Originally published by Rivkin
U.S. equity finished relatively unchanged on Friday as investors assessed key data, a speech from Janet Yellen and earnings from the big banks. Advanced retail sales (MoM Sep) grew at +0.6% as expected and up from the -0.2% previously while business inventories (MoM Aug) increased +0.2%, higher than the expected +0.1% gain. Business inventories data is seen as having an inverse relationship with the underlying economy, declines in inventories signal higher demand and also future demand as those drawdowns in inventory need to be replaced adding to economic growth. While this small increase is a little disappointing the data is not the timeliest being from August when compared with retail sales data, so is not overly concerning.
Elsewhere the university of Michigan consumer confidence survey (MoM Oct) was lower than forecast at 87.9 from 91.2 previously and estimates for 91.8. The survey assesses responses regarding personal finances, business conditions and purchasing power with the reason for the relatively negative reading most likely to do with the uncertainty around the U.S. presidential election.
Fed Chair Janet Yellen spoke at a conference in Boston where she provided little in the way of clues for a December rate hike, she did notably say there are “plausible ways” to allow the U.S. economy to run hotter than normal to help repair damage from the GFC. Notably increased business sales would increase productive capacity encouraging additional capital spending and a tighter labour market would help encourage more people back to the workforce. Overall these comments do not really provide us with any new insights as to Yellen’s way of thought, we know she is a dove and we know the FOMC is likely to err on the side of caution when it comes to raising rates with the emphasis being on gradually raising rates.
In response to these comments longer-term bond yields highlighted by the ten-year yields which are more sensitive to inflation expectations rose +5.5 basis points to +1.792% while the yield on two-year debt decline -0.5 basis points to +0.839%. The S&P 500 finished flat, up just +0.02% with gains in technology (+0.42%), basic materials (+0.36%) and financials (+0.36%) offsetting declines in healthcare (-0.72%) and utilities (-0.53%). The U.S. dollar gained +0.59% against a basket of peers benefiting from a +0.46% gain against the Yen and +0.80% increase against the Euro shown on the first chart below.
Friday saw three of the U.S. major banks report third quarter’s earnings which were better than expected, mostly as a result of increased revenue from fixed income trading. JP Morgan’s earnings per share was $1.59 vs $1.39 estimated as a result from a 48% increase in revenue from fixed income trading. Wells Fargo (NYSE:WFC) net profit per share declined to $1.03 but beat estimates of $1.01 mainly as a result of reduced credit loss provisions however the outlook remains bleak as the company faces scrutiny over account opening scandals. Citigroup Inc (NYSE:C). also benefited from increased bond trading for which revenue increased 35% year-on-year and while earnings per share decreased from a year earlier to $1.24 it still beat estimates of a decline to $1.15.
In Europe the trade balance (MoM Aug) declined to €18.4 billion from €25.3 billion previously however it surpassed estimates of €15.3 billion. Equity markets were broadly higher benefiting from a weaker Euro, both the Euro Stoxx 600 & DAX up +1.29% & +1.60% respectively.
In the U.K. the GBP/USD fell -0.53% against the dollar while both the FTSE100 & 250 indices gained +0.51% & +0.58% respectively. The second chart below shows the Pound & FTSE100 performance since the June 23rd referendum, since then the Pound has fallen almost 18% while the FTSE100 is around 10.5% higher. The weakening Pound continues to drive inflation expectations higher, the ten-year yield on government debt rose +7.3 basis points to +1.097%. To put that in perspective on August 15th yields reached a low of +0.503%.
A weaker currency will benefit exports and tourism sectors as British goods & services become cheaper compared with other countries, however there are now real concerns about the Pound depreciating too quickly which would push up inflation faster than expected. The negative effects of this including erosion of savings, reduced competitiveness and perhaps the Bank of England holding off on further easing could easily outweigh the benefits of the weaker currency.
Chinese data on Friday helped to alleviate concerns relating to the weaker than expected trade data earlier in the week with both consumer and producer prices increasing more than anticipated. The consumer price index (YoY Sep) increased +1.9% vs +1.6% forecast and +1.3% reflecting stimulus efforts earlier in the year by policy makers. Producer prices (YoY Sep) turned positive for the first time in five years reflecting higher commodity prices with a reading of +0.1% vs -0.3% estimated and -0.8% previously. Overall the data adds to the broad trend of stabilisation in the Chinese economy.
Despite the positive Chinese data commodities were generally lower weighed on by the stronger U.S. dollar, both Crude Oil & Brent crude oil declined -0.18% & -0.15% respectively. Copper prices fell -0.54% as did natural gas -1.68% and the Thomson Reuters CRB index which measures a basket of commodities declined -0.16%. Precious metals spot gold & silver declined -0.59% & -0.40% respectively.
Locally the S&P/ASX 200 was little changed, down just 0.03% and we can expected a modestly weaker open this morning with ASX SPI200 futures down 9 points in overnight trading.
Data releases:
- Japanese Industrial Production (YoY Aug) 3:30pm AEDT
- Euro-zone CPI (YoY & MoM Sep) 8:00pm AEDT
- U.S. Industrial & Manufacturing Production (MoM Sep) 12:15am AEDT
This article was written by James Woods - Global Investment Analyst, Rivkin Securities Pty Ltd. 