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Macro and Markets Monthly

Updated: May 17, 2022

There were few signs during the month of October that the global economic improvement of late was starting to stutter. Labour markets in the developed world continued to strengthen, while inflation trends also remained positive. In other words, there was no reason to think that monetary policy roadmaps set out by developed world central banks would need to be adjusted any time soon.

"The global economy as a whole is moving from recovery phase to expansion phase"

In the US, the ADP Employment Change came in at 135,000. This was bang in line with expectations but lower than the previous month’s increase of 228,000, revised down slightly for the original 237,000. Nonfarm payrolls two days later were on the weak side, showing a decline of 33,000 jobs over the month. This however should be viewed in the context of a revision upwards in the September increase from 156,000 to 208,000. As for the unemployment rate, it fell from 4.4% in September to 4.2% in October. Furthermore, the underemployment rate showed a decent improvement from 8.6% to 8.3%. The labour force participation rate also ticked up slightly, from 62.9% to 63.1%, indicating that more people were being drawn back to the workforce. We now consider the US to be very much in expansion phase, during which we would expect to see employment growth start to decline slightly. In other words, the aforementioned employment data is what we would have expected to see at this point on the cycle.

Continuing in the US, on the inflation front, there are signs of stability appearing following a few months in which core inflation has fallen below the central bank target of 2%. Although core inflation fell short of the expected 1.8% year on year, it was in line with the previous month’s 1.7%. Real average hourly earnings growth rose from 0.6% in August to 0.7% in September, another sign that price growth is at a comfortable level.

Elsewhere in the developed world, employment numbers continued on the whole to improve. In the UK, the three-month unemployment rate held steady at 4.3%, while the 3 month/3 month employment change was a reasonable 94,000. In the Eurozone, the unemployment rate for September came in at 8.9%, compared with 9.0% the previous month, while in Japan it held steady at 2.8%. Inflation numbers too in the UK, the Eurozone and Japan remained comfortable.

The reason for focusing on employment and inflation is that these are the key indicators that central banks target when deciding on monetary policy. In other words, there was nothing to suggest central banks needed to reconsider the monetary policy roadmaps that they had previously laid out.

Economic improvement was also seen in the emerging world, where inflation rates in China, India, Brazil, Russia and Indonesia are now at a much more comfortable level than was the case a year or two ago.

As for financial markets, equity markets generally rose in October. Asian and emerging market equities performed particularly well, as the global economic backdrop continued to improve. The improvement in inflation may also have helped to boost sentiment towards these regions.

As far as the outlook is concerned, we think the global economy as a whole is moving from recovery phase to expansion phase (some like the US are firmly in the latter while others such as the Eurozone are still in the former). Thus we expect equity market returns to continue to fall slightly, but remain positive for the two or so years up to the point at which monetary policy becomes much tighter and when economies are likely to start peaking.

Inflation we think will continue to rise and we thus remain negative on safe haven bonds which anyway are very expensive in light of low or negative real yields.

Published in Investment Letter, November 2017

The views expressed in this communication are those of Peter Elston at the time of writing and are subject to change without notice. They do not constitute investment advice and whilst all reasonable efforts have been used to ensure the accuracy of the information contained in this communication, the reliability, completeness or accuracy of the content cannot be guaranteed. This communication provides information for professional use only and should not be relied upon by retail investors as the sole basis for investment.

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