PMC Weekly Review - October 30, 2015

A Macro View – Witches’ Brew: The Market’s Spell

Witches brew is good for you, sit for a spell, let yourself jell, and drink a lot from my pot. – J.M Connor

Fitting for Halloween, October economic data has masqueraded in a variety of forms and costumes—some bold and colorful, others small but promising, and a few downright terrifying. So, should you be scared? Perhaps the better question is: do you believe?

This week’s Fed meeting certainly would suggest that the Federal Open Market Committee (FOMC) is hopeful, but is not entirely convinced. Although major indicators like corporate and household spending have improved on the margin, job gains have slowed, and significant geopolitical risks remain—with China and Europe at the center of this debate.

Last week, The People’s Bank of China announced its sixth straight cut in the country’s central lending rate in a year, dropping the rate 25 basis points from 4.6% to 4.35%. Reserve requirements for lenders also were reduced by 50 basis points. Chinese leaders convened this week for their fifth plenary session to discuss the nation’s development plans and growth prospects for the next 5 years. Among the key initiatives targeted were anti-corruption, innovation and scientific development, environmental protection, an increase in private consumption and foreign investment, and the ubiquitous end of the country’s one-child policy. China’s GDP target, which has been followed closely due to its possible reverberations for markets around the globe, was lowered to 6.5%.

Last Thursday, the European Central Bank (ECB) left its rate unchanged from 0.05%, prompting stocks to rally. Mario Draghi’s comments reinforced the ECB’s commitment to support the economy, and set the stage for a possible extension of its quantitative easing (QE) program beyond September 2016.

Domestically, disappointing readings this week on US durable goods orders and inventories led to a reduction in third quarter GDP growth forecasts. Thursday’s numbers revealed that GDP expanded at a mere 1.5%, after growing at a 3.9% pace in the second quarter. Initial jobless claims increased slightly, to 260,000 from 259,000 the week prior, and consumer confidence fell lower, from 102.6 in September to 97.6 in October. New home sales increased by 468,000, down from 522,000 in August. And, although Morningstar reported that nearly 75% of companies thus far have beat earnings forecasts, it is important to keep in mind that many of these forecasts already had been revised downward.

So, who has it right? Will the porch lights be on this Halloween, or will we be left holding an empty bag? The markets certainly have rallied at an unprecedented pace during the last few weeks, buoyed by expectations of further global easing and accommodative monetary policy. Although it is safe to say that we are no longer in a growth environment, the consensus paints a picture of stability. The Fed’s message, although hawkish, is decidedly optimistic. And, barring any additional significant overhang in employment, manufacturing, or consumer spending, we would not be surprised to see a rate hike as early as December. The Fed has been eager to raise rates for quite some time, and its credibility is at risk should it not take action soon.

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