Asset prices continue to rise, decoupled from sluggish macroeconomic data
28/Oct/2013 • Currency Updates•
Financial assets made new gains last week. Worldwide, equities rose to new cycle highs, while US stocks rose to fresh all time highs. Government bond prices and credit both rose across the curve. Softer economic news actually seemed to buoy risk assets, as investors worldwide push back their expectations for the timing of an end to easy money policies from central bankers. The sole exception is commodities that fell sharply this week as data in Europe and the US both disappointed. G10 currencies again traded in very narrow ranges, although the dollar fell back somewhat vs. most emerging market currencies as the consensus pushes the timing for the start of the taper further into 2014.
The disconnect between macroeconomic news and market reaction was perhaps starker in the UK. Sterling struggled against most currencies, in spite of the fact that the UK bucked the trend towards softer economic data in much of the developed world. Third quarter GDP growth came in at 0.8% QoQ, or 3.2% in annualised terms. The scant details available were also positive. Growth was broad based with particular strength in construction and no clear laggards. The October minutes from the MPC meeting made it clear that the Bank of England is taking note of the stronger economic dataflow. All members voted against changing policy and the discussion acknowledged that growth is coming in above its predictions and that slack “had been eroded a little more quickly” than it expected. Once investors begin to focus back on economic fundamentals, we expect to see further sterling stress against most other European currencies, particularly the euro.
European PMI business surveys pulled back 0.7% to 51.5, after six consecutive increases. This level is roughly consistent with sluggish growth of 1% saar (seasonally adjusted annual rate) and confirms our view that the European economy has not really pulled out of its “permacession”, i.e., near-flat growth punctuated by shallow downturns. At any rate, this level of growth is nowhere near sufficient to generate the net jobs that the periphery desperately needs if its sovereigns finances are to be put on a sustainable path. Lending data showed yet another decline in overall bank lending, though the pace of decline slowed from the 30+bn EUR average of the past few months to just under 10bn EUR. For now, investors remain solely focused on the timing of the Fed’s taper and are ignoring macroeconomic data other than that released in the US, and the common currency hovered near the unchanged mark during the entire week.
The long-delayed September labour market report was disappointing. Non-farm employment increased just 148,000 for the month and unemployment was stable in a context of continued record low labor force participation. Whereas the October decline in manufacturing sentiment can be blamed on the shutdown, the payroll report gives us a snapshot of the state of the labour market before the Washington nonsense started. The picture is sluggish, and removes any chance that the Federal Reserve will start tapering QE at its December meeting. Orders for capital goods also declined again in September, which makes it less likely that we’ll see a strong pick up in business investment in the third quarter GDP release. Overall, the data is still consistent with moderate growth in the 2-2.5% range but we acknowledge that this week’s release has introduced some downside risks for that critical figure.