Daily Agenda: Hawkish Tone from Fed Despite Tremors Abroad

BNY fund pricing issues unresolved; Europe reports sluggish inflation; Toshiba reporting numbers delayed because of accounting scandal.


David Paul Morris

The August U.S. Labor Department employment report — the final job data release ahead of the September Federal Open Market Committee meeting — will be released on Friday. Consensus economist forecasts are targeting a 220,000 rise in payroll numbers and stronger average earnings compared to July. Yet many investors have questioned whether Fed policymakers may refrain from a rate hike until December or beyond in response to recent international turmoil. To date, messaging from policymakers themselves has remained fairly hawkish on balance. In a presentation at the Jackson Hole symposium, Federal Reserve vice chair Stanley Fischer stated that the recent deflationary pressure driven by lower oil costs was unlikely to persist and indicated that any tightening will be gradual in nature.

Scapegoat hunt continues in China. After deploying more than $200 billion in capital to arrest the decline of equity markets since early July, media reports today surfaced that Beijing has decided to halt further market intervention. While such action may be off the table, however, regulators are continuing to focus on punishing sellers as the China Securities Regulatory Commission expands probes into brokerages on the mainland and Hong Kong. China’s official Xinhua News Agency announced that more than 200 people, including a financial reporter, had recently been punished for spreading false rumors.

BNY pricing issues may be unresolved at market open. Bank of New York Mellon Corp. today announced that pricing issues for mutual funds and ETFs caused by a software glitch on Friday may still impact markets, despite a weekend spent trying to fix the issues. Net asset value calculations for more than 1,200 securities have been unavailable for a week and bank executives announced today that pricing through last Thursday’s market close will be available today.

Chinese bank reports downbeat earnings. Over the weekend China Construction Bank Corp. reported lackluster results for the three-month period ending on June 30. China’s second-largest bank reported net income of $10 billion, unchanged from the same period in 2014. Construction Bank also raised its nonperforming loan ratio for the eight consecutive quarter to 1.42 percent.

Inflation in Europe remains muted. Eurostat price data for the euro zone indicated that headline consumer prices rose by an annualized 0.2 percent during August. Core prices, excluding volatile components, rose by 1 percent year-over-year as deflationary pressures persist despite European Central Bank easing measures.

Accounting issues force Toshiba to delay filing again. Toshiba Corp. today announced a delay to filing fiscal-2014 results until September 7 as it continues to grapple with accounting issues. This is the second delay for the figures, which were due into Japanese regulators in May after writedowns of more than $1 billion led to the resignation of the firm’s CEO.

India’s GDP falls short. GDP data for the fiscal first quarter released today by the Ministry of Statistics revealed that India’s economy grew by a slower pace than anticipated. Weighted down by slowdowns in manufacturing and agriculture, headline GDP registered at 7 percent versus an anticipated 7.5 percent.

Portfolio Perspective: Is the Worst Over for Equities?

There are still likely to be a few more ripples post the seismic shock of the past seven trading days. A number of contrarian indicators, however, such as the Chicago Board Options Exchange put-call ratio, AAII Bearish sentiment reading and the number of stocks making new lows versus new highs suggest that the worst of the rout is over for now.

Interestingly, the volatility this past week came at a time when U.S. macro data improved and there were increasingly more segments of the U.S. economy that were strengthening. This bodes well for sales revisions, excluding energy. For example, orders for U.S. capital goods rose in July by the most in a year, while U.S. second-quarter GDP growth was revised sharply higher to 3.7 percent versus a prior estimate of 2.3 percent. The latter was helped by better consumer spending, increased residential and nonresidential activity and higher company investment. Gasoline prices continue to drop.

This are all signs that U.S. domestic stocks will once again see an upswing.

Sean Darby is chief global equity strategist for Jefferies in Hong Kong.