This week we receive inflation data in the US, UK and the eurozone, which will be of interest for signs of developing inflationary pressures.
In addition, retail sales in the US will provide insight into the strength of domestic consumer activity. Lastly, Chinese activity data will also be keenly observed.
Market and economic review
US mid-term elections – no surprise
In the highest electoral turnout since 1970, the US mid-term election last week resulted in the Democrats taking control of the House of Representatives, while the Republicans retained control of the Senate. Election results were broadly in line with expectations and a split Congress until 2020 means the Republicans are very unlikely to be able to implement any further tax cuts.
With the prospect of stable fiscal policy, US Treasury yields and the US dollar fell as the election results came in, contributing to broad-based gains in risk assets, with the S&P 500 Index closing up over 2% on 7 November.
The longer-term impact of electoral outcome on key issues such as US-China trade conflict remains to be seen for now. China’s Vice President Wang Qishan meanwhile reaffirmed the country’s desire to work with the US for an acceptable solution to ongoing trade issues.
Economic data – continued moderation
US data releases continued to indicate strong growth momentum with the ISM non-manufacturing index beating expectations at 60.3. Unsurprisingly, the release was down from September’s record 61.6 level. US growth dynamics have remained resilient this year despite moderation in the rest of the world, and this week’s data releases could indicate continued momentum into Q4 2018.
Chinese economic data, on the other hand, pointed to continued weakness amongst small/medium scale enterprises, with the lower-than-expected Caixin services and composite PMI releases at 50.5 and 50.8, respectively. Trade data was better than expected, with solid year-on-year growth in export and imports (both in local currency and US dollars) – perhaps reflecting activity ahead of higher potential trade sanctions.
In the eurozone, German factory orders unexpectedly rose to 0.3% in September from an upwardly-revised level of 2.5% in August. Growth dynamics in the euro area have started to show tentative signs of divergence with better-than-expected German services and composite PMI releases at 54.7 and 53.4, respectively. Equivalent Italian services and composite PMI releases indicated contraction at 49.2 and 49.3 respectively. Overall euro area October composite PMI was 53.1, up from a preliminary level of 52.7. Elsewhere, Brexit appears to have weighed on UK data, with a weaker-than-expected services PMI release of 52.2.
Italian budgetary developments
Following disappointing economic releases this week, the prospect for potential contraction in the eurozone’s third largest economy comes at a time of heightened focus on Italian budgetary developments.
The European Commission’s (EC) latest economic forecasts suggested that the Italian budgetary deficit could exceed the EU limit of 3% in 2020, and come close to it in 2019. It further forecasts the Italian economy to grow by 1.2% in 2019 – lower than the Italian Finance Ministry’s forecast of 1.5%. After rejecting the EC’s forecasts, Italy has until 13 November to resubmit tax and spending plans. The country faces potential sanctions and fines in case of non-compliance. The yield on 10-year Italian government bonds rose, contributing to further weakness in Italian equity markets towards the end of the week.
Policy divergence continues
The US Federal Reserve (Fed) voted unanimously to keep policy rates unchanged last week. The policy statement acknowledged a slowdown in business investment and a continued drop in the domestic unemployment rate, while also recognising strength in consumer spending. There was no mention of the market volatility in October or tightening of financial conditions. With an unchanged inflation outlook, the Federal Open Market Committee is expected to increase policy rates for the fourth time this year at the December meeting.
The gradual normalisation in US policy rates remains in contrast to monetary policy developments in China. The Chinese Securities Regulatory Commission published revised rules on Friday, which could allow listed companies to issue shares more frequently and for broader use, including replenishing operating capital and repayment of debt. Moreover, the Chinese Banking and Insurance Regulatory Commission is proposing to set up targets for lending to private companies to ease financing pressures.
Global equities gains – short-lived
Following strong gains in risk assets after the US mid-term elections mid-week, global equity markets ended the period on a softer note. Chinese equities were weak towards the end of the week, as the latest Chinese measures brought concerns about non-performing loans to the fore at a time of slowing growth dynamics.