The positive sentiment in global equity markets continued to build yesterday after the Philadelphia Fed President, Patrick Harker, said the Fed’s 2% inflation target should be symmetric and therefore the US central bank should hold off on raising US interest rates until inflation is above its target (i.e. allow inflation to overshoot 2% before the Fed starts to take action). Given US CPI inflation is just 0.6%, this confirms what we have long been saying in these commentaries: US monetary policy is likely to remain very loose for the foreseeable future.
Data wise, none of yesterday’s important releases (the Empire State Manufacturing Survey; US industrial output; and the Fed’s Beige Book), had any hint of the US economy losing momentum – which suggests, as we wrote in yesterday’s commentary (please see here), that JPMorgan’s CEO, Jamie Dimon, was being too cautious in his economic outlook and as a result, potentially ‘kitchen sinking’ their bad-debt provisions.
In fact, US industrial production in June had its largest monthly gain since December 1959 (when it rose 6.18% following the end of a 116-day US steel industry strike): after climbing 1.4% in May, total output at factories, mines and utilities increased by a further 5.4% in June – which indicates that US manufacturing is bouncing back strongly as the economy starts to reopen following the coronavirus shutdowns.
The Empire State survey improved for the third month in a row, from -0.2 to 17.2. Zero is the line dividing expansion and contraction, and so a reading of 17.2 also indicates that the US economy is bouncing back strongly as the economy reopens, while the Fed’s Beige Book also reported signs of improving demand growth due to the economic reopenings.
This morning’s Chinese Q2 GDP data also confirmed the economy is well and truly on the mend as not only did GDP turn positive, it smashed economist estimates of a 2.4% expansion, by growing by a whopping 3.2%, while industrial production rose 4.8% in June. The only fly in the ointment was retail sales, which slipped 1.8% in June – although a deeper investigation shows this was predominately due to car sales, as most other categories showed strong sales growth.
However, UK and European equity markets have opened slightly lower this morning ahead of another large dump of economic data later today. First up will be the ECB monetary policy meeting (although we aren’t expecting anything interesting to come from it), followed by US retail sales and the weekly US jobless claims data – and any further signs that the economy is recovering should help push equity markets higher.
The FTSE-100 is currently down just over 40 points, or 0.70%.
Investment Management Team