Markets last week

It was a relatively serene week for asset markets, as gentle summer lethargy seemed to take hold; the general tenor was constructive for most asset classes without any particular dramas.

Equities enjoyed another decent week, with most regions up between 1 and 2%. Many areas have seen mid-teen growth this year, led by relatively similar performances from the US, Europe ex-UK and the UK. Japan and emerging markets have been the laggards, in the latter case hurt by the continuing Chinese crackdown on its internet giants and in the former by the slow pace of its vaccine rollout.

Bonds eked out small gains, with ten-year yields falling marginally in the UK, Europe and the US as economic data came in slightly less hot than the previous week and inflation in particular failed to scare further with in-line numbers from the UK and US.

Currencies saw a mixed bag; sterling was unchanged against the dollar but a little weaker against the euro, while the Japanese yen climbed marginally against the greenback.

Commodities saw a mixed outcome, with oil very slightly weaker, but most metals stronger, both industrial metals like copper, up by a little more than 1% to $9570/tonne and precious metals like gold, which climbed just under 1% to $1780/oz. Gold is struggling to hold the $1,800/oz level. Iron ore was weaker, however, as China’s drive to limit imports hit sentiment.

The week ahead

Tuesday: UK unemployment

Our thoughts: with furlough programmes in the UK winding down, there will be an inevitable focus on the publication of the UK’s unemployment data for July. The rate stood at 4.8% in the June reading, and any significant move upwards, alongside increased COVID-19 cases, may be seen as evidence that forecasts of a very steep economic rebound may need to be scaled back, especially after the very strong Q2 numbers released last week.

Wednesday: UK CPI (consumer price index)

Our thoughts: just as there are some concerns over the momentum of growth recoveries, there remain strong fears over the progression of inflation, with supply bottlenecks in many areas (perhaps most notably in semiconductors) and the lingering effects of the rise in energy prices still filtering through into the annualised numbers. At the last print the level stood at 2.4%, with estimates looking for a small decline this time. Any large increase would undoubtedly reinforce the slightly more hawkish tone of last week’s comments from the Bank of England and perhaps help bonds at the expense of equities.

Wednesday: US initial jobless claims data

Our thoughts: earlier this month we saw a strong rise in non-farm payrolls, and it wouldn’t be a surprise were this strength to be further reflected in the weekly US jobless claims data, due on Wednesday. Last week this came in at 375,000, and although the surge in delta variant COVID-19 infections may weigh down on some job creation in the States, the underlying trend in unemployment is down.

Markets for the week

Sources: FTSE, Canaccord Genuity Wealth Management

Central banks/fiscal policy

All calm in the run-up to the Jackson Hole central bankers’ symposium in Wyoming later this month

It was a relatively quiet week for central bank announcements, as eyes turned to the annual Jackson Hole symposium of central banks later this month. We also have the publication of the minutes from the last US Federal Reserve meeting due during the coming week, which may cast further light on the range of views in the rate-setting Federal Open Market Committee on the pathway to tapering and a normalisation in interest rates, a process likely to take several years, with much opportunity for complication along the way.

United States

A more balanced few days after the previous week’s strong data

Inflation: as elsewhere, producer prices continued to rise strongly with an annualised rise of 7.8%. Meanwhile, CPI also grew strongly, with the year-on-year rate coming in at 5.4%, very slightly more than estimates. Despite this, the narrative that the present increase will be transient remains dominant in markets, even if concerns remain in some areas that the effects may be more durable.

Surveys: the NFIB (National Federation of Independent Business) small business optimism indicator showed a surprising decline, falling to 99.7 compared with forecasts of 102, perhaps reflecting difficulties in hiring qualified staff and resurgent COVID-19 infections in some states, especially those where vaccine take-up has been relatively low. Late in the week, the University of Michigan Consumer Sentiment survey was notably poor, showing the weakest number for 10 years, driven by fears over the resumed spread of COVID-19 and evidence of new closures and social restrictions in some states.

Productivity: non-farm productivity showed further gains with an increase of 2.3%, although this was behind more optimistic estimates of a 3.2% gain. Even so, the rate of improvement here remains encouraging for those who reckon inflationary pressures can be contained, and those who hope that rising salaries can be offset by more efficient production.

Employment: initial jobless claims fell further to 375k from last week’s 285k, in line with estimates. Continuing claims also fell, as states progressively remove payroll support measures put in place during the pandemic, helping the drive to get the unemployed back into the workforce.

United Kingdom

Deceleration in the housing market continues

Surveys: the Rightmove house price index fell for the first time in several months as the impact of the removal of the stamp duty holiday continues to be felt. The overall decline of 0.3% was driven by homes with more than four bedrooms, which declined by 0.8% month-on-month, while smaller houses, where the stamp duty effect is less marked, continued to rise in value. This was confirmation of the trend seen in the RICS (Royal Institution of Chartered Surveyors) survey, which came in at 79%, down less than expected, but still lower than the previous month’s reading of 82%.

GDP: the much-anticipated Q2 GDP number came in even stronger than expected, with a rise of 4.8% quarter-on-quarter and fully 22.2% year-on-year, as our recovering economy lapped the worst quarter from the onset of the pandemic in 2020. Unsurprisingly, this was led by a combination of a strong recovery in private consumption and continuing support from government spending. More disappointingly, business investment lagged more optimistic forecasts and the net balance in trade was worse than expected.

Europe

A very weak ZEW survey after the strong Markit numbers last week

Surveys: the ZEW surveys of investor sentiment came in at 29.3 for current conditions, compared with expectations of 31, but the larger negative surprise was a decline in expectations from 55 to 40.4, as market participants reacted to the spread of the delta variant and worries about the potential for a weaker than expected economic recovery as a result.

CPI: both German and French CPI were in line with estimates, at annualised rates of 3.1% and 1.5% respectively. EU-wide numbers are due this week and are expected to rise slightly above 2% from last month’s 1.9%, driven largely by energy costs.

China/India/Japan/Asia

Surprise in China

China: China produced a raft of weaker data with retail sales the standout. Although these rose 8.5% year-on-year, this was much weaker than expectations of 10.9% and the previous month’s 12.1% annualised rate. Allied with other weaker than expected numbers covering industrial production, fixed asset formation and unemployment, these clearly showed the impact of new COVID-19 outbreaks with the associated strong health policy responses. Elsewhere there were heavy rains and serious flooding across large swathes of the country that will also have crimped activity.

Japan: in Japan, the Economic Watchers’ Survey current situation index was slightly stronger than expected, at 48.4 compared with estimates of 43.4. However, the outlook index fell to 48.4 from last month’s 52.4. This split probably reflects a successfully-executed Olympic Games, balanced by record COVID-19infection rates and a still relatively tardy vaccination roll out.

Oil/Commodities/Emerging Markets

There was little movement in commodity markets. Oil prices hovered between gains and losses, whilst industrial metals in the form of copper recovered. Iron ore was weak, however, as a Chinese clampdown on imports impacted sentiment, with the price falling below $150/tonne from around $160/tonne a week earlier.