With it being Thanksgiving week the amount of key economic data to be released is limited. Instead, focus is expected to remain on the latest Brexit developments and US trade tensions.
We have written on many occasions about how inflation remains the missing ingredient in the global economic recovery. And so again this week markets will be focused on global inflation reports with central bankers hoping for some signs of life if they are to have more conviction as they tighten monetary policy. This is especially true for the US where the Federal Reserve have embarked on interest rate rises whilst inflation has been neither ‘too hot nor too cold’, implying something of a goldilocks scenario for policy makers. After a weak print in September, analysts expect the October CPI headline reading to tick back up to 2.4%.
Ever since the changing of the guard at the White House back in November of 2016, commentators have constantly speculated over whether gyrations in global equity markets have been determined by the words, and sometimes actions, of US President Donald Trump. This week brings the mid-terms, a measure of how much support he has maintained since that fateful night just under two years ago. History would tell us that the period immediately after a mid-term election is typically a bullish one for the US equity market, yet this time things do feel very much different.
Equity markets took another beating last week, with the S&P 500 hovering around correction territory, i.e. a 10% fall from its recent peak. Market corrections should not be too surprising given that statistically they happen, on average, once a year. What has surprised us, however, is the fact this correction has occurred during a period where US companies are reporting annual earnings growth, on average, of over 20%. It seems to us that these stellar earnings have intensified end of the cycle fears as they have most probably peaked now as the tax cuts start to fade out as we move into 2019.
Following a week of heavy losses, equity markets struggled to find clear direction last week as a positive start to the US corporate earnings season failed to offset political risks weighing on sentiment. This week sees no let-up in political news flow with developments in Saudi Arabia and Italy chiefly in focus. On the macroeconomic front, the European Central Bank’s monetary policy meeting and third quarter estimates for US economic growth numbers will be the highlight of the week.
After a couple of weeks of suffering, investors will be hoping this week can instil some confidence back into markets. One aspect that could restore some confidence is in US corporate earnings released this week as we enter the latest quarterly earnings season. According to Thomson Reuters, consensus is for third-quarter earnings to grow 21.5% compared to last year’s third-quarter.
The week after the US employment report tends to be a quiet affair and true to form, this week is a little light on data. The highlights however include CPI inflation numbers from the US, trade data out of China and the start of the third quarter corporate earnings results in the US.
It’s a busy week as we enter the final quarter of the year, with the release of the global manufacturing and service sector sentiment surveys, the US employment report and the Conservative Party Conference set to occupy domestic investors’ attentions.
It feels like Autumn is starting to hit its stride this week, whether financial markets will cool down with the weather remains to be seen. Global politics is certainly heating up. From this week we are introducing a short section focused on our current thoughts around Brexit, which we hope will keep readers informed on recent machinations. If we’re lucky then we’ll be able to stop writing about Brexit on March 29th 2019…
With the UK in full focus last week (more on that below), this week we have inflation and retail sales to look forward to on Wednesday and Thursday respectively. Headline inflation is expected to tick up further to 2.7%, partly due to the rising oil price we have experienced over the past year (Brent Crude oil has risen from $55 per barrel up to around $78 in the past twelve months). Retail sales for August are expected to fall slightly for the month, which is unsurprising considering the strength of July due to the hot weather and the World Cup boosting consumer spending.