The Rearview Mirror – August 2016

The Rearview Mirror
The Rearview Mirror

Christian Zorico (162)



bridge_by_motowncinderellaOne word to describe July: rebound. Here below you can find a table that summarize the behaviour of 8 major indexes over the past 4 weeks.

A strong speculation on BOJ easing program and Japan fiscal policy plan drives the Nikkei higher during the first half of the month, although a partial disappointment from Kuroda output weighted on its correction.

Mr Draghi did not add any new relevant elements in his speech at the ECB press conference of 21 July. He focused on Brexit and terrorism as potential negative drivers for the Eurozone, confirming that ECB will continue to “monitor economic and financial market developments very closely and to safeguard the pass-through of its accommodative monetary policy to the real economy”. He highlighted the need of implementation of structural reforms and supportive fiscal policies to endorse the recovery. The European equity market has been driven by growing concerns about the banking system, particularly about the Italian one. EBA stress test revealed not only the ability of single banks to healthier offset a financial crisis; investors focused much more on their ability to create value, to generate sustainable earnings in the future.

Immagine1Finally FED meeting was a bit more hawkish than usual for the words that the Chairman Yellen used, but in the end, the market seemed to react in an opposite way. The 2yr Note yield jumped to 0.765% before closing at 0.73%, i.e. 2.5bps below the previous closing day.

And we start exactly from this number when we analyze the market reaction to the Nonfarm Payroll of last Friday. The Labor Department showed U.S. hiring surged in July, by counting for 255’000 new positions versus a median forecast of 180’000 units. The jobless rate held at 4.9 percent and the labour-force participation rate increased. Still the reaction seemed to be subdued. In fact yields on 2yr note, the most sensitive bucket of the government curve to Fed policy expectations, closed at 0.72%, well below levels reached less than two weeks ago.

A single strong job report cannot mitigate the weight of a weak GDP figures that came out from the Commerce Department. In fact on Friday 29, the Bureau of Economic Analysis released that gross domestic product, the broadest measure of goods and services produced across the U.S., grew at a seasonally and inflation adjusted annual rate of just 1.2%  in the second quarter, the Commerce Department said Friday, well below the pace economists expected.

Real GDP_Fonte U.S. Bureau of Economic AnalysisMy point of view is that FED members will act sooner than later, may be December is more likely than September, but we should consider that yields will gradually move higher to incorporate upcoming inflation. Perhaps the short end of the curve will reflect this movement in a more decisive way, rather than the long end will continue to flatten for at least a couple of reason: the hunting for positive yields and the perspective of a sluggish growth for the U.S. economy.

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