Insight Multi-Asset Weekly Update – all eyes on the Federal Reserve meeting Wednesday with a cut widely expected


Market and economic review

A positive week for risk assets, with US corporate earnings being well received by the market

Global equities ended last week in positive territory on the back of positive share price reaction to Q2 2019 US corporate earnings mixed with disappointing global growth data. Government bonds moves were relatively muted: 10-year yields in the US ended up broadly flat, while European yields fell by 5bp as European economic data disappointed.

Manufacturing weakness was the standout on the global growth data front in the first part of the week which added more scrutiny to Thursday’s ECB meeting. As widely anticipated the central bank left rates unchanged and the forward guidance on rates has been amended to include an easing bias, indicating that rates are likely to be cut at the next meeting in September. The statement was perceived as dovish and triggered an initial rally in rates and equities, which proved short-lived as assets retraced most of their moves during Mario Draghi’s press conference. This implied that the wider Governing Council did not fully agree on the exact nature and size of further easing. Nevertheless, the ECB has inserted a paragraph signalling that further easing measures are on the way and the market is now fully priced for a 10bp rate cut in September.

A busy week for US earnings, with share prices generally reacting with a positive skew

Last week was busy for US earnings, with 30% of the S&P 500 reporting. The headline earnings-per-share (EPS) growth rate now stands at -1.1%, running slightly ahead of pre-season expectations for -2.8%.

Our main focus ahead of this season was on management guidance and market reaction to surprises and thus far, both of these elements have been positive. Companies beating on earnings have been rewarded, while the price reaction to misses has been muted. This suggests that positioning is not overly extended, despite the strong equity market rally this year.

Management guidance for the second half of this year has also been positive in aggregate, with a number of large firms either increasing or maintaining their FY 2019 projections. This was particularly evident in the technology sector, with Alphabet, Intel and Texas Instruments all providing an upbeat outlook.

Consensus expectations remain for earnings to increase in the second half of this year, although this is may require a stabilisation in global growth to materialise. On that note, Caterpillar, a bellwether for global growth, published results that were less positive, with both trade pressures and lower Chinese demand hurting earnings this quarter.

Data releases were soft on the week, serving as a reminder that global growth is still moderating

Wednesday saw the release of provisional July PMI data points out of Japan, Europe and the US. PMIs provide a good leading indicator of global economic activity, which we closely follow given our concerns about global growth. The flash PMIs for July continue to suggest manufacturing remains weak, although services are holding up better, but ultimately forward expectations remain dogged by trade war fears.

Japan saw an improvement in its manufacturing PMI to 49.6 from 49.3, although it remains in contractionary territory (i.e. below 50). France saw its composite PMI for July slide by one point versus the previous month, dragged down by the decline in manufacturing (-1.9 points), while the services index edged lower more modestly, to 52.2 (from 52.9 in June). The picture is similar in Germany where the manufacturing print declined to 43.1, a seven-year low, although the services index beat estimates.

The German IFO business climate indicator for July was released on Thursday and added to the gloomy picture of manufacturing conditions. The headline number dropped 1.8 points, missing estimates. However, the bigger worry was the expectations component, which also plunged 1.8 points to a new cycle low of 92.2 – a level last seen in 2012.


The Federal Reserve meeting on Wednesday will be the main event this week, as it is widely expected to cut rates for the first time since 2008. A rate cut of 25bps is widely expected, although a 50bps cut cannot be ruled out.

On the data front, the highlight will be the US June employment report on Friday. Amid a background of low inflation and downside growth risk, both the payrolls data and the average hourly earnings will be important to watch. Other top tier data to be released include the US ISM data and the finalised PMI data releases for China, Japan and Europe. Markets will watch out for any declines or revisions in the PMI release, as it is an important indicator for the future economic environment. Preliminary inflation readings for Germany, France and Italy will be in focus as they will influence how dovish the ECB is likely to be in September. On Tuesday, US PCE Inflation will be released.

Additionally, another 30% of companies are due to report in the week ahead, with Apple results on Tuesday the notable focus. Finally, a US delegation will be travelling to China to resume trade talks.

By Adam Whiteley, Investment Specialist, Insight Investment Australia

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