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US economy has seen many macroeconomic data being released this week, in particular regarding the labour market, while the FED governor had a speech that has strongly affected the markets on Wednesday.
The labour market has been the main actor of the week: the ISM manufacturing index registered a figure of 54.1 against a prediction of 54, while the non-manufacturing one registered a figure of 59.1 versus a prediction of 56.5. The ADP non-farm employment change beat expectations (182K against 180K) and also the non-farm payroll has been much better than expected with a figure of 271K against a prediction of just 180K. Finally, the unemployment rate remained stable at 5% and the average hourly change increased 0.4% this month. This side of the economy continues to show a consistent growth.
On Wednesday, Yellen has continued to keep real the chance of 25bp rate hike in December due to positive signals that the US economy is showing, particularly on the labour market side. Furthermore, Yellen believes that a December rate hike would allow proceedings that are more gradual for the future.
The S&P500 opened on Monday at 2,084.03 and closed the week at 2,099.02 gaining +0.73% during the week, while the NASDAQ opened at 5.067,16 and closed at 5,147.12 gaining 1.62%. On the FX market, the EUR trades at 1.0742 against the USD.
Moving to the next week, the PPI and the initial jobless claim will be released respectively on Thursday and Friday.
The main macroeconomic data of the week were the PMI figures. Manufacturing PMI came in slightly above expectations at 52.3 (52.0 expected). Looking at individual countries, it is worth mentioning that, while German and Italian numbers were stronger than analysts’ estimates, French and Spanish manufacturing index was below expectations. On the services side, EU aggregate PMI was strong at 54.1, but slightly below forecasts (54.2). Looking at individual countries, opposite situation to manufacturing: France and Spain beat projections.
What impacted the most, however, were ECB governor’s declarations and strong US job market data: indeed, the markets seem to have further discounted the divergence in the US and EU monetary policies, the result of this being large swings in currency markets.
Mentioning some markets movements, it is worth stressing that EUR/USD dropped to 3-month lows, while stock markets have been fairly volatile, thus confirming the unstable situation in global equity markets, driven by weak economic growth and concerns about Chinese slowdown. Italian FTSE MIB has been very volatile, yet closed near flat after this week trading at 22,530 (after opening at 22478). At the beginning of the week, it became official that Volkswagen’s emission-conceiving devices were also used in Audi and Porsche’s vehicles, thus triggering a sharp decrease of almost 10% in VW’s stock price, which weighted on the whole DAX index. Despite that, German DAX slightly rose from 10,880.5 to 10,988.0.
Next week, German GDP, Eurozone GDP and CPI data of the main European countries will be out.
As anticipated seven days ago, the past week was rather relevant for UK, with BoE meeting on Thursday. Along with announcing an 8-1 vote on the MPC to hold interest rates at 0.5% (as expected), the central bank published inflation forecasts in its quarterly report, suggesting they would stay low for longer than previously expected. Many economists had been predicting an interest rate rise in the spring or summer of next year. However, the assumptions underlying the BoE forecast suggest that there is only a small risk of overshooting the 2 per cent inflation target, even if borrowing costs do not rise until 2017. MPC also said that it would not consider starting to reduce the £375bn stock of assets purchased under quantitative easing until it had raised interest rates up to 2%.
On the pure macroeconomic side, PMI figures (both manufacturing and services) came in very strong.
In such a context, FTSE100 is roughly 8bps shy from the opening of the week, with the main changes that are observed in the FX. Cable is down 5bps or 2.614% from 1.5454 to 1.5050 (while EUR/GBP is almost unchanged since the beginning of the week at 0.7136), due to the strong data about the health of the US labour market. UK 10Y are up 10bps at 2.029%.
For the coming week, we will wait for news about the Inflation Report Hearings and the BoE governor Carney speech.
Elsewhere in the world
Outside the usual three monetary areas, China published some important data. In particular, official manufacturing PMI showed an unexpected shrinkage in October, setting at 49.8 (while it was expected neutral at 50.0). However, more surprising, Chinese authorities decided to increase the Renminbi fix the most in more than 10 years.
Next week, China will reveal its CPI and industrial production figures. Moreover, Russia will publish the level of central bank reserves and GDP growth: it may be interesting to analyse the data in order to gauge the solidity of the economy after the recent turmoil.