Market and economic update: The eurozone stalls as the U.S. economy sees growth

Monetary policy authorities remained at the center of market attention last week. Global developed market economies seem to be headed in different directions, with eurozone activity slowing toward no growth and the U.S. economy growing around 3%.

  • The Federal Reserve concluded its meeting by announcing the tapering program would conclude, wrapping up bond purchases by the end of October. The U.S. economy seems to have reached a point where the Fed can normalize monetary policy and likely see little to no slippage in economic output.
  • In contrast, the European Central Bank (ECB) conducted its first targeted long-term refinancing operation (TLTRO), issuing loans for just €82.6 billion, well short of consensus estimates. At this rate, it seems the ECB will fall far short of its target to increase its balance sheet by €1 trillion. The ECB seems unlikely to generate enough injection of money into the economy to improve the trajectory of activity.

Inflation seems to be slowing around the world. The U.S. Consumer Price Index (CPI) fell 0.2% in August, slowing to a year-over-year pace of just 1.7%. Inflation in Europe remained weak, with consumer prices rising just 0.4% for the year ending in August. Emerging market economies also saw inflation slow. Year-over-year inflation slowed to a rate of 2% in China and 7.8% in India. Certainly weakness in commodity prices is a common factor for all economies, with the S&P GSCI losing more than 6% over the past year.

In the case of emerging economies, this slowing of inflation may allow authorities to expand economic support in order to rekindle economic growth. In the case of Europe, the ECB has reduced interest rates and implemented TLTROs, essentially four-year loans to support bank lending to the commercial economy. Should this support be sufficient, we may eventually see an uptick in European prices.



U.S. economic data is somewhat dour. Industrial production fell 0.1% in August and housing starts fell to an annual pace of just 956,000. Weekly initial unemployment claims fell by 36,000 to just 280,000, raising hopes for a strong September employment report next week. Worries about housing data are likely overblown as the 12-month trend has improved and homebuilder confidence rebounded to levels seen prior to the polar vortex last winter. Generally, the trend of the U.S. economy remains one of modest improvement. Employment is the most steady strength, with housing and capital spending data improving in fits and starts.

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