- ECB reduces stimulus, vows low rates
- US Q3 GDP advances at 3.0% annual rate
- German business sentiment sets record high
- Party congress elevates status of China’s Xi
- Progress on US budget opens way for tax bill
Global equities edged lower this week, with Japan’s Nikkei average a bright spot, closing at a 21-year high. Yields on US 10-year Treasury notes continued their rise, ending the week at 2.42%, up from 2.38% a week ago.
The price of a barrel of West Texas Intermediate crude oil rose about $1 to $52.60 while equity market volatility, as measured by the Chicago Board Options Exchange Volatility Index (VIX), advanced to 10.8 from 9.9 last week.
MACRO NEWS
ECB trims QE program but vows continued low rates
The European Central Bank (ECB) announced that will halve its bond-buying program to €30 billion from €60 billion a month from January through September 2018, or longer, if necessary, until inflation is revived. The move was widely expected, with the market generally delivering a muted response following the news.
In addition, the ECB said it will reinvest the principal from maturing bonds for an extended period after the end of the bond-buying program. German 10-year bunds, the German benchmark, fell nearly 7 basis points in yield on the news, to 0.41%, while the euro gave ground versus major currencies.
Pace of US GDP growth exceeds forecasts
The US economy grew at a faster-than-forecast pace of 3% in the third quarter, handily beating 2.5% forecasts. Economists had expected a moderate Q3 slowdown because of the impacts of hurricanes Harvey and Irma.
Real consumer spending showed continued strength last quarter, rising 2.4%, which exceeded forecasts for a 2.2% advance. Core inflation remained well below the US Federal Reserve’s 2% target, coming in steady at 1.3%.
German business confidence jumps
The IFO Business Climate Index hit a record high this week, reflecting confidence that Europe’s economic recovery will extend into the future. The improved sentiment is notable in that it comes against a backdrop of uncertainty surrounding Brexit, Catalan independence and the final makeup of Angela Merkel’s ruling coalition.
China’s Xi now on par with Mao
At the conclusion of a weeklong congress of China’s Communist Party, Xi Jinping was elected to a second term as president. In addition, members of the congress voted unanimously to revise the party’s constitution to include “Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era.” The only two leaders whose thoughts are enshrined in the party’s constitution are Mao Zedong and his successor Deng Xiaoping.
Analysts note that the makeup of the new Politburo Standing Committee suggests that the 64-year-old Xi may serve beyond the completion of the traditional two five-year terms.
US House passes Senate’s budget blueprint; tax reform next
After a year of dysfunction, congressional Republicans appear to be rallying around efforts to reform the bloated US tax code. On Thursday, the House of Representatives passed the Senate’s budget bill, laying the procedural groundwork for the passage of a tax reform package without any support from the Democratic opposition.
An initial bill is set to be released as early as next week, with a vote possible by late November. Details of the measure are still being worked out as constituents balk over the potential loss of tax deductions for state and local taxes, as well as potential changes to the tax treatment of retirement plans such as 401(k)s.
Stars align to lift US dollar
The US dollar advanced strongly late in the week, particularly against the euro, lifted in part by the ECB’s relatively dovish shift toward a less accommodative monetary policy. Also supporting the greenback were press reports that US president Donald Trump has ruled out reappointing Janet Yellen as Fed chair.
Yellen was seen by market participants as the most dovish candidate on Trump’s short list. Fed governor Jerome Powell and Stanford University economist John Taylor are reportedly the frontrunners for the post. Rising hopes for an overhaul of the US tax code also helped spur dollar strength.
UK business groups warn they will move jobs out of UK
The leadership of five large British business groups, including the Confederation of British Industry and the British Chamber of Commerce, wrote to Prime Minister Theresa May this week that their members will start moving jobs and investment outside the United Kingdom if a transition deal with the European Union is not agreed soon.
UK business investment slowed sharply in the wake of the June 2016 Brexit vote, and has been flat since that time, recent figures show, owing to uncertainty over the UK’s future relationship with the EU.
Japan’s Abe secures supermajority
Japanese prime minister Shinzo Abe won a landslide victory in last weekend’s general election, opening the way for a push to amend the country’s pacifist constitution. Abe campaigned on the idea that the threat from North Korea requires leaders to remove any doubt over the legitimacy of Japan’s military.
In the wake of Abe’s reelection, the Nikkei 225 Index ended the week above 22,000 for the first time in 21 years.
EARNINGS NEWS
With 45% of the constituents of the S&P 500 Index having reported Q3 earnings, the blended estimate for aggregate year-over-year earnings growth is 5.3%. Excluding the energy sector, the earnings growth estimate is 3.0%. The blended aggregate revenue growth projection for the quarter is 4.8%. However, stripping out energy, revenue is expected to rise 3.9%.
All the best and have a great week
CEO
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Stuart Yeomans 