro, abetted by the European Central Bank (ECB)’s largely unexpected decision to cuts its main interest rate to a record low of 0.25%. The move was seemingly triggered by a slide in European inflation announced in the prior week; at this point in time the path of the Fed and the ECB’s policies looks poised to diverge. In the UK, there were no surprises when the Bank of England (BoE) left its policy unchanged. A raft of data also supported the thesis that Britain’s economy is recovering: manufacturing output grew 1.2% in September, like-for-like retail sales rose 0.8% year-on-year in October, while the service sector purchasing manager’s index (PMI) came in well ahead of predictions at 62.5 in October (>50 signifies expansion). In Asia, investors were reluctant to commit money to equities ahead of a key meeting of China’s top officials – the ‘Third Plenum’ of the 18th Communist Party.
Over the weekend, all eyes turned to China. A slew of October data was released, which provided some positives and negatives. Factory output rose 10.3% from a year earlier, while retail sales jumped 13.3%. However, annual inflation climbed to an eight-month high of 3.2% as food costs soared. The nation’s eagerly anticipated Third Plenum has also kicked off, where expectations are running high that the Chinese government could launch bold reforms. Areas they are potentially discussing are said to include industry deregulation, financial liberalisation, and social reform. Following last week’s surprising numbers, scheduled US releases will continue to garner attention. The Conference Board delivers its latest labour market trends report on Tuesday, while November’s Empire Manufacturing Survey and October’s industrial production figures will follow on Friday.
In the UK, investors are awaiting Wednesday’s Quarterly Inflation Report, which will provide the BoE’s new forecasts for growth and unemployment; the jobless rate, also released on Wednesday, will be closely watched as the bank has tied its policy to this falling below 7%. While interest rate rises were not forecast by the bank until 2016 previously, stronger signals from the UK economy could potentially see this date being brought forward. UK consumer price index inflation data will be published ahead of the bank’s report on Tuesday, with analysts anticipating an easing in the rate from 2.7% to 2.5% year-on-year in October. In the eurozone, GDP numbers for the third quarter are announced on Thursday, including country breakdowns for France, Germany and Italy. It is expected that eurozone growth could slip back from its previous reading of 0.3% qoq.