After equity markets closed Tuesday, JPMorgan Chase announced third-quarter earnings excluding tax and other considerations of $1.32 per share, versus consensus analyst estimates of $1.38, and $1.36 for the same period last year. During the subsequent conference call, the New York bank’s chief financial officer, Marianne Lake, indicated that despite strong returns from equity trading, lower returns from credit and commodity trading as well as weaker mortgage-banking revenues would likely provide a drag on fourth-quarter earnings as well. With rivals Bank of America Merrill Lynch, Goldman Sachs, Citigroup and Wells Fargo slated to announce results in coming days, concerns over the health of the financial sector weighs on equity-market sentiment in the U.S. Not a good start to earnings season.
Production slows in Europe. Industrial production data for August released today by Eurostat indicated a deceleration in the pace of activity, with headline output for the common-currency region registering at 0.9 percent year-over-year versus a prior, downwardly revised, 1.8 percent expansion. The strongest segment for the month was durable goods while energy production contracted by 3 percent for the month in lower demand.
U.K. employment improves. The headline unemployment rate for Britain fell to 5.4 percent for August, according to data released Wednesday by the U.K. Office for National statistics, while average wages grew by 2.8 percent on an annualized three-month basis during the period, slightly softer than forecast by economists. While income expansion continues to trail improvement in the broad job market, analysts note that the pace of worker-earnings growth is sufficient to support healthy consumption in light of ultra-low inflation levels.
Chinese inflation remains soft. China’s National Bureau of Statistics consumer inflation data for September revealed a 1.6 percent rise in prices at the cash register versus a year earlier, a level well below consensus forecasts. Prices at the factory gate meanwhile remained muted with the headline producer-price index contracting 5.9 percent for the month in line with August levels. Sustained low-price pressures provides the People’s Bank of China with a significant amount of leeway for further easing.
Prices drop again in India. Wholesale price inflation data released today by the Indian Ministry of Commerce registered an 11th consecutive contraction for September at an annualized pace of -4.54 percent. Reserve Bank of India Governor Raghuram Rajan, who surprised markets with a 50-basis-point rate cut last month, is likely to extend accommodative policy in pursuit of stronger price growth in the consumer and wholesale segments.
Tarullo thinks Fed should wait. In remarks Tuesday with CNBC, Federal Reserve Governor Daniel Tarullo, a Federal Open Market Committee member, said he opposes a rate hike before year-end 2015, underscoring divisions among policy makers at the central bank. In the interview, the former Georgetown University professor cited a need to wait for stronger signals of returning inflation before tightening commences.
Portfolio Perspective: Pressure on Bond Yields Likely to Be Limited
Investors and the news media are correctly paying much attention to global economic data, particularly that of China. Right now, the related news flow is risk-off. But what is less talked about is the extent to which investors are already defensively positioned and many sectors of the risk asset markets are oversold.
We thus expect risk assets, U.S. equities in particular, to grind somewhat higher within a broader sideways pattern until either we see an acceleration of downward economic pressures or a stabilization. While we see more negative risks than positive ones to the 2-3 year global outlook, there seems to be a reasonable chance for stabilization in the fourth quarter. This is when China’s stimulus is expected to at least temporarily stop the slowing trend, and U.S. GDP is expected to rebound from a soft third quarter. Consensus forecasts for U.S. GDP are for 2 percent annualized in the third quarter and 2.7 percent in the fourth quarter.
We see negative news flow (bearish) and the oversold/defensive nature of sentiment and positioning (bullish) as the two key dynamics in the risk-asset markets right now. The performance of these markets is clearly key for Treasuries but we do not see high-grade fixed-income markets as overbought. So even if equities resume their bull trend and commodities stabilize, the upward pressure on bond yields should be relatively limited as inflation looks set to remain quite low for at least the next few years.
Karl Haeling is a vice president at Landesbank Baden-Württemberg in New York.
