As expected, the major equity indices traded roughly flat until Fed Chair Janet Yellen began speaking at 10AM. All then proceeded to take a dip lower, but it was no swan dive, so there is not much panic among investors. The unemployment rate alone is not enough to evaluate the strength of the U.S. job market. In defense of her dovish policy approach, Yellen said that the U.S. labor markets remain hampered by the effects of the Great Recession and the Federal Reserve should move cautiously in determining when interest rates should rise. The Fed has held benchmark rates near zero since December 2008, and has said it would wait a "considerable time" after winding down a stimulative bond-buying program in October before raising them. Financial markets currently expect rates to rise around the middle of next year. However, she noted that the unemployment rate alone is not an adequate measurement of economic recovery as there are still millions of workers who are stuck in part time jobs and are out of the job market altogether. Serious strength in the job market will be needed to determine the appropriate timing of raising interest rates, but for the moment the market remains unfazed. While the U.S. economy continues to press on with its rate dilemma, on the other side of the world, conditions are not looking great for China.
This week, HSBC's flash reading for the Chinese Manufacturing Purchasing Managers' Index (PMI) was incredibly discouraging. The August reading came in at 50.3 and was way below all economists' estimates (at an average of 51.5), and a big drop from the final July reading of 51.7. We note that a reading below 50 is indicative of economic contraction while a reading above 50 indicates expansion; however a reading at 50 indicates no change. Ultimately this reading shows that activity is slowing to levels comparable to the start of the year. Stocks declined in China after this report, and coupled with a slump in credit expansion and a slowdown in investment spending, this points to the very likely scenario that the Chinese government will up its stimulus activity. In a year that China is expecting a whopping 7.5% GDP growth rate, most economists around the globe are expecting 2014 to be the weakest year in the Chinese economy since 1990. The flash PMI is typically based on 85% to 90% of responses to surveys sent to purchasing managers at more than 420 companies, but the final reading will be released on September 1st. It's important to note that HSBC is a private research entity and the final reading, released by the Chinese government, ought to give the impression that the manufacturing situation is not as dire as economists are letting on. Whether through fudging the numbers or through an industrial stimulus: there is likely a much more sinister story behind China's economic reality.