Global Stocks Rise on Trade, Fed Cut Expected
Last Week Review
Global equities rose after U.S. President Donald Trump delayed a tariff hike planned for October 1. China’s negotiators responded in a gesture of goodwill with plans to increase agricultural purchases from the U.S. and open up access to China’s market. Emerging markets stocks led all major regions, followed by non-U.S. developed markets and U.S. equities. Two-year and 10-year Treasury yields rose around 25 basis points each, adding some steepness to the yield curve. The move in interest rates was the largest since late 2016 and marked a partial reversal of the sharp decline observed in interest rates since late July. Interest rates in Europe also increased following the ECB announcement, with the 10-year German Bund yield rising nearly 20 basis points for the week to finish at -0.45%.
European Central Bank Confronts Slowing Economy
After the central banks of Canada, Australia and Sweden decided to maintain their current policy rates in the week prior, the European Central Bank announced its largest stimulus package since 2016. In the final stretch of Mario Draghi’s term as president, the central bank took the main policy rate further into negative territory to -0.50% and restarted the €2.6 trillion bond purchase program. The central bank will buy €20 worth of bonds beginning in November and continue the program until inflation reaches near the 2% target. Officials adjusted monetary policy in order to spark growth and inflation as the global trade slowdown has weighed on the eurozone economy. Draghi acknowledged the central bank’s inability strongly impact economic growth and price stability as he asked for help in the form of fiscal stimulus.
Strong U.S. Retail Sales Drive Economy
U.S. retail sales rose more than estimated over the prior month, with help from online purchases and auto sales. Consumer spending, making up about two-thirds of the economy, continues to drive the slow but positive growth. Still, sentiment readings showed mixed results. The small business optimism reading fell slightly below expectations while the University of Michigan reading surprised to the upside. Inflation was mixed as well with headline numbers falling below expectations, possibly due to energy prices, while core numbers ticked higher.
This Week Preview
Investors Expect Fed Rate Cut
Low inflation, a flat yield curve and trade war uncertainty mean investors see a 97% chance of a 25-basis-point rate cut this week, based on Fed funds futures pricing. After two dissents in July’s decision to cut rates, Fed officials may be split on adjusting the main policy rate in Wednesday’s Federal Reserve meeting. Stability in the labor market and service sector makes a case against monetary policy changes. Equity markets will likely respond positively to a cut and negatively if the Fed holds steady.
England, Japan and Switzerland Central Banks May Discuss Brexit
The Bank of England, Bank of Japan and Swiss National Bank will hold monetary policy meetings on Thursday. Investors do not expect the Bank of England to adjust interest rates but expect officials to discuss the economic outlook for different Brexit scenarios as the October 31 deadline approaches. Recent trade optimism has contributed to Japan government bond yields climbing higher. Government bond yields are now in the Bank of Japan’s target range, which makes investors uncertain of potential actions by the central bank. Markets see less than a 20% probability of a rate adjustment. The Swiss National Bank will hold its first meeting after switching to a new policy rate last June.
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