Markets last week
The week in markets reacted to two main events: the release of earnings by semi-conductor giant Nvidia, the current poster child of the artificial intelligence theme, and the US Federal Reserve (Fed) Jackson Hole meeting on Thursday and Friday. Global bond yields rowed back on their recent surge during last week, in particular gilts, as weaker surveys and data impacted Europe and the UK. Weakness in the European economies added to concerns about China. European Purchasing Manager Indices (PMI) fell sharply, with Germany, France and the UK all dropping below the threshold between growth and contraction for services, not just for manufacturing. Both sterling and the euro fell in line with the change in economic outlook. The employment gauges in both surveys fell but price pressures did not seem to abate in the eurozone, a negative combination, and oil prices reflected a softening of global growth.
In line with recent trends, Japanese PMIs were more resilient than their western counterparts, although the US was softer than anticipated.
The Brazil, Russia, India, China and South Africa (BRICS) summit was focused on the US dollar’s place in global trade, but no particular move was even mooted for alternative trading currencies, despite several new countries being invited to join. Markets generally shrugged off the event.
The Jackson Hole Economic Policy Symposium organised by the Fed Kansas City region confirmed what market participants already knew. Despite a repeat of the rhetoric by both Fed Chair Powell and European Central Bank (ECB) President Christine Lagarde, markets seemed to perceive a slightly ‘happier’ tone on inflation from the Fed Chair.
Chinese authorities have been trying to boost the poor investor sentiment for most of this year and unveiled a cut in stamp duty and measures to stop sales by large shareholders. Markets seemed to take more heart from these recent moves than the previous raft of policy announcements.
The positive returns over the week in equity markets hid enormous intra-day volatility reacting to the above events. Japanese, US and emerging market equities did best, led by information technology, but the energy sector corrected after its recent strong run. The UK lagged as a result.
Yesterday, while UK markets were closed, global equities rose sharply, partly as a relief reaction after the Jackson Hole speeches. Chinese and European shares were particularly buoyant.
The week ahead
Wednesday: Chinese PMIs
Our thoughts: after the shock last week of a slump in PMIs across Europe and the UK with a significant weakening in the US, too, Chinese surveys will take on particular importance. It is well known that the Chinese economy is much slower than expected this year, but what is the forecast? The official China Federation of Logistics and Purchasing (CFLP) PMIs (manufacturing and non-manufacturing) and the unofficial Caixin manufacturing PMI will provide guidance on whether the Chinese consumer is really ‘on strike‘ or simply ‘on hold’.
Thursday: US Personal Consumption Expenditures (PCE) inflation
Our thoughts: the PCE deflator is an alternative inflation measurement to the better-known Consumer Price Index (CPI), but the core PCE reading is used by the Fed as its inflation gauge with a 2% target. The 2% target has not been seen in over two years and, despite a meaningful fall in the headline PCE deflator to the 3% area, the core number is still uncomfortably above 4%. PCE data will be published ahead of the Fed’s next meeting and may have an influence over the final interest rate decision.
Friday: US employment data
Our thoughts: US non-farm payrolls have just been revised down by over 300K, but the trend in the data probably matters more than the absolute level. The monthly payroll creation is still very high for an economy that is supposed to be slowing down to keep inflation under control. The moderate reduction seen in payrolls is still leaving net new jobs at expansionary levels, compared to the large drops seen ahead of recessions, which reflects a likely ‘soft landing’ of the US economy rather than a downturn. In addition to the headline payroll number, the unemployment, underemployment and labour force participation data will paint a fuller picture of the tightness of the jobs market and the average hourly earnings should highlight wage inflation at least directionally.
The numbers for the week
Central banks/fiscal policy
Jackson Hole confirms central bank rhetoric, but markets take a positive spin on it
The annual monetary policy symposium of the Kansas City Fed at Jackson Hole, Wyoming, was the most expected event of the whole week. The Fed was in full force, together with representatives from major central banks in Europe and other parts of the world, including ECB President Christine Lagarde and Bank of Japan Governor Kazuo Ueda. In addition to many comments delivered by Fed officials ahead of the symposium, it was the eagerly awaited speech by Fed Chair Jay Powell on Friday that was expected to move markets. His comments were not really different, however: ”Although inflation has moved down from its peak – a welcome development – it remains too high. We are prepared to raise rates further if appropriate and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down towards our objective.” He added more poetically that: “we are navigating by the stars under cloudy skies… we will keep at it until the job is done.” ECB President Christine Lagarde did not make any commitments for the next meeting of the central bank, simply echoing Fed Chair Powell’s views: “while progress is being made, the fight against inflation is not yet won.”
Chinese authorities have been scrambling to shake off the gloomy market mood, unveiling a further easing of mortgage policies, a cut in stamp duty for equity purchases and limits on major shareholders selling their stakes, to some moderate improvement in sentiment.
Poor outturn for some data and surveys
Surveys: the Philadelphia Fed Non-Manufacturing Activity Index slumped from +1.4 to -13.1. The Richmond Fed Manufacturing Index improved, though, from -9 to -7 with business conditions up from -8 to +1.
The S&P Global PMIs fell, with the manufacturing PMI dropping from 49.0 to 47.0 and the services PMI from 52.3 to 51.0, albeit still in expansion territory (above 50). The manufacturing survey showed the first drop in new orders in six months, a significant slowdown in employment and backlogs falling at the fastest rate since the pandemic.
The Chicago Fed National Activity Index recovered sharply from -0.33 to +0.12, above estimates. The Kansas City Fed Manufacturing Activity Index also rallied from -11 to 0. The Dallas Fed Manufacturing Activity Index improved from -20.0 to -17.2.
Housing: existing home sales fell 2.2% in July, following a -3.3% month. New home sales, however, surged 4.4%, above expectations, compared to -2.8% the prior month. According to the Mortgage Bankers Association (MBA), the contract rate on a typical 30-year mortgage rose to 7.31% during the week of 18 August (different mortgage reports show higher rates), which was partly behind a drop in the home purchase applications index to the lowest level since 1995. MBA mortgage applications slumped 4.2% during the same week.
Employment: the level of US non-farm payrolls has been revised down by 306K, which was less than expected. Jobless claims fell back, with initial claims down from 240K to 230K, the lowest level in three weeks, and continuing claims down from 1711K to 1702K.
Industry: durable goods orders dropped 5.2% in July, from +4.4% the prior month, with durables ex-transportation rising 0.5%, up from 0.2%.
Surveys are still weak, although some point to a bottoming in consumer confidence
Public finances: the public sector net borrowing requirement fell sharply in July, from £17.1bn to £3.5bn, well below budget forecasts due to higher tax receipts on company profits, wage growth and inflation.
Surveys: the Confederation of British Industry (CBI) trends survey was much weaker, with total orders falling from -9 to -15 and selling prices from +18 to +8. The CBI distribution surveys were also much worse, with retailing reported sales down from -27 to -44 and total distribution reported sales from -17 to -26.
The S&P Global PMIs unexpectedly slumped, with the manufacturing PMI down from 45.3 to 42.5 and the services PMI falling into contraction from 51.5 to 48.7.
The GfK consumer confidence improved from -30 to -25.
Inflation: the British Retail Consortium (BRC) shop price index eased from 7.6% to 6.9% with some softening in food prices.
Poor surveys throughout
Inflation: the German Producer Price Index (PPI) continued on its downtrend, falling 1.1% in July for a year-on-year move of -6.0%. Eurozone money supply turned negative, with M3 money supply down 0.4% year-on-year in July, from +0.6% previously.
Consumer: French retail sales fell 2.1% year-on-year in July, barely changed from the previous month.
Surveys: the PMIs for the eurozone showed a surprise deterioration in the services activity against the backdrop of a weak manufacturing sector, driven by large drops in the services PMI in Germany and France. Although the HCOB eurozone manufacturing PMI recovered from 42.7 to 43.7, it is still heavily in contraction territory. At the same time, the services PMI fell into contraction from 50.9 to 48.3.
Eurozone consumer confidence was lower at -16.0 vs. -15.1. French confidence surveys were weaker, with business confidence down from 100 to 99, manufacturing confidence from 101 to 96 but the production outlook indicator was flat at -9 and the own-company production outlook rose from -4 to +1. In Germany the GfK consumer confidence gauge fell further from -24.6 to -25.5.
A huge difference between China and Japan
China: industrial profits disappointed once again, down 6.7% year-on-year in July, although it was an improvement over the prior month at -8.3%.
Japan: the Jibun Bank PMIs improved further with the manufacturing PMI edging up from 49.6 to 49.7 and the services PMI higher at 54.3 vs. 53.8. The PPI services rose from 1.4% year-on-year to 1.7% in July. Surprisingly, the jobless rate increased from 2.5% to 2.7%, although the job-to-applicant ratio eased from 1.30 to 1.29.
Idiosyncratic moves in commodities
Oil prices corrected, even as crude inventories fell 6.13 million barrels, as per the Energy Information Administration (EIA). Gold recovered from its stint below US$1,900/oz despite a stronger US dollar. Copper has been quite resilient in light of poor Chinese economic data.