China rate cut, positive Eurozone and US data, left investors in good spirits

The first week of the month got off to a largely positive start as a rate cut in China, better inflation and employment data in the eurozone and predominantly strong US data left investors in good spirits.

While loosening monetary conditions are generally cheered by the markets, we saw today that the latest rate cut from the People’s Bank of China wasn’t overly well received, as we may have seen in the past. This appears to be a sign that investors believe more needs to be done to overcome the many headwinds facing the Chinese economy - declining growth, possible deflation and rising borrowing rates to name a few.

Today’s economic data was good in many respects but many of those positives seemed to have a slightly negative undertone which prevented anyone getting too carried away. In the eurozone we saw better inflation and unemployment figures but can we really get too excited about inflation rising from -0.6% to -0.3% and unemployment falling from 11.4% to 11.2%? The unemployment decline is the most encouraging thing as this has fallen consistently since peaking at 12.2% in September 2013 but I refuse to be happy with inflation at -0.3%.

In the US, the final manufacturing PMI for February rose to 55.1, the highest level since October. Output grew at its fastest rate since October but unfortunately employment was the lowest since July. Given the overall employment situation in the US right now, I think we can be forgiven for overlooking this for now.

The most important release today in my view was the personal income and spending figures as it’s this that’s going to drive future inflation and therefore being about the first Fed rate hike since June 2006. Unfortunately it was again a mixed bag as income rose by only 0.3% while spending fell by 0.2%. The general view in the markets though is that the decline in spending is ok, as long as it’s only temporary. In an economy like the US in the long run, you can rely on spending to pick up if income is and therefore the fact that we saw a 0.3% increase in January is the most important thing.

Despite starting the week on a positive note as a result of the Chinese rate cut and better data from the eurozone, European indices are all looking to end in negative territory as falling Brent Crude prices weighed on energy stocks. Meanwhile in the US, the Nasdaq hit 5,000 for the first time since March 2000 as equities on the other side of the pond continued to cheer the encouraging manufacturing and income figures as well as the Chinese rate cut.