The Week In Hindsight – 31 October 2014

Developed markets close an event filled week higher, action from both BOJ and the Fed take centre stage

This week saw a multitude of events drive global equity prices higher, with US Q3 GDP topping forecasts and key policy decisions emerging from the ECB, the Bank of Japan & the Federal Reserve.

In detail, the ECB was the one to fire the starting pistol for the week when it announced better than expected results from stress tests carried out on the balance sheets of Europe’s major banks.

This was followed swiftly on Wednesday by the FOMC which announced the final taper, before going on the cite diminishing spare capacity in the labour market as grounds for increased optimism over US economic prospects.

Following on from the FOMC was Q3 GDP numbers from the US economy, which came in at 3.5% as opposed to the projected 3.1%. In addition to stronger US growth, the Bank of Japan also shocked markets into a late rally when it reacted to mounting concerns over the trajectory of inflation and economic growth, by extending its current stimulus program.

Under the adjusted program, the BOJ will increase its annual purchases of government bonds from 50 trillion yen, to 80 trillion yen. In addition to a higher rate of purchases, the bank will also extend the maximum time till maturity of its holdings from the current 7 years, out to 10 years.

These measures the bank expects to help support its quest to further increase the expansion of the Japanese monetary base, from current annual growth rate of 60-70 trillion yen, out to 80 trillion yen.

All in all, the week’s central bank actions underline the relevance of the divergent monetary policy theme.

As one of our preferred external forecasters, Capital Economics, recently pointed out – the BOJ’s actions may not do very much to prop up international capital markets directly however, it is possible that the bank’s willingness to act will place inadvertent pressure upon the ECB to do more for the continental economies.

If this proves to be the case then it is likely that the bull run in both international bond and stock markets will continue for some time to come as investors from Asia and Europe continue to seek yield in alternative and overseas markets.

It is also possible to go so far as to say that still loosening policy elsewhere in the world may even help to smooth the transition into a rising rate environment for the UK and US economies.


Central bank announcements and economic data are the order of the week ahead

Looking to the week ahead, yet more central bank actions and another round of key economic data releases comprise the main menu for investors over the coming days.

In detail, policy announcements are expected from both the ECB as well as the Bank of England. While no changes to current settings are expected, markets will watch closely for signs that the ECB is growing nervous over the inflation outlook for the continent.

In addition to monetary policy, another round of PMI surveys are set to emerge from the UK to cover the month of October. Investors will look here for early indications of what to expect in relation to UK economic growth for Q4.

Despite all of the above, the main event for the week is without doubt US payrolls and unemployment data for the month of October. With quantitative easing in the US soon to fade into the history books, and in light of Janet Yellen’s comments last week on low inflation being a concern despite diminishing spare capacity in the labour market; these figures could set the US monetary policy tone among investors for much of November.

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