The week that was…
Investors carefully listen to US Federal Reserve
The US Federal Reserve (US Fed) Chairman, Jerome Powell’s semi-annual testimony to Congress took centre stage this week. Investors studied every word of Mr Powell’s statement to try and determine whether the US Fed is about to change tact and begin to cut interest rates. The potential U-turn by the US Fed on interest rate policy should not be underplayed; less than 12 months ago two-three interest rate hikes were expected, and now markets are pricing in cuts. Jerome Powell’s testimony strongly hinted at the possibility for a drop in interest rates at their next meeting on 30 July, citing weakness in the global economy and uncertainties around trade tensions as reasons for the accommodative policy. The news buoyed equity markets, particularly in the US, where all three major indices, the S&P 500, Dow Jones and NASDAQ, hit record highs. US President, Donald Trump, took to Twitter to acknowledge the good news.
Interest rate cuts questioned
US inflation data released on Thursday beat expectations and caused some market commentators to question whether there should be interest rate cuts when there are inflationary pressures in the world’s largest economy. US Consumer Price Index excluding Food and Energy (the typically volatile inflation inputs) came in at 2.1%. The news helped support the US Dollar and drove US bond yields higher.
UK economy struggling
Here on our own shores, there was little to cheer about as a plethora of economic data pointed towards a weakening economy. Retail sales for June dropped by 1.3%, which has been described as the “worst June on record”. However, this does need to be tempered with the fact that the hot summer of 2018 and the World Cup led to bumper sales last year. After the data release, sterling briefly dropped below $1.25, hitting fresh year-to-date lows, before recovering as the week went on. Manufacturing and industrial production figures both undershot consensus forecasts, although construction output was better than expected.
Middle East tensions felt
Tensions in the Middle East continued this week, with the UK still detaining an Iranian oil tanker. The heightened geopolitical tensions supported the oil price, and this was pushed higher still following the weekly US oil-inventory report. The report showed crude stocks fell by more than expected, and that inventories had fallen for the fourth consecutive week.
Mixed week for European industrials
The week was rounded off with mixed news from the Eurozone as Industrial Production beat estimates, helping support equity bourses. However, on a company level, German carmaker Daimler released a profits warning, it’s fourth of the year, and pointing to weakness in Germany’s automobile sector.
The week ahead…
No holiday for economic data
Next week sees many schools breaking up for their summer holidays, and classes will typically be in wind-down mode, however, there will be no such respite for markets as economic data from key economies around the globe is reported.
Chinese economy to grow despite tensions?
On Monday, we will wake to Chinese Gross Domestic Product (GDP) data for the second quarter. The print will take on added significance as investors look to see if the trade war tensions with the US are impacting growth negatively. The consensus view is that the Chinese economy will have grown 6.2% year-on-year.
UK employment and inflation figures to remain positive?
Despite the recent uncertainty caused by Brexit, UK unemployment has broadly been trending lower, and currently stands at a multi-year low of 3.8%. On Tuesday, the latest unemployment rate will be released alongside average weekly earnings. UK Inflation is revealed later in the week, expected to be close to the targeted 2% level. Wage growth has been outstripping inflation recently, and workers will hope this continues, leading to real wage growth and encourage future consumption.
The US release anticipated retail sales figures
Across the Atlantic, we will gain insight into the state of the US consumer, with retail sales figures published. The consumer accounts for around two-thirds of US GDP and is, therefore, the biggest driver of the economy. Retail sales will highlight whether the consumer is, in fact, confident, and therefore spending in the economy.
Oil rig count to increase?
We will close the week with the Baker Hughes US Rig Count. With technological improvements, oil drilling rigs can be brought into service in short spaces of time, allowing oil companies to react quickly to the variable oil price. The rig count has been falling slightly, although, with Middle East tensions, we may witness an increase as the higher oil price incentivises drilling activity.