The Investment Climate And The Week Ahead

The broad economic conditions have been shaped to a large extent by the different policy responses to the Great Financial Crisis.  For reasons that need not concern us here, the US and UK policy response was relatively stronger than the eurozone and Japan’s response.   This, in turn, has produced a de-synchronized growth cycle.    

Admittedly, Japan is a bit more complicated.  The first two arrows of Abenomics, namely aggressive fiscal and monetary policy appeared to put the world’s third largest economy on a better path of growth and finally broke deflation’s grip.  However, the retail sales tax hike, and fear of next year’s hike (from 8% to 10%) has derailed the economy.   The impact has been deeper and longer lasting than Japanese officials had expected.  

Most recently, the UK economy appears to have lost some momentum.  As expectations of the BOE’s first rate hike get pushed out in time, sterling has weakened.  In fact, last week, it under-performed the euro (1-7% for sterling and -1.3% for the euro), even though Draghi’s press conference disappointed many.  

We had highlighted the risk of a potential downside surprise of the September employment report, which did not materialize.  One of the reasons in our thinking was the clear recent pattern for the consensus forecasts to err on the upside of actual. Important economic reports, such as factory orders and construction spending so missed expectations that many economists shaved Q3 growth forecasts lower.  The non-farm payroll growth surprised on the upside.   The unemployment rate fell below 6%.  

Given this backdrop, the market may be pre-disposed to read the FOMC minutes that will be published on Wednesday hawkishly.   The FOMC minutes, like the dot-plot, give greater voice to hawks than actually reflected in policy.  There were two dissents as Fisher joined Plosser.  Yet, unlike the dissents at the Bank of England, Fisher and Plosser’s dissents are not about raising interest rates, but how the Fed’s forward guidance is characterized.  Is quibbling over words too harsh a judgment?  Fisher himself said he was inclined to see the first hike in Q1.  The consensus seems to be April or June. Is that really the difference between the “hawks” and “doves”, rhetoric aside? 

The Fed’s new Labor Market Condition Index and the JOLTS report offer broader views of the labor market.  They are more important than in many respects than last week’s employment report in terms of shaping the Troika (Yellen, Dudley, Fischer) assessment of the labor market.  

The US corporate earnings season officially kicks-off with Aloca’s report in the middle of the week.  Generally speaking, the major investment houses are fairly unanimous in recommending overweight tech and underweight consumer staples and consumer discretionary stocks.  In addition, to tech, analysts are mostly bullish financials and healthcare.