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
Bank of England Governor saying rates are near the top caused a drop in sterling
Fed Governor Christopher Waller talked about the Fed “proceeding carefully”, saying that “there is nothing that is saying we need to do anything imminent anytime soon”.
Cleveland Fed President Loretta Mester, however, said that the Fed may have to raise rates “a bit higher”. Chicago Fed President Austan Goolsbee stated: “we are very rapidly approaching the time when our argument is not going to be about how high should the rates go”. NY Fed President John Williams summarised his views as: “policy is in a good place”.
ECB Governing Council member Klaas Knot noted that markets may underestimate the chance of an ECB rate hike in September. “It’s quite crucial in the disinflation process toward 2% by the end of 2025 that wage growth decelerates visibly… If I look at current wage agreements, they are still pretty far off longer-run compatibility with a 2% inflation target plus half a percent productivity growth”.
The BoE Governor Andrew Bailey cast doubts on whether the BoE needed to hike rates further. “I think we are much nearer now to the top of the cycle“. He also expected inflation to “fall quite markedly”. This comment led to the pound falling to a three-month low.
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.
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.
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.
Mixed data direction in China points to a possible bottoming of activity, but hitherto buoyant Japan missed on quite a few numbers
China: the last of the monthly surveys, the unofficial Caixin services PMI, dropped from 54.1 to 51.8, confirming the official CFLP survey for non-manufacturing activity.
Although both imports and exports continued to have negative growth, the August readings were better than the previous month and estimates. Exports were down 8.8% year-on-year vs. -14.5% and imports down 7.3% vs. 12.4%. Foreign exchange reserves fell slightly in US dollar terms from US$3.184trn to US$3.16trn.
There was a small recovery in negative inflation numbers, with the CPI moving up to +0.1% from -0.3% and the PPI to -3.0% from -4.4%.
Money supply, which denotes the amount of money in circulation in a country, was slightly lower, with M2 money supply (which includes cash, current and savings accounts) up 10.6% year-on-year vs. 10.7%, M1 money supply (which includes cash and current accounts) at 2.2% vs. 2.3% and M0 money supply (which only measures cash in circulation) up 9.5% vs. 9.9%.
Japan: household spending fell further in July, from -4.2% to -5.0% year-on-year. The Leading Index CI fell from 108.8 to 107.6 and the coincident index from 115.6 to 114.5. The Eco Watchers Survey was weaker, at 53.6 vs. 54.4 for the current situation and 51.4 vs. 54.1 for the outlook. Labour cash earnings were much softer in July at 1.3% year-on-year vs. 2.3% the prior month.
Q2 GDP growth was downgraded from 1.5% to 1.2% with the annualised number from 6% to 4.8%. Money stock (the Japanese phrase for ‘money supply’) was unchanged with M2 money stock up 2.5% year-on-year and M3 money stock up 1.9%.
The bellwether machine tool orders data improved somewhat from -19.7% year-on-year to -17.6%, indicating a potential turn in global manufacturing.
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.