And no, I am not talking about footballs! Looking across last week, much of the activity was either as the result of inflation/deflation concerns or will cause movement in the inflation/deflation situation.
European Central Bank (ECB) Stimulus
For weeks there has been speculation over expected action by the ECB. The overwhelming sentiment was a ‘Quantitative Easing’ style (Similar to the US over the last several years) package that would lower interest rates, encourage consumer spending, and prop up economic growth. Last week the ECB released the details of the package and it was larger than expected. This sent stocks north and interest rates south.
Not only did interest rates trend lower, but the Euro (€) also weakened against the Dollar ($). The ECB program is expected to last till late 2016 and as a result, the weakness against the $ is becoming a longer term expectation.
Federal Reserve Board (FRB) Impact
There are several international factors that will have an impact on expected action from the FRB:
- China’s GDP came in lower than expected for the year at 7.4%[1]. China’s GDP expectation for the year was 7.5%. Also, HSBC manufacturing data points towards contraction (49.8)[2].
- EU Manufacturing data has improved to 51, reflecting expansion, but the lack of inflationary pressures makes the environment tenuous at best[3].
- International Monetary Fund (IMF) global growth estimations have been revised down from a GDP of 3.8% to 3.5%, with the IMF asking for more accommodative policies[4].
All of these factors coupled with low or negative global inflation will impact the US and lead to less inflationary pressures here. The FRB has a double mandate of containing inflation (2%) and fostering full employment. With inflation seemingly well contained or even becoming dangerously low, The FRB is likely to leave rates unchanged to foster additional job growth. While the unemployment rate was 5.6% in December, underemployment still sits at 11.2%, down from 11.4% in November[5]. This gap in underemployment should drive the FRB to forestall their intention to take action during the 2nd quarter. This would be a more accommodative stance that would bode well for equities and fixed income alike.
Potential Shift in Oil Supply
A major factor in the current inflation/deflation situation is the meager cost of oil due to heavy supply. There have been some recent developments that could impact supply down the road.
The passing of Saudi Arabia’s King Abdullah may signal a change in policy regarding current production. This may lead to flexibility in the international markets discussing a global contraction of production.
In addition to the development in Saudi Arabia, Ukraine and Russian tensions have escalated once again. This issue may lead to further western sanctions, a supply disruption (unlikely), or alternate nation involvement that may disrupt other supplies. The unpredictable nature of geo-political events cause this to create investor apprehension.
In all the soft inflationary environment is expected to be here for a while and may drive accommodative monetary policy across the globe leading to strong equity and fixed income performance, in the short term.
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Always remember that while this is a week in review, this does not trigger or relate to trading activity on your account with Financial Future Services. Broad diversification across several asset classes with a long term holding strategy is the best strategy in any market environment.
Any and all third-party posts or responses to this blog do not reflect the views of the firm and have not been reviewed by the firm for completeness or accuracy.
[1] www.mfs.com – week in review
[2] www.investing.com – economic calendar
[3] www.investing.com – economic calendar
[4] www.mfs.com – week in review