The Global Markets Weekly – 10/26/15

Super Mario

Global stock markets received a boost from the ECB this week.  While policy was left unchanged, the suggestion of additional easing in December, including a possible policy rate cut action (“to do whatever it takes” in Mario-parlance) sent stocks soaring.  As we discuss in the Focus section this week, ECB is still concerned about softness in EM economies and the strength in the euro might delay the expected pickup in Eurozone inflation.

Normally, the possibility of lower policy rates would be bad news for equity investors.  But we have not been in “normal times” since August 2007.  The equity market mindset is still that signs of lower policy rates are a signal to buy, even if it is in response to signs of economic weakness.  Fortunately, even the ECB has had to accept the recent news of a more resilient Eurozone backdrop and did so in the first paragraph of its statement.  DE is concerned that the ECB is exaggerating the downside risks.  First, outside of Germany, the Eurozone exposure to China is not substantial and exports to China has stopping growing in 2014.  Second, the euro is well below its long-term average on a trade-weighted basis.  The recent rebound in the euro has made European consumers richer, serving to further boost spending.

In fact, the ECB may be under-estimating the upside risks.  The improvement in monetary conditions point to a banking sector that is no longer an impediment to growth.  In addition, lower oil and higher currency values boost consumer spending power and corporate profitability.  The ECB may very well decide to adopt further easing measures later this year, just as the Eurozone recovering gather some real steam.  That could lead to some problems down the road, but that is a trade for another day.

• U.S.:  No one expects a change from the FOMC (Wed), so all eyes on how low can Q3 GDP growth go (Th).  The consensus expects a poor 1.5% gain but a figure slower to zero is possible given the degree of the drag from trade and inventories.  Ironically, demand growth will be solid, promising a sizeable pickup in GDP growth in late 2015 and into 2016.  But the soft headline figure will grab all the headlines making a Fed move in December less likely.
• Eurozone:  After energy prices have been holding down inflation for some time, energy-related base effects should finally start to pull the Y/Y rate higher, starting with the October Flash HICP data (Fri). Moreover, German Retail Sales on Friday and French Household Spending may show more solid undertones in repsonse to the decline in inflation recntly.
• UK: The coming week’s data will be important in helping update BoE thinking, which is seemingly in a state of flux.  Very much so, the stand-out piece of data will be the Q3 GDP preliminary estimate on Tuesday, especially given the mixed messages in survey and hard data seen of late.  Any softening in reported growth may not fully reflect the resilience in the actual economy.
• Other central banks:  In Sweden, a stable monetary policy decision is anticipated (Wed), although another dovish surprise could be in the offing, if so most likely discernible in a further tempering with the bond purchase program timeframe.  In New Zealand, the RBNZ will maintain the policy rate at 2.75% (Th).  However, an easing bias will be restressed paving the way for another cut in December.  In Mexico, the central bank rate decision (Th) will likely bring no surprises during the month with a hold likely, awaiting action in the U.S.
• Japan:  While expanded stimulus is unlikely at the upcoming BOE meeting (Fri), the retail trade and IP data (Wed/Th) will be examined to gauge the potential need for stimulus.  The CPI (Fri) should show further deceleration.

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