Weekly Review Brief - September 16, 2019

Posted by FlexShares on Sep 16, 2019 4:21:28 PM

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Global equities appreciate on trade optimism and ECB stimulus. “The Week in Review.”

Last Week Review

Global equities appreciate on trade optimism and ECB stimulus. Global equities rose after President Donald Trump delayed a tariff hike planned for October 11. China’s negotiators responded to the two-week tariff delay in a gesture of goodwill with plans to  increase agricultural purchases from the U.S. and open up access to China’s market. Despite the positive news, a longer-term, comprehensive trade deal remains unlikely2. Global equities moved 1.4% higher last week, with emerging markets (1.9%) and non-U.S. developed markets (1.9%) leading the way3. U.S. equities lagged all regions still up 1.2% last week4. Within the fixed income markets, the 2-year and 10-year Treasury yields increased more than 25 basis points each and added some steepness to the yield curve5. The move in interest rates was the largest since late 2016 and marked a partial reversal of the sharp decline observed in interest rates since late July. Interest rates in Europe also increased following the ECB announcement, with the 10-year German Bond yield rising nearly 20 basis points for the week to finish at -0.45%6.

The European Central Bank eases while asking for fiscal help. After the central banks of Canada, Australia and Sweden decided to maintain their current policy rates in the week prior, the ECB announced its largest stimulus package since 2016. In the final stretch of Mario Draghi’s term as ECB President, the central bank took the main policy rate further into negative territory to -0.50% and restarted its €2.6 trillion bond purchase program. The central bank will buy €20 billion worth of bonds beginning in November and continue the program until inflation reaches near the ECB’s 2% target. Officials adjusted monetary policy in order to spark growth and inflation as the global trade slowdown has weighed on the Eurozone economy. Draghi acknowledged the central bank’s inability to strongly impact economic growth and price stability as he asked for help in the form of fiscal stimulus7.

Strong U.S. retail sales help drive economy. U.S. retail sales improved by more than economic forecasts on Friday over the prior month and also upwardly revised July’s number to 0.8% month-over-month. Online purchases and automobile sales contributed to the strong posting. Despite deterioration in the manufacturing sector, consumer spending, making up about two-thirds of the economy, continues to drive the slow-but-positive growth. Reviewing other economic data, sentiment readings showed mixed results. The small business optimism reading fell slightly below expectations while a consumer sentiment gauge surprised to the upside. Consumer Price Index (CPI) readings were mixed as well with headline numbers falling below expectations and the prior month possibly due to energy prices while core numbers ticked higher.

This Week Preview

Markets anticipate 25 basis point rate cut at Fed meeting. After two dissents in July’s decision to cut rates, Fed officials may be again split on adjusting the main policy rate in Wednesday’s Federal Reserve meeting. Low inflation, a flat yield curve and trade war uncertainty contribute to Fed funds futures pricing in a 97% probability of interest rates moving lower to the 1.75% to 2% channel. Markets continue to expect additional Fed easing beyond September, though stability in the labor market and services side of the U.S. economy help make cases against further cuts. Equity markets will likely respond positively to a cut though markets may express concern if there is no change in policy8.

Central banks also meet in England, Japan and Switzerland. Following the Fed meeting this Wednesday, the Bank of England (BOE), Bank of Japan (BOJ) and Swiss National Bank (SNB) will hold monetary policy meetings on Thursday. Investors do not expect the BOE to adjust interest rates but expect officials to discuss the economic outlook for different Brexit scenarios as the October 31 deadline approaches. Recent trade optimism has contributed to Japan government bond yields climbing higher. Government bond yields are now in the BOJ’s target range which makes investors uncertain of potential actions by the central bank. Markets see less than a 20% probability of a rate adjustment. The SNB will hold its first meeting after switching to a new policy rate last June9.

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.

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End Notes

  1. 1. Bloomberg, MSCI World Index returns 09Sep2019 – 13Sep2019.
  2. 2. Mason, Jeff. Prentice, Chris. Reuters. Trump favors ‘whole deal’ with China, two sides prepare for trade talks. Retrieved on 16Sep2019 from https://www.reuters.com/article/us-usa-trade-china/china-says-firms-have-started-inquiring-about-u-s-agriculture-purchases-idUSKCN1VX0NJ
  3. 3. Bloomberg, MSCI World Index returns 09Sep2019 – 13Sep2019. Emerging Market Equities Index returns 09Sep2019 – 13Sep2019. MSCI World ex-U.S. IMI Index returns 09Sep2019 – 13Sep2019.
  4. 4. Bloomberg, MSCI U.S. Equities IMI Index 09Sep2019 – 13Sep2019.
  5. 5. Bloomberg, 2-Year Treasury Rate 09Sep2019 – 13Sep2019. Bloomberg, 10-Year Treasury Rate 09Sep2019 – 13Sep2019.
  6. 6. Bloomberg, 10-Year German Bond Yield Rate 09Sep2019 – 13Sep2019.
  7. 7. Smith, Elliot. CNBC. Analysts divided on ECB stimulus prospects amid conflicting tones from officials. Retrieved on 16Sep2019 from https://www.cnbc.com/2019/09/09/ecb-prospects-for-qe-rate-cuts-divides-economists.html.
  8. 8. Bloomberg, Fed Funds Futures Index 16Sep2019. Fed funds futures are used by banks and fixed-income portfolio managers to hedge against fluctuations in the short-term interest rate market. They are also a common tool traders use to take speculative positions on future Federal Reserve monetary policy.
  9. 9. Reinicke, Carmen. Markets Insider. Global central banks are in a rate-cutting frenzy. Here are the 7 other meetings coming up this month, and what’s expected at each. Retrieved on 16Sep2019 from https://markets.businessinsider.com/news/stocks/global-central-bank-september-meeting-schedule-rate-expectations-7-countries-2019-9-1028521610.

Tags: Weekly Market Update