Review of the week (week ending 27 October)

The Apprentice: Federal Reserve

For all the jokes about Donald Trump running America like a game show, it really is hard to argue with.

The favourites that come and go; alliances forming, dissolving; the drawn-out contests for administration jobs and the backstabbing. There is even the jilted evictee dishing the dirt bitterly on the sidelines.

The latest episode has focused on who will be Federal Reserve Chair for the next four years. There have been many candidates mooted over the past few months, but they’ve finally been whittled down to three. Sitting Chair Janet Yellen made the last-minute comeback from complete outsider to hopeful (great underdog moment to keep the fans interested). Stanford professor John Taylor, who wrote the eponymous monetary policy rule that says central banks should hike interest rates by more than an upward move in inflation, is the bookish hardliner that would shake up the status quo. And then there is sitting Fed Governor Jerome Powell, a centrist who would continue Mrs Yellen’s cautious, easy monetary policy stance.

A decision is believed to be imminent, driven no doubt by Mr Trump’s teasing tweets on the subject. For now, Mr Powell seems to be the most likely winner – something that markets are pretty happy with. We all know that game shows don’t always go the way we thought they would though – there’s nothing like a left-field twist to keep the punters talking.

Nations and presidencies have more than simply ratings in the balance though. If Mr Taylor is nominated, expect the market to get tumultuous.

The Federal Reserve meets this week, but it’s extremely unlikely to raise its interest rate, however, with the probability put at exactly 0% by the fed funds futures market. It is expected to hike its rate by 25 basis points to 1.25-1.50% next month.

As for the Bank of England (BoE), it will probably raise rates from 0.25% to 0.5% on Thursday. A decent boost from the services sector helped third-quarter GDP grow by a faster than expected 0.4%, which would help justify a decision to hike. The BoE needs to act on inflation which is hitting consumers hard – the CBI retail sales flash survey crashed in October – but by doing so it runs the risk of increasing borrowing costs and dampening demand. Much of the rise in prices was out of the bank’s hands: the currency has slumped since the Brexit vote and recent negotiations have caused more weakness.

Another external force is rising too: Brent Crude is up more than 30% since hitting a 2017 low of $45.90 in June. As of Monday morning, it was above $60 a barrel, 6.7% higher for the month so far. 

Index1 week3 months6 months1 year
FTSE All-Share -0.2%2.1%5.6%13.0%
FTSE 100-0.2%2.0%5.8%11.7%
FTSE 2500.0%2.2%4.1%17.8%
FTSE SmallCap0.2% 3.6%7.4%20.2%
S&P 5000.8%4.4%7.0%14.0%
Euro Stoxx0.1%3.7%10.9%21.3%
Topix 2.6%7.4%11.8%12.1%
Shanghai SE1.2%6.3%10.5%3.9%
FTSE Emerging Index-0.2%4.0%10.8%12.9%
Source: FE Analytics, data sterling total return to 27 October

Mental scarring

We have been fixated by central banks for years now – ever since the global financial crisis took the world economy to the brink and monetary policy stepped through the looking glass in a bid to stave off a depression.

It’s impossible to say whether the world really would have collapsed into a 1930s-like slump of demand, causing widespread unemployment and poverty. We can never know how things would have gone had we taken a different path or used different tools.

There are two points that we can grasp, however. The first is philosophical: policymakers had absolutely no appetite for letting capitalism sort itself out through creative destruction and natural mechanisms of supply and demand and imposing losses on failure. The risks were too great to allow banks to fall insolvent, potentially taking with them the combined savings of everyone. No politician wants to be the one who has to explain to an angry mob that bank savings are actually unsecured loans and at the back of the bankruptcy queue. It is just as unpalatable for a government to agree to make such depositors whole when no-one knows how many of the banks will collapse. Easier then to step in to prop up ailing banks and urge central bankers to loosen monetary policy beyond even mainstream theory. This philosophical risk-aversion from policymakers and central bankers remains today. And it has pervaded through society to the point where even the market doesn’t truly believe in the strength of the market. It believes in central banking subsidies and worries that even a stiff breeze could destroy growth around the world.

The second point is that there was a 1930s-like slump in certain places, among certain people. Wide swathes of Europe have dealt with years of sky-high unemployment, even while neighbouring provinces have done well. Towns and cities in America, the UK and Europe relying on manufacturing and low-tech jobs have become barren of opportunities as state funding was rolled back and private companies moved elsewhere.

This has created a groundswell of anger, resentment and radicalism in hinterlands around the globe. From France and Germany to Spain and Austria, the UK to the US – even to New Zealand in the South Pacific and Iceland in the northern Atlantic. Some of this radicalism has been scary, xenophobic and populist. But not all of it. Some of it is simply radicalism in the sense of wanting to change how things are done and looking for new answers.

This clash between risk-averse policymakers and millions calling for change has created the strange world we live in today. It ushered Mr Trump into the White House, pushed the UK away from the EU, destroyed the old order of French political parties, fuelled a rise in German right-wing xenophobes, and much more besides.

The market – the supposed home of dynamism, innovation and new ideas – shouldn’t be worried about the chance of changes of the status quo, whether interest rates, central bankers, quantitative easing purchases and governments. Yet it is.

Business should be championing the potential for commerce to bring prosperity and new technology to society. It should be focusing on what it can change and how to adapt to things that it can’t. Policymakers meanwhile should be trying to improve what they can affect: the standard of living of the people they represent and the effectiveness of their policies.

At the moment, sometimes it feels like each is trying to do the other’s job, but badly.

Bonds

UK 10-Year yield @ 1.36%
US 10-Year yield @ 2.42%
Germany 10-Year yield @ 0.39%
Italy 10-Year yield @ 1.95%
Spain 10-Year yield @ 1.61%

 Economic data and companies reporting for week commencing 30 October

Monday 30 October

UK: Net Consumer Credit (Sep), Net Lending Secured on Dwellings (Sep), Mortgage Approvals (Sep), M4 Money Supply (Sep)
US: Personal Income/Spending (Sep), Dallas Fed Manufacturing Activity (Oct)
EU: Economic Confidence (Oct); GER: CPI (Oct); SPA: CPI (Oct)

Quarterly results: Glencore, HSBC, Millennium & Copthorne

Tuesday 31 October

US: Chicago Purchasing Manager (Oct)
EU: FRA: GDP (Q3), CPI (Oct), PPI (Sep); ITA: Unemployment Rate (Sep), CPI (Oct), PPI (Sep)

Quarterly results: Barclays, BP, Just Eat
Quarterly operating update: Nostrum Oil & Gas
Trading update: Croda International

Wednesday 1 November

UK: PMI Manufacturing (Oct)
US: MBA Mortgage Applications (27 Oct), ADP Employment Change (Oct), PMI Manufacturing (Oct), ISM Manufacturing/Prices Paid (Oct), Construction Spending (Sep), FOMC Rate Decision, Wards Total Vehicle Sales (Oct)

Interim management statement: Standard Chartered
Trading update: Next

Thursday 2 November

UK: PMI Construction (Oct), Bank of England Bank Rate/Asset Purchase Target
US: Initial Jobless Claims (28 Oct), Continuing Claims (21 Oct), Nonfarm Productivity (Q3), Unit Labour Costs (Q3)
EU: PMI Manufacturing (Oct); SPA: PMI Manufacturing (Oct); ITA: PMI Manufacturing (Oct); FRA: PMI Manufacturing (Oct); GER: PMI Manufacturing (Oct)

Half-year results: BT Group, Tate & Lyle
Quarterly results: INTU Properties, IWG, Lancashire, Randgold Resources, Royal Dutch Shell, RSA Insurance Group, Schroders
Trading update: Wm Morrison

Friday 3 November

UK: PMI Services/Composite (Oct)
US: Change in Nonfarm Payrolls/Private Payrolls/Manufacturing Payrolls (Oct), Unemployment Rate (Oct), Average Hourly Earnings (Oct), Trade Balance (Sep), ISM Non-Manufacturing Composite (Oct), Factory Orders (Sep), Durables Ex Transportation (Sep), PMI Services/Composite (Oct)

Trading update: Smith & Nephew

 

Julian Chillingworth, Chief Investment Officer

The value of investments and the income from them may go down as well as up and you may not get back your original investment. Past performance should not be seen as an indication of future performance. 

Rathbone Unit Trust Management Limited is authorised and regulated by the Financial Conduct Authority and a member of the IA. A member of the Rathbone Group. Registered office: 8 Finsbury Circus, London, EC2M 7AZ . Registered in England No. 02376568

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