Macro Commentary
Is the divergence getting even greater? This week, the Bank of England (BoE) responded as expected with additional support after the Brexit vote in June weakened their economic stability. Cutting their policy interest rate to 0.25% from 0.50%, the BoE has not yet fallen to the level of their European counterparts but they have reversed course from earlier this year when the English were perceived to be in the “tending towards tightening” camp with the U.S. Like a boxer, the BoE landed the jab of the expected interest rate cut only to follow with a surprise hook of increasing their quantitative easing program for both UK corporate and government bonds. Let’s hope the combination works to settle concerns. A look at the purchasing manager index surveys (PMI) across both manufacturing and services showed a quick decline in activity in July to a point indicating contraction. Sentiment measures too fell swiftly. These measures can be volatile so one month does not necessarily a trend make, but what was interesting is that the PMI measures in the Euro-area remained relatively stable. We would have expected Europe to feel a bit more of the pain, so perhaps it is yet to come.
Meanwhile, the U.S. economy posted a killer jobs report on Friday. The report from the Bureau of Labor Statistics (BLS) showed a payroll increase of 255,000 jobs – well in excess of the 180,000 jobs expected. Granted, last month was a bit weak but this was a solid report. Yields on US Treasury bonds jumped a bit across maturities. As we work through more data in August, the speculation of whether the Fed will act in September will grow. Given the global uncertainty, it still feels like a hike by year-end (during the December meeting) is still an even guess. It will likely come down to the effect of wage growth on inflation. Time will tell.