Chinese data boosts investor sentiment

Good morning,

• Markets bounce back after yesterday’s losses;

• Yellen’s softened tone doesn’t change anything, yet;

• Chinese data boosts investor sentiment;

• UK unemployment falls but wage growth remains a problem;

• Yellen testimony key again today.

Janet Yellen may have spooked investors a little yesterday, with her warning that rates could rise earlier and quicker if economic data improves, but that’s not holding them back on Wednesday following the release of a strong second quarter GDP figure from China.

In reality, Yellen’s comments don’t actually change anything. The Fed’s monetary policy stance has always been data dependent and always will be. However, until now Yellen has refused to even speculate about higher rates, claiming it won’t happen until well after the end of tapering. Yesterday’s acknowledgement that they could rise has been seen as a slight softening in stance by Yellen and a sign that the Fed sees potential for the data to continue to improve to the point that a rate hike will need to be considered.

While this may have spooked investors, it was only ever going to be temporary because it doesn’t change current rate expectations. Today’s Chinese data has been a real boost for investors who have been looking for any reason to buy the dips recently. Given the concerns about Chinese growth earlier this year, it is a big relief to see the country growing at 7.5% in the second quarter, even if this is largely due to the targeted stimulus efforts of the government and central bank. As long as this continues, investors will be happy.

There was mixed news for the UK this morning, who saw its unemployment rate fall to 6.5% in the three months to May, a near five and a half year low, and jobless claims fall 36,300. As has been the trend for a while now, this positive employment report came alongside data showing weakness in wage growth which is likely to delay any decision by the Bank of England to hike interest rates. They will be very reluctant to raise rates at a time when inflation is easily outstripping wage growth, especially given how reliant the economy is on consumer spending.

There’s plenty of data due out of the US today, although the majority of it is lower impact reports, such as PPI inflation and industrial production numbers. The key event will again be Janet Yellens testimony, this time in front of the House Financial Services Committee. This tends to go much the same way as yesterday’s testimony but it’s still worth watching as some of the questions will be different and there may be attempts made to expand on some of yesterday’s hawkish comments.

Ahead of the opening bell, the S&P is expected to open up 5 points, the Dow up 42 points and the Nasdaq up 21 points.