The numbers for the week – 21 Aug 23
Markets last week
Global bond yields reached a 15-year high last week, dragging equities down. The US dollar continued its recovery from the July low, and gold corrected below US$1,900.
Gilt yields were in focus, surging by 15 bps as markets now price in a 6% Bank of England rate early next year, in a rebound of rate forecasts. US treasury yields also rose 10 bps, with the US economy exhibiting further signs of acceleration. The Federal Reserve Bank of Atlanta projection of US GDP growth for this quarter soared to 5.8% (from 2.6% in Q2 and 1.8% in Q1). The recently well-behaved US inflation numbers don’t seem to be arresting the upward trend in treasury bond yields against that backdrop. Markets are awaiting the speech by US Federal Reserve (Fed) Chair Jay Powell this Friday at the Jackson Hole Fed retreat with bated breath for signs of any future direction in interest rates and hence bond yields.
Economic numbers were not market-moving, with the exception of Asia. The monthly Chinese data release showed a continuing decline in activity throughout all sectors, whereas Japanese GDP growth hit an unexpected annualised 6% for Q2. In the US, surveys were mixed. The usual pairing of the Empire State (NY) and Philadelphia surveys was confusing due to diverging directions. Eurozone surveys bounced back a little but UK retail sales disappointed.
The summer correction seems to be under way. Global equities have dropped 5% from their peak in July in sterling terms. Last week represented most of that fall, with approximately 3.5% losses, led by Chinese shares, as markets are losing patience with the multiple announcements from the Chinese authorities about small, piecemeal reforms that fail to rekindle consumer activity in the country. Indeed, the weekend’s loan rate moves from the People’s Bank of China (PBoC) disappointed markets as too timid and out of sync with the comments made by authorities recently. US shares were the most resilient thanks to a late Friday bounce, but still down 2.5%.
The worst-affected sectors covered a wide swathe of economic areas, such as consumer discretionary, materials, financials, real estate and industrials, pointing to some indiscriminate selling, with energy shares the most defensive, albeit still negative.
Commodity prices were all affected by the risk-on mood and the stronger US dollar, with oil correcting more than 2% from its strong run since late June.
The week ahead
Tuesday: UK public finances
Our thoughts: how much more spending can the public finances afford in order to support the economy at a time of soaring mortgage rates and still sticky inflation? The weakness of UK growth may well influence the budget process. It will be interesting to note whether the deficit is kept under control to allow for a pre-electoral tax giveaway, or if some significant spending is starting already.
Tuesday-Wednesday: manufacturing PMIs for Japan, UK, eurozone and US
Our thoughts: the global picture for growth seems to be clear: US outperforming, China underperforming, Japan surprising on the upside and Europe/UK (just) staving off a recession. Is this likely to change, though? The manufacturing Purchasing Manager Indices (PMIs) are the best early indicator of such possible changes. Although the services PMIs also matter, their variability and anticipation of general economic growth is meaningfully less than manufacturing.
Thursday-Friday: Jackson Hole Symposium of Kansas City Fed
Our thoughts: the annual meeting of the Kansas City Fed in Jackson Hole, Wyoming, is rightly perceived as one of the main events in the market and economic calendar. Not only do all Fed officials attend, but heads of important foreign central banks also come to Jackson Hole. Discussions are of a longer-term nature compared to regular central bank policy meetings and tend to set the scene for the years ahead, often with new monetary policy ideas for the coming decade. In that respect, Fed Chair Jay Powell’s speech on Friday will be eagerly awaited and could move markets. It is unclear at this stage what balance he will wish to strike, between dovish and hawkish views on inflation, Fed funds rates and the US economy.
The numbers for the week
Central banks/fiscal policy
Fed minutes worry markets. China still lacking proper policy stimulus
The minutes of the July meeting of the Fed were perceived by markets to be hawkish, even though the details were not quite that way. Fed officials don’t see a deteriorating job market. It seems that most Fed members still see significant upside risks to inflation and several still believe significant disinflation is yet to become evident in the ‘super-core’ measure (services excluding shelter), but the minutes continue to suggest a committee that’s cautious of being too hawkish.
Minneapolis Fed President Neel Kashkari said that there was good progress on the inflation front but that it was still too high. “The question is, have we done enough, or do we need to do more… I’m not ready to say that we’re done.”
The PBoC reduced the one-year medium-term lending facility rate from 2.65% to 2.50%, the largest cut since 2020. Surprisingly, the five-year loan prime rate was kept unchanged at 4.20% and the one-year loan prime rate only cut by 10 bps from 3.55% to 3.45%. The PBoC also tried to restore confidence in the Chinese currency, the Renminbi, through its intervention in the foreign exchange market.
Chinese authorities have hinted that they might cut the stamp duty on share trading, as part of an economic stimulus programme. Chinese Premier Li Qiang led a State Council which promised to meet economic targets through “targeted and forceful” controls and policy, although the details are still missing.
United States
Mixed surveys but strong retail sales, industrial production and employment
Housing: the National Association of Home Builders (NAHB) housing market index unexpectedly fell from 56 to 50. Mortgage Bankers Association (MBA) mortgage application fell 0.8% for the week ending 11 August after -3.1% previously. Housing starts rose 3.9% in July after -11.7% the prior month. Building permits edged up 0.1% after -3.7%.
Surveys: the Empire Manufacturing index slumped from +1.1 to -19.0. The New York Fed services business activity index increased from 0.0 to 0.6. The Philadelphia Fed Business Outlook surged from -13.5 to +12.0.
The Leading Index was down again for July, at -0.4% vs. -0.7% the prior month.
Consumer: retail sales had a strong July, with the advance reading up 0.7%, up from 0.3% the prior month and retail sales ex auto and gasoline up 1.0% vs. 0.4%.
Industry: industrial production rose 1.0% in July, following -0.8%, driven by a surge in vehicle production. Capacity utilisation climbed from 78.6% to 79.3%.
Inflation: the import price index was -4.4% year on year, up from -6.1% previously and the export price index was down -7.9% vs. -11.9%.
Employment: initial jobless claims moved down again, from 250K to 239K, but continuing claims jumped from 1684K to 1716K.
United Kingdom
Core inflation sticky and retail sales disappointing
Inflation: UK wage growth accelerated at the strongest pace since records began in 2001. Average weekly earnings excluding bonuses rose 7.8% in the three months through June compared with a year ago, up from 7.5% previously.
The Consumer Price Index (CPI) fell from 7.9% to 6.8%, marginally above estimates, but the core CPI (ex food, energy, alcohol and tobacco) remained at 6.9%.
There was some hope from the Producer Price Index (PPI), with the PPI output down from +0.3% to -0.8% and the PPI input down from -2.9% to -3.3%.
Employment: the July data show a surprising increase in the payrolled employees of 97K for the month with the claimant count rate up from 3.9% to 4.0% and jobless claims up 29K vs. 16.2K the prior month. The June International Labour Organisation (ILO) data show the three-month rate of unemployment up from 4.0% to 4.2% with employment change over that period down 66K vs. +102K previously.
Housing: the house price index rose 1.7% year-on-year in June, down from 1.8% previously. The Rightmove house price index in August slumped 1.9% for a year-on-year of move of -0.1%, down from a positive 0.5% the previous month.
Consumer: retail sales fell more than expected in July, down 1.2% including auto fuel and -1.4% excluding auto fuel.
Europe
Some recovery in surveys
Surveys: the Zentrum für Europäische Wirtschaftsforschung (ZEW) survey improved with the eurozone expectations survey up from -12.2 to -5.5, the expectations for Germany up less from -14.7 to -12.3 but the current situation for Germany slumping from -59.5 to -71.3.
Growth: the Netherlands suffered a technical recession (two consecutive quarters of negative GDP growth) with -0.3% in Q2 after -0.4% in Q1. The eurozone, however, had growth of 0.3% in Q2, with a year-on-year GDP of 0.6%.
Industry: industrial production in the eurozone increased 0.5% in June up from 0.0% previously. Construction output in the eurozone fell 1% in June, from a positive 0.2%.
China/India/Japan/Asia
Monthly Chinese data depressing, but Japanese GDP soars
China: the monthly data release showed a weaker economy throughout. Industrial production was lower at 3.7% year-on-year from 4.4%, retail sales at 2.5% down from 3.1%, fixed assets ex rural (i.e. investment) down to 3.4% from 3.8%, property investment at -8.5% vs. -7.9%, residential property sales at +0.7% vs. +3.7% and new home prices down 0.23% on the month vs. almost flat the prior month. The surveyed jobless rate edged up further from 5.2% to 5.3%.
Foreign direct investment into China fell further to -4.0% year-on-year from -2.7%.
Japan: the economy grew much faster than expected during Q2, with a 1.5% quarterly increase, for an annualised growth of 6.0%, way above the 3.7% in Q1 and significantly above all estimates. Net exports were a significant contributor, as domestic demand fell slightly.
The tertiary industry index (namely services) fell 0.4% in June, after +1.0% the prior month.
The national CPI remained at 3.3% but the ‘core-core’ CPI ex fresh food and energy rose from 4.2% to 4.3%.
Oil/Commodities/Emerging Markets
All commodities fell
Oil prices corrected last week, after a strong run since late June. Copper prices have been trading in the same range since April, despite being recently affected by the resumed strength in the US dollar. Gold fell below US$1,900/oz, the first time since March and a significant drop from the peak in May at US$2,050.
