Although there is concern around global economic growth, that is not really reflected in asset prices with US equity markets trading close to record highs. A pronounced drop in bond yields along with falling oil and commodity prices have played an important role in easing economic conditions. Consumer spending seems to be holding firm as is employment. Nothing economically suggests equities should be trading at all-time highs but lower interest rates globally seem to be driving a substitution effect from bonds into equities. This is highlighted by the fact that a third of the world’s government bonds offer a negative yield-to-maturity/rate-of-return making equities look relatively attractive.
US Economic Growth
However, looking at the US economy, employment economic data releases are crucial for perception of economic conditions and therefore financial market sentiment. And it is US employment figures that are of most importance with the US economy being the largest economy in the world so such economic data releases will impact markets globally. Such US employment figures are known as ‘Non-Farm Payroll’ i.e. Non-Farm because it excludes employment in the farming sector as hiring there is very seasonal and ‘Payroll’ refers to the number of people joining the Payroll each month. So, this figure represents the number of people in the US getting hired in manufacturing and services and is a key indicator of the state of the largest economy in the world. The figure is released on the first Friday of every month at 8.30 New York time / 1.30 UK time and markets hold their breath to hear the news.
If the employment figures are too high – although this represents strong economic growth – the markets (equities in particular) don’t like it as it means the US Federal Reserve (see below) is likely to start raising interest rates (become more ‘hawkish’) i.e. bad for the economy.
If the employment figures are low, markets like this data release as it implies the US Federal Reserve is going to cut interest rates to stimulate the economy.
Economists expect today’s U.S. payrolls report will show job growth slumped to a five-month low in October and are forecasting a figure of +85,000. Check what the figure actually was? How did the markets react?
US /China Trade War
Another important factor for the markets is the U.S. / China ‘trade war‘ but it looks as the two sides are heading towards an agreement with the two countries looking to sign the first phase of the trade deal the pair are working towards, which Trump says remains entirely on track and which China cast doubt upon on Thursday. Any further, more concrete doubts arising that this first phase will get signed, may well take the wind out of stock markets, so watch for anything further on that front.
US Interest Rates
US Interest Rates are set by the FOMC (Federal Open Markets Committee) which meets approximately every 6 weeks. The ‘Fed’ has an unwavering commitment to ‘normalising’ interest rates. The average key ‘Fed Funds’ rate (the rate at which banks lend to each other via deposits placed at the Federal Reserve) is 5.95% looking at the last forty years.
The current federal funds rate, which affects the cost of mortgages, credit cards and other borrowing, has been set to now hover between 1.5% and 1.75%.It has been cut 3 times this year but Donald Trump continues to put continuous pressure on the Fed (which is meant to be independent) to cut interest further.
UK: Sterling has entered a relative calm phase now that investors are daring to believe that its biggest threat – a no deal Brexit – is fading away. The UK currency has rocketed this month. Gaining more than 5% since a deal with the EU was agreed if not ratified by the UK parliament. Obviously, a December general election is the next key event in this long saga. A Conservative victory would boost Sterling as an orderly Brexit would then seem likely.
Europe: Mario Draghi, the outgoing president of the European Central Bank has just been replaced by Christine Lagarde, the first female boss of the ECB. The ECB restarted its “quantitative easing” this week after a 10-month absence. From March 2015 to December last year, the ECB bought nearly EUR 2.6 Trillion of debt (so effectively passing money onto banks to lend out into the economy). This is a further effort to stimulate the stagnating European economy. The QE programme will send European sovereign bond yields further into negative territory.
Misc. Saudi Aramco is set to launch its long-awaited IPO in the next week as the market awaits the listing of the world’s most profitable company. The part privatisation of Saudi Aramco is the centrepiece of Prince Mohammed’s ambitions to reshape the kingdom’s economy. The floatation plans were first announced in 2016 and has been set with delays and concerns over whether the company would achieve the $2 Trillion valuation coveted by the prince.