Markets last week

Market volatility last week was driven by a variety of factors and events. The geopolitical rivalry between the US and China had a major impact through China’s retaliation on technology. The broadening of China’s ban on iPhones had a significant impact not just on Apple Inc. but on the technology sector as a whole. Oil prices continued on their buoyant trend, helping energy equities as a foil to the technology sector weakness.

Bond yields enjoyed a fairly calm backdrop as economic data globally moved in different directions. Below the surface, though, a few statistics were the focus for investors. The US weekly jobless claims series slumped to levels last seen in February this year, before growth data improved meaningfully against the backdrop of better US surveys and less negative Chinese trade and inflation data. European numbers were still soft, but UK retail sales improved and inflation expectations fell. This would have been positive for sterling, were it not for comments from the Bank of England (BoE) Governor Andrew Bailey that the BoE may be close to the end of rate-rising cycle. One of the future BoE hikes has been taken down by markets and sterling had a bad week.

At the same time, the Chinese renminbi hit a 16-year low, after the country reported falling exports for the fourth month in a row, although the trade data looked better than expected. The US dollar climbed to a six-month high as a result and the widely followed DXY dollar gauge (comparing the USD to developed currencies) inched above 105, over 5% higher than its July low.

With the stronger dollar as a backdrop, equities generally suffered a down week, but the drop in the pound dulled that negative return for sterling-based investors. China recovered somewhat from its heavily negative streak and the FTSE 100 enjoyed the energy sector strength, but other markets had poor returns, particularly Europe. The leading sector was energy, with utilities also slightly positive, and the worst returns came from technology, industrial and materials, which had recently been at the top of the performance league.

The week ahead

Wednesday: US CPI

Our thoughts: the US Consumer Price Index (CPI) is one of these vital market statistics everybody looks at, although it is not exactly the inflation gauge followed by the US Federal reserve (Fed). Having said that, investors will dissect the number and its components to try and predict the direction of the next reading. The expectation is for an increase in the headline CPI but a decrease in the core CPI (ex food and energy). We are now finding that the direction of the various sub-indices is switching, with energy prices now rising after being negative for five months, and goods flat but services still sticky. Will anything change in that equation? Given the recent softening moves in the employment sector, anything other than less sticky services inflation would disappoint markets. The Producer Price Index (PPI) the following day may also shed some light on pipeline costs, as could also import and export prices on Friday.

Thursday: ECB meeting

Our thoughts: markets are now assuming that there is little, if any, tightening left from the major central banks. The European Central Bank (ECB) is the one that may still confuse investors, as it started hiking rates later than the Fed or the BoE. The eurozone economy has managed to skirt a deep downturn but may still be vulnerable now, particularly in exporting countries like Germany. Will that weakness stop the ECB hiking further? Markets are split on the rate prospects for this meeting and the next, although they still assume more increases ahead. The commentary is always plentiful but future guidance is generally lacking, so markets will latch on to whatever useful snippet they get out of ECB President Christine Lagarde.

Thursday: China August data

Our thoughts: once again, Chinese growth will be under the microscope. Are the estimates now so weak that the data can only beat them? Industrial production, retail sales and investment will paint a sector-by-sector picture of the Chinese economy. Obviously, the property area is still expected to be suffering, but the rest of the country should be different. Since the government downgraded the details released about unemployment, the surveyed jobless rate may now be less meaningful, but other data should move markets if out of sync with estimates.

The numbers for the week

Central banks/fiscal policy

Surprising switch in trend for jobless claims amid improvement in surveys

Industry: factory orders fell 2.1% in July after four positive months, although ex transportation, they rose 0.5%. Wholesale inventories fell 0.2% in July whereas wholesale trade sales surged 0.8% after a negative -0.8%.

Housing: Mortgage Bankers Association (MBA) mortgage applications fell 2.9% for the week ended 1 September. The MBA index of home purchase applications fell 2.1% to the lowest since April 1995.

Surveys: the Institute for Supply Management (ISM) services index rallied beyond estimates from 52.7 to 54.4 with the underlying components improving further, new orders rising from 55.0 to 57.5, employment from 50.7 to 54.7 and prices paid from 56.8 to 58.9. 

Employment: jobless claims have been quite volatile recently and managed to fall sharply, down from 229K to 216K for initial claims, the lowest level since February, and from 1719K to 1679K for continuing claims.

Productivity: Q2 productivity was revised down from 3.7% to 3.5%, but, more importantly, unit labour costs were revised up from 1.6% to 2.2%, which is a less favourable combination.

United Kingdom

Retail sales bouncing back as consumers expect lower price rises

Retail: the British Retail Consortium (BRC) sales like-for-like surged to 4.3% year-on-year in August from 1.8% previously. New car registrations eased in August from 28.3% year-on-year to 24.4%.

Surveys: the S&P Global construction Purchasing Manager Index (PMI) slipped to 50.8 from 51.7, albeit still in expansion territory.

Inflation: the Decision Maker Panel (DMP) survey mean expected price growth expectations fell, from 5.2% to 4.9% for the three-month output price and from 5.4% to 4.8% for the one-year CPI expectations, the lowest level in two years.

Housing: UK house prices, as reported by the Halifax, dropped 1.9% in August, the fifth consecutive fall, to an average price just below £280,000 – a loss of some £14,000 over the last 12 months.

Europe

Industry still suffering amid sticky inflation expectations

Industry: German factory orders plunged 11.7% in July, far worse than estimates, following three months of gains. German industrial production fell 0.8% in July, for a -2.1% drop year-on-year, down from -1.5% previously.

Consumer: eurozone retail sales fell 0.2% in July for a year-on-year -1.0%, similar to the prior month.

Inflation: eurozone inflation expectations rose slightly in July, with the 12-month expectations at 3.4% and the three-year expectations at 2.4%, up from 2.3%. The eurozone PPI fell 0.5% in July for a year drop of -7.6%, down from -3.4%.

Surveys: the eurozone Sentix investor confidence index fell further from -18.9 to -21.5. The HCOB Germany construction PMI edged up a little from 41.0 to 41.5, still a very depressed level.

China/India/Japan/Asia

Oil prices bullish

Oil prices were very well supported as Saudi Arabia and Russia announced an extension of their output cuts until December. Brent oil prices went above US$90/bbl for the first time since November.

Copper inventories jumped on the London Metal Exchange leading to a correction in the copper price.