Fed treading carefully
This week has been filled with activity on both sides of the Atlantic. In the United States the September Federal Reserve meeting and a new set of employment statistics clarified little and seemed to set fixed income investors’ teeth on edge. Activity in Europe was more intense, with the French Government scraping through a parliamentary confidence vote and a somewhat subdued launch of the European Central Bank’s (ECB) much heralded targeted liquidity scheme (TLTRO).
The French government and economy is likely to remain under siege for a while, as early indicators suggest no meaningful pickup in economic activity in the third quarter. Elsewhere, the German economy appears to be bouncing back from its softer second quarter and, despite the weaker than expected take up of the ECB’s first tranche of TLTRO, credit markets in the eurozone continue to thaw. An improving credit market should aid the uneven recovery in much of peripheral Europe.
As a result, we see European equities, with their geographically diverse revenue footprint, as attractive amidst a brightening global economic backdrop, led by the US.
Turning to the US, the latest statement from the Federal Reserve confirmed that its asset purchase programme will finally conclude in October, bringing quantitative easing to an end. It did not, however, clarify when it intends to raise interest rates, suggesting that they may remain on hold ‘for a considerable time’. While the equity market rallied on the news, bonds sold off. This is likely due to the fact that the general direction of future interest rates is higher.
While Chair Yellen highlighted continued slack in the labour markets as a reason to keep interest rates low, the economy did not oblige her argument, as initial jobless claims fell by 36,000 to 280,000 for the week ending September 13th. Furthermore, those collecting unemployment benefits fell to a seven-year low. Economic growth in the US continues apace and will be reflected in rising earnings estimates for both large and small companies alike.