DR.CHENJIAZI ZHONG

 Macro Update

On U.S.

The U.S. job market added 151,000 jobs in August 2016. The largest gains came from several private service-providing industries, including information, financial activities, real estate rental and leasing, professional and business services, education and healthcare services, while the goods-producing industry shed 24,000 jobs. Employment Cost Index data was recently revised; compensation increased 2.3% quarter over quarter in the second quarter. Hourly earnings rose 2.5% year over year in August 2016.

Economic activity in the manufacturing sector contracted in August following five consecutive months of expansion. The Institute for Supply Management (ISM)’s Manufacturing PMI decreased 3.2 percentage points to 49.4 percent in August, as compared with 52.6 percent in July. All the sub-indexes contributed to the overall decline, except new export orders, which held steady at 52.5.

Inflation data released in the last week of August from Europe and U.S. indicates inflation barely budged month over month due to the continuous suppressing impact of oil. Inflation continues to run well below each central bank’s target and therefore, increasingly challenging for the Fed and European Central Bank (ECB) to achieve their respective mandates.

On U.K.

In fact, the U.K. data held up relatively well over the month and better than market participants had expected. The GfK survey and Markit U.K. Manufacturing PMI both rebounded in August. The GfK rose to -7 in August from -12 in July. The seasonally adjusted Markit U.K. Manufacturing PMI rebounded back into expansionary territory, recovered sharply from the 41-month low of 48.3 in July to 53.3 in August. In July the volume of retail sales gained 1.4% month over month and 5.4% year over year. Largely driven by base effects in food, fuel and alcohol, inflation rose 0.6% year over year. On a trade-weighted basis, sterling remained quite stable over August, buoyed by the better-than-expected data.

On Oil

Oil prices rebounded in August, with West Texas Intermediate (WTI) rising by 12% in USD terms over the month. Among the casual factors, speculation on a coordinated oil-freeze gained traction, short positions were covered, and earlier supply disruptions were resolved. Available indicators point toward reasonable demand for oil over the medium term, while supply remains hampered by low capital expenditure.

European Stocks May Be Cheap, But Cheap for a Reason

Forward Price to Earnings Ratio

Italy’s second quarter 2016 GDP was released at 0.7% year on year and its stock market, as measured by the major stock index, down 23.9% year to date, It continues to be the weakest among the developed countries. The policies of Western democracies have become a broken play in which both politicians and investors would be unwise to plant their feet. Some may remember that Silvio Berlusconi proved victorious in three separate runs for the role of Prime Minister. The U.K.’s decision to leave the European Union may simply be the beginning. Populism appears likely to remain both a political and investment theme. European stocks may be cheap, but cheap for a reason.