Markets last week

Amid constant tales of industrial bottlenecks, supply chain shortages and employment mismatches, equities were quite volatile last week, not only from day to day but also from market to market, with Japanese equities once again outperforming the field whereas nearby Asian equities were hit by further concerns about Chinese policies. The Japanese index had its highest close since 1990, due to the upcoming elections but also because more than 50% of the Japanese population has now been vaccinated, after having started behind all other countries.

In China the looming Evergrande default added to general concerns from investors.

Economic data have been mixed globally, with US retail sales unexpectedly surging whilst UK retail sales collapsed. Inflation has also been a tale of two cities, with the US CPI (consumer price index) finally showing a downtick whereas the UK CPI shocked on the upside. Chinese statistics show a clear slowdown, but European numbers are more resilient.

Higher bond yields globally seem to be reflecting expectations of central bank moves, especially tapering of asset purchases by the US Federal Reserve. In turn this has impacted different equity sectors, with materials and utilities faring worst whereas energy managed to eke out the lone positive return.

Gilt yields, for instance, have climbed to 0.85% for the 10-year from 0.52% less than a month ago.

The US dollar has recovered its uptrend. Gold was hit by the rise in government bond yields and industrial commodities fell sharply, with oil as the exception as Hurricane Ida affected 40% of the Gulf of Mexico oil output.

The week ahead

Tuesday: UK public finances for August

Our thoughts: after the Government decided to raise £12bn a year from higher taxes through national insurance contribution and dividend taxes, the balance between spending and raising funds is becoming more relevant for markets. It is true that the budget deficit (Public Sector Net Borrowing Requirement or PSNBR) has improved beyond the Chancellor’s expectations due to higher tax receipts, but the size of the gap is still huge and if the Chancellor should stick to some kind of “golden rule”, knowing the exact state of the public finances would help in forecasting future tax changes. The expectation is for a significant rise in the PSNBR in August, although there is some seasonality involved to both receipts and spending.

Wednesday: US Federal Open Market Committee (FOMC) meeting of the Federal Reserve (Fed)

Our thoughts: will a tiny drop in the CPI (consumer price index) in the US last month vindicate the Fed Chair Jay Powell in his view that the surge in inflation is “transitory” or “transient” (both words are used interchangeably by Fed members)? There is no doubt that the communication from the Fed post the FOMC meeting this week will be parsed with a fine-tooth comb for any change in vocabulary indicating a potentially different view on inflation. There is also the important question of when the Fed will start to taper its asset purchases (US treasury bonds and mortgage bonds) and at which speed the tapering will take place. The outcome of the FOMC meeting has the power to move markets depending on the message delivered.

Thursday: Bank of England Monetary Policy Committee (MPC)

Our thoughts: just like the Fed above, the Bank of England (BoE) will communicate its decisions to the public this week. The slight difference here is that markets have reacted quite sharply to the recent rise in inflation in the UK by anticipating a couple of rate rises next year. It will be interesting to hear whether the MPC is willing to dispel such expectations in light of the poor retail sales and the removal of the furlough scheme. It may well be that money markets have to roll back their expected increases in BoE rates after the statements on Thursday. Let’s see.

Markets for the week

Sources: FTSE, Canaccord Genuity Wealth Management

Central banks/fiscal policy

ECB talking about improving economic data

“We’re back from the brink, but we’re not out of the woods”, European Central Bank President Christine Lagarde said yesterday. “In the euro area, the recovery is clearly under way, and probably more so and faster so than we had anticipated only six months ago”. She said a lot of the surprisingly positive news has to do with vaccinations.

United States

Better retail sales and surveys. Could the slowdown be over yet?

Inflation: there was a smidge of an improvement in the CPI as it increased 0.3% from July, the smallest advance in seven months. Compared with a year ago, the CPI rose 5.3%. Core CPI climbed 0.1%, the smallest gain since February, with the year-on-year change down to 4.0% from 4.3%, due to declines in the prices of used cars, airfares and auto insurance. Conversely, the housing market strength is starting to feed through into rent prices, which rose by the most since March 2020.

US import prices fell for the first time in 10 months, down 0.3% in August and growing 9.0% year-on-year. Export prices, however, increased for the fifteenth consecutive month, up 0.4% and 16.8% year-on-year.

A New York Fed survey showed that consumers expect inflation at 4% over the next three years, the highest since 2013. Also, the inflation forecasts within the University of Michigan sentiment index are still very elevated with the 1-year number rising further from 4.6% to 4.7% but the 5-10 year expectation stable at 2.9%.

Industry: industrial production rose for the sixth month in a row, up 0.4% in August, 5.95% year-on-year. Capacity utilisation rose 0.35% to 76.4%.

Surveys: the NFIB Small Business optimism Index improved from 99.7 to 100.1 against an expected fall. The New York Empire State Fed manufacturing index bounced back 16 to 34.3 due to increases in new orders, shipments, the average workweek and employment. The Philadelphia Fed current activity index surged 11.3 to 30.7, with strength led by inventories and shipments, although new orders and prices paid fell. The future activity index, however, slumped -13.7 to 20.0 on lower expected new orders and capital expenditures. The University of Michigan sentiment index was a tad higher at 71.0 vs. 70.3, with current conditions lower at 77.1 vs. 78.5 but expectations better at 67.1 vs. 65.1.

Sales: US retail sales rose unexpectedly in August, climbing 0.7% following a downwardly revised 1.8% decrease in July. Excluding autos, sales advanced 1.8% in August, the largest gain in five months. The data showed restaurants and bars stagnated in August and car sales fell. Meanwhile, grocery store receipts climbed 2.1%. Ten of 13 categories registered sales increases. Control group sales jumped 2.5% in August, the most in five months.

Housing: MBA mortgage applications rose 0.3% on the week.

United Kingdom

Shocking drop in retail sales and increase in inflation put Bank of England in a quandary

Employment: unemployment fell in August with the claimant count rate at 5.4%, down from 5.6% the previous month. As at July the last three months created 183K jobs and the ILO unemployment rate was down to 4.6% from 4.7%. This may change with the end of furlough.

The number of workers on UK company payrolls climbed above its pre-pandemic level as vacancies hit a record high. There was a 35% surge in job openings in the quarter to 1.03 million, the first time they’ve risen above 1 million. There are 1.6 million that remain furloughed as that programme comes to an end this month. The number of employees on company payrolls rose a record 241,000 in August.

Inflation: the CPI (consumer price index) jumped 3.2% in August, more than expected and the most since March 2012, with core CPI at 3.1%. The strongest upward pressure came from prices charged by hotels and restaurants, due to last year’s Eat-Out-to-Help-Out programme as the comparison. The cost of used cars and fuels made a big contribution to higher transport costs. Housing and household services also rose sharply, reflecting higher rent costs. The Bank of England/Kantar inflation gauge for the next 12 months rose from 2.4% to 2.7%.

Sales: UK retail sales fell unexpectedly for a fourth month in August, the worst stretch of declines in at least 25 years. The volume of goods sold in stores and online fell 0.9% from July, when sales plunged by 2.8%, against an expected gain. Sales excluding auto fuel dropped 1.2%. The only categories that enjoyed an increase in sales were clothing and fuel as more people returned to offices and travelled for summer holidays.

A separate survey showed that 6.5% of retail businesses were unable to get the goods, materials and services they needed. The figure was highest at department stores 18.2%, followed by clothing stores at 11.2%.

Housing: the house price index grew less, down to 8.0% in July year-on-year from 13.1% the previous month.

Europe

More stability in numbers within Europe

Industry: industrial production in the eurozone rose 1.5% in July vs. a drop the previous month, bringing the year-on-year move to 7.7% down from 10.1%. Construction output in July rose 0.1% or 3.3% year-on-year down from 4.1% the previous month. EU 27 new car registrations fell 18% in August vs. 24% in July year-on-year.

Trade: the eurozone trade balance with non-EU countries increased €1.45bn to €14bn in July.

Inflation: the wholesale price index in Germany jumped from 11.3% to 12.3% in August, highlighting continuing inflationary pressures. The eurozone CPI (consumer price index) rose to 3.0% year-on-year from 2.2% in July with the core CPI climbing from 0.7% to 1.6%, due mostly to increases in clothing, furniture, appliances and utilities prices.

Surveys: the Bank of France industrial sentiment survey slid from 105 to 104. The post-COVID-19 high was 107.

China/India/Japan/Asia

Slowdown in numbers in China

China: the monthly data underscored the slowdown in the economy, in particular in the consumer sector. Retail sales posted lower growth than last month, up 2.5% year-on-year vs. 8.5% the previous month, way below estimates. Industrial production eased from 6.4% to 5.3%, fixed assets ex rural (i.e. investment) from 10.3% to 8.9% and property investment from 12.7% to 10.9%, with the surveyed jobless rate remaining at 5.1%. New home prices rose 0.16% in August down from 0.3% the previous month.

Japan: core machine orders rose 0.9% in July, reducing the year-on-year growth from 18.6% to 11.1%. Japanese exports rose 26.2% year-on-year in August, down from 37% the previous month with imports surging 44.7% vs. 28.5% before, flipping the trade balance from a surplus to a deficit for the month.

Oil/Commodities/Emerging Markets

Amid drops in many commodities, Brent oil exceeded US$75 for the first time since 2 August. Prices were given a further boost by Hurricane Ida shutting down 40% of the US Gulf Coast oil production.

Iron ore has collapsed, having halved since May, which is hurting the mining sector.

Gold has fallen quite sharply with bond yields surging.