There is plenty of data out today and it is generally reinforcing our three main thematic points: divergence, weak commodities, especially energy, and the slowing of the Chinese economy. This is helping the US dollar and global bonds, but weighing on equities.
HSBC’s flash manufacturing PMI for China slipped to 50.0 from 50.4. It is a six-month low. The output sub-index fell below 50 for the first time since May.
The FOMC minutes were not very surprising. The FOMC is not in any hurry to raise interest rates before the middle of next year at the earliest. The FOMC statement did not drop the “considerable period” phraseology to describe the time between the end of QE and the first rate hike. However, the minutes show it was a point of discussion and a compromise was achieved to emphasis the data dependency of the Fed’s actions.
Currently, the top one percent of all Americans holds about 40% of the complete wealth of the nation. Recent studies have indicated that the biggest income gap in history is having a huge impact on the economy of the United States. This is causing the disappearance of the middle class because of high taxes, regulations that devastate small businesses and regulations that deter risk taking.
The main theme this week has been the heavy tone of both sterling and the yen. The yen’s weakness stems from the aggressive easing by the BOJ and the stepped up buying of foreign assets by Japanese investors. The story that has emerged this week is that Prime Minister Abe is expected to decide shortly after Q3 GDP is reported at the start of next week that the economy is too weak to sustain the planned hike in the sales tax next year.
A note sent to select clients of the investment bank juggernaut Goldman Sachs urged investors to buy stocks now, as more jobs and a resurgent U.S. economy could tip equities even higher in the next few years.
In their note, Goldman Sachs told investors that a rise in aggregate income would lift consumer spending, which in turn will lift U.S. retail and financial stocks. The bank said that U.S. GDP growth for 2014 could see a reacceleration in 2015 thanks to more money in consumers’ pockets that in turn will lift revenues for publicly listed companies.
US jobs data was largely in line with expectations, and the key take away is the divergence between the US on one hand and Europe and Japan on the other.
Non-farm payrolls rose 214k and the back two months were revised up by 31k, putting the combined number at 245k, which is around the average for the last several months.
Both U.S. manufacturing and economic activity expanded in October at a much faster rate than economists expected, while a slowdown in Europe hints at an uneven global recovery.
The United States saw 3.5% GDP growth in the third quarter of 2014 while the Federal Reserve expects low bond yields to remain for the foreseeable future. In Europe, growth has come to a standstill, with second quarter GDP growth stagnant throughout the Eurozone and negative GDP growth in Germany and Italy dragging down the entire continent.
Bob Trebilock, editor of the Supply Chain Management Review, sent me an interesting email today that poses an interesting set of questions.
Bob writes:
“A friend sent me an email today with a link to a column by Peter Morici, a well-known conservative economist and writer (you see him on Xerox commercials wearing a bow tie) titled: Lift Vocational Education, not Minimum Wage, to Fight Inequality.”
[quote] The day is not far off when the economic problem will take the back seat where it belongs, and the arena of the heart and the head will be occupied or reoccupied, by our real problems – the problems of life and of human relations, of creation and behaviour and religion. [/quote]
