Turkey moves emerging markets, US inflation data declines and where will PMI come in this week? Find out more in this edition of “The Week in Review.”
Last Week Review
Turkey central bank move gives emerging markets a boost. Global equities saw a 1.3% gain last week1 with positive returns across the U.S. (1.2%)2, non-U.S. developed markets (1.6%)3, and emerging markets (0.6%)4. Last Thursday, Turkey President Recep Tayyip Erdogan banned the use of the U.S. dollar and spoke in favor of cutting interest rates right before Turkey’s central bank went on to raise its policy rate by more than 6% to 24%. The rate increase almost doubled investor expectations and led to some relief across emerging markets. Also, global markets reacted positively to news of the U.S. inviting China to hold another round of trade talks although the U.S. still may go forward with additional tariffs on $200 billion of China exports.
ECB confirms asset purchase plan while BOE stands pat. The European Central Bank (ECB) and Bank of England (BOE) both met last Thursday with meeting outcomes in-line with market expectations. Both central banks left their policy rates unchanged. The ECB remains on pace to halve its asset purchase program to €15 billion per month in October before finishing the program at the end of 2018. Investors continue to expect the first ECB rate hike to occur sometime after summer 2019. Switching to the UK, the BOE reiterated its plan to gradually increase interest rates, while also noting inflation remains on track to decline towards the BOE’s 2% target.
U.S. inflation data modestly declines. U.S. Consumer Price Index (CPI) data released last Thursday revealed headline (2.7%) and core (2.2%) figures on a year-over-year (y/y) basis. Both measures came in below their respective prior levels and survey expectations. After steadily increasing from the beginning of the year, the CPI level fell due to a decrease in the shelter component which makes up just over 30% of the calculation. The soft inflation data helps offset investor concerns on the above-consensus wage growth figure in the August jobs report.
10-year anniversary of the Lehman Brothers collapse. With over $600 billion in assets, Lehman Brothers filed for bankruptcy on September 15, 2008. U.S. equities hit bottom six months later while the unemployment rate climbed to a 10% peak about a year later. U.S. equities recovered to the pre-crisis high by March 2013 and have remained in a bull market for nearly ten years.5 Since the financial crisis, major developed market central bank policy has been very accommodative overall. The Federal Reserve (Fed) has led the way on normalizing policy including seven rate hikes and starting to slowly decrease the size of its balance sheet. Outside the U.S., the BOE has hiked rates twice while the ECB appears next in line as it intends to conclude its asset purchase program and eventually slowly raise rates.
This WEEK PrEVIEW
Flash PMI data expected to stay healthy. Flash manufacturing Purchasing Managers’ Index (PMI) data for many of the major regions will be released at the end of this week. The U.S. reading is expected to move up to 55.0, while surveys anticipate the Europe and Germany figures moving slightly lower to 54.5 and 55.7, respectively. Though most major regions sit lower than the beginning of the year, the PMI data remains in expansionary territory and consistent with a constructive global growth environment.
Europe and Japan inflation readings expected to remain contained. Inflation readings throughout Europe and Japan will be released this week with limited expectations for change from prior levels. After a large uptick in May, Europe headline CPI has floated around 2.0% y/y, where it is expected to remain in the August reading. Core CPI has moved much less and surveys expect a 1.0% y/y figure. In the UK, core inflation is expected to tick lower, with a reading of 1.8% y/y. Finally, expectations for Japan CPI and core CPI readings call for moves modestly higher to 1.1% y/y and 0.4% y/y, respectively. In addition to the inflation readings, the Bank of Japan meets on Wednesday with little expectation for a policy change.
European Union leaders set to meet to discuss Brexit. With the March 2019 Brexit date fast approaching, EU leaders must work through the latest proposal. EU chief negotiator Michel Barnier expressed optimism on an eight-week timeline to strike a deal.
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Unless otherwise noted, all opinions expressed in this post are those of the author and do not necessarily represent the views of Northern Trust. Information contained herein is current as of the date appearing only and is subject to change without notice.
1) Bloomberg, MSCI World Index return 10Sep2018 – 17Sep2018.
2) Bloomberg, MSCI U.S. Equities IMI Index return 10Sep2018 – 17Sep2018.
3) Bloomberg, MSCI ex-U.S. Equities IMI Index return 10Sep2018 – 17Sep2018.
4) Bloomberg, MSCI Emerging Market Equities Index returns 10Sep2018 – 17Sep2018.
5) Bloomberg, MSCI U.S. Equities IMI Index returns 01Mar2013 – 17Sep2018.
Past performance is no guarantee of future results. It is not possible to invest directly in any index and index performance returns do not reflect any management fees, transaction costs or expenses.