It’s Wednesday, November 13, and U.S. equity futures declined sharply in early trading in the wake of a parade of underwhelming economic and corporate news. The third-quarter earnings season is winding down and markets are bracing for the all-important holiday season with mixed expectations.
Measures of consumer spending remain fairly strong, but economic confidence was shattered in October. The spotlight has once again meandered back to the Federal Reserve, and the market is as uncertain as ever about the future of monetary policy in the U.S. At 8:50 a.m., Dow futures were off 0.54 percent, S&P 500 futures were off 0.53 percent, and Nasdaq futures were off 0.73 percent.
1. European Industrial Production
September industrial production fell by 0.5 percent on the year in the euro area (EA17) and by 0.2 percent in the European Union (EU28), according to a report released Wednesday by Eurostat, the statistical office of the European Union. Although production is still up 1.1 percent on the year in the EA17, the sequential decline was slightly more than expected. Industrial production increased by 1.0 percent int he EA17 and by 0.6 percent in the EU28 in August.
2. BoE Inflation Report
“Inflation is now as low as it has been since 2009. Jobs are being created at a rate of 60,000 per month. The economy is growing at its fastest pace in 6 years,” said Bank of England governor Mark Carney in the opening remarks to the November Inflation Report. “For the first time in a long time, you don’t have to be an optimist to see the glass as half full. The recovery has finally taken hold.”
That low level of inflation is 2.2 percent, as measured by the consumer price index in October, a rate that is lower than economists expected three months ago. Like the U.S., the BoE has set a 2 percent target rate for inflation. Overall economic activity in the United Kingdom increased 0.8 percent in the third quarter, and “surveys point to continued robust growth in Q4,” according to the report. The news, as is often the case, is good but not great. “Significant headwinds — both at home and abroad — remain, and there is a long way to go before the aftermath of the financial crisis has cleared and economic conditions normalize,” states the BoE. The size of the economy is still 2.5 percent below where it was in 2008, and nearly 1 million people are still unemployed.
A separate labor market report released on Wednesday showed that unemployment in the UK was flat at 7.6 percent, while average earnings increased 0.7 percent on the year. Major European equity markets declined in mid-day trading. In the UK, the FTSE 100 was off 1.48 percent; in Germany, the DAX was off 0.88 percent; in France, the CAC 40 was off 0.87 percent; and the Euronext 100 index was off 0.90 percent.
3. Chinese Economic Reform
Economists appear underwhelmed by the news out of a four-day meeting of top Chinese officials that concluded earlier this week. The ruling party did officially relax its posture on market-driven economics and recognized the market’s “decisive” and “basic” role as a mechanism to allocate resources. Premier Li Keqiang said that the party was receptive to allowing the market to play a bigger role in economic innovation and that there should be a better balance in China between business and government.
“The key is to let the government, market, and enterprises do their own job. What the government needs to do is to enhance supervision and management and to create a business-friendly environment,” said Wei Jianguo, vice chair and secretary-general of the China Center for International Economic Exchanges, according to China Daily. At the heart of some of the proposed reforms coming out of the meeting is a redistribution of power. China and the world have simply become far too complicated for a small ruling elite to manage effectively. “Delegating power is a smart choice, as this can improve the efficiency of the market and corporations and let the market decide what to do and where to go,” said Lu Mai, secretary-general of the China Development Research Foundation, according to China Daily.
“But what is also important is enhanced management and supervision on some key hot issues, such as food safety and environmental pollution.” However, notably absent from the remarks was language addressing state-owned enterprises, a growing debt problem facing local governments, and a residence-based registration system that can make social mobility difficult. Major equity markets in Asia declined dramatically on Wednesday. In Hong Kong, the Hang Seng fell 1.91 percent to 22,463.83, and in Shanghai the SE Composite fell 1.83 percent to 2,087.94.