Equity markets last week ended largely unchanged but volatility remained slightly higher (VIX 15.4) than the abnormally low levels of the past three months. Last week, markets absorbed a large plate of real time economic data while anticipating significant events in the coming two weeks including BOJ & Fed meetings 9/21 and the first presidential debate on 9/26. Betfair odds of a Trump victory rose to their highest point last week of 33.7% in a notable rally in Trump polling data. Market participants feel the election will begin to play into market psyche in earnest after the first debates give the country a better look at the candidates. U.S. equity markets (+0.5%) managed to post marginal gains on the week while European stocks (-2.2%), Japanese stocks (-2.6%), and oil (-6.2%) all lost ground. The U.S. yield curve continued to steepen and bounce off the ‘overshoot’ following the Brexit vote as longer dated (20yr, 30yr) rates moved up 0.05% while shorter dated (2yr, 3yr, 5yr) fell 0.02%. Steeper yield curves are typically reflective of positive expectations for the economy and the past few weeks have seen U.S., Japan, UK, and German yield curves all steepen materially.
Last week, the ECB opted to hold off on ramping up stimulus measures which sent some tremors through both stock and bond markets. Equity volatility and longer dated bond yields have both moved higher since the ECB meeting and next week all eyes are on the Fed and Bank of Japan statements on Wednesday 9/21. It is relatively unlikely that financial market conditions and economic data of the past few weeks have influenced the Fed enough to move on rates this coming week. Rate hike expectations fell from 30% to 20% last week. It seems the yield anxiety of the past couple of weeks is largely focused on the upcoming BOJ meeting as to whether they will elect to intensify NIRP and/or increase bond purchases. Some indications this week suggested a BOJ preference to drive interest rates further into negative territory in lieu of increasing bond purchases. There has been continued chatter over fiscal easing across a variety of economies which may be the next focal point for global stimulus initiatives looking forward.
Economic data last week could rightly be categorized as a data deluge, particularly on Thursday. Inflation internals of the PPI and CPI reports showed some welcomed signs of life in August. Headline and core CPI registered at 1.1% and 2.3% respectively. The Fed however places more weight on PCE which is still only growing at 1.6% annual rate. For the second straight month, retail sales came in weaker than expected (-0.3% vs -0.1%). Industrial production came in soft while oil inventories grew much more than expected, contributing to the significant slide in oil prices on the week.
