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Markets are rallying across the board this morning after the US jobs report last Friday. The US reported an increase in nonfarm payrolls, however wage growth was muted.
You may find it hard to understand why the market would rally when wages are not increasing. The reason being that lower wage growth could help quell inflation fears reduce the probability of a forth interest rate hike in the US.
What does nonfarm payroll mean?
Nonfarm payroll employment is a compiled name for goods, construction and manufacturing companies in the US. It does not include farm workers, private household employees, or non-profit organisation employees.
Though it wasn’t the US alone which led to the risk on mode we are seeing this morning. The following are events which took place last week which improved investors’ sentiment on the markets.
The ECB made a big change with its policy outlook
The European Central Bank dropped its easing bias, fueling expectations that it will normalise monetary policy in the euro area.
Until now, the ECB has stated that it stands ready to increase the level of bond purchases it makes in both duration and/or size, in case the economic outlook deteriorates in the euro zone.
ECB President Mario Draghi said that the solid economic recovery in the region supported the decision to remove the so-called easing bias.
The BOJ kept stimulus unchanged ahead of new term for Kuroda
The Bank of Japan stayed the course with its monetary stimulus last Friday at Governor Haruhiko Kuroda’s final policy meeting before his new term begins next month.
With inflation still far from the BOJ’s 2 percent target, Kuroda made it clear during parliamentary confirmation hearings this week that "powerful monetary easing” is here for a while. The two new deputy governors who are set to join the board later this month also endorsed continued monetary easing.
This will put the BOJ further behind its global peers, who are either raising interest rates or turning toward normalising policy.
Conclusion on the equity markets
I expect 2018 to end the year with positive gains for global equities with particular preference to European and Emerging Market equities.
However, it is also true that pullbacks and volatility will become more common as investors adjust to rising interest rates. More volatility should not detail the underlying economic expansion or fundamentally dent risk assets, but it will make markets more bumpy and less predictable.
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