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Data were mixed…
- The private sector Caixin services PMI in China was unexpectedly weak in September at 51.3 (vs 52.0 expected), although this headline weakness belied strength in employment and new orders sub-indices.
- German industrial production rose unexpectedly in August, as did Spanish and Italian, whilst readings for France and the UK unexpectedly fell. Overall France, Italy and the UK have recorded year on year (YoY) declines of 1.5-2%, Germany has fallen more, by around 5%, whilst Spain is an outlier to the upside at +1.7%. Industrial confidence surveys continue to depict a gloomy outlook.
- US core CPI missed on the downside at +0.13% mom after four months of solid beats, leaving the annual reading at +2.4%. Headline CPI was a touch below expectations at +1.7%.
…monetary policy setters are highly divided on the correct policy stance
- The September ECB meeting minutes indicated that “all members” felt easing was needed, with “a clear majority” advocating a resumption of QE and “a very large majority” agreeing to a rate cut. This is somewhat at variance with the public criticism expressed since the meeting by a number of Governing Council members, not just the traditionally hawkish Germans and Dutch, but also the French and the Baltic states. The bar for additional easing is likely high.
- The September FOMC meeting minutes indicated that whilst “most” participants favoured the rate cut delivered, “several” felt that the policy stance was already sufficiently accommodative. The rationale for easing has primarily been “risk management” in the face of growing uncertainty stemming from trade tensions and slowing growth overseas, with the domestic economy still viewed as strong. The question is whether the two 25bp cuts since July are sufficient to offset the impact of overseas developments. Market pricing still regards another rate cut at the October meeting as more likely than not.
Stocks posted solid gains on rising optimism around Sino-US trade talks and Brexit negotiations
- After last week’s “rising recession risk” scare, equities rebounded smartly this week as a Chinese trade delegation arrived in Washington and hopes rose for the raft of tariffs due for implementation on 15th October to be delayed.
- Sterling bounced past $1.25 towards the end of the week on “promising signals” of a deal after Irish Taoiseach Leo Varadkar met with Boris Johnson in Dublin. Technical talks are ongoing in Brussels ahead of the EU summit next week.
- As the backlash intensifies over the most recent ECB stimulus package to begin next month, European bonds yields and pan-European value equities (particularly Banks) were also up over the week.
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