Markets last week
Last week saw further market volatility, with equities generally falling, bond yields rising and commodities slumping, with the exception of oil.
Chinese markets seemed to have stabilised (until this morning) with even an improvement in the main services PMI. Other equities suffered, though, as concerns shifted away from the Chinese property and regulations angle to global growth fears and the legislative gridlock in the US carrying the risk of a default in US treasury debt. President Biden had to sign a continuing resolution to prevent the government from shutting down, but the fight in Congress on the infrastructure bill is still going on and the risk of a US default is looming large, as it is at the core of the negotiation between Republicans and Democrats in Washington, D.C.
The twin virus-related announcements of 700,000 US deaths from the pandemic and the unveiling of a COVID-19 antiviral pill with high efficacy levels, helped to remind us that the global economy is still recovering from the COVID-19 crisis and that bottlenecks and shortages are a natural outcome of the reopenings.
Economic data were surprisingly strong, with a better manufacturing PMI in the UK, ISM manufacturing PMI in the US, Chinese services PMI and stable eurozone PMIs at a high level. Inflation, however, continued to spook some market participants, rising above 3% in various eurozone countries and with the US core PCE (which is the Fed’s target gauge) staying at a high 3.6%.
In markets, the US dollar was the best developed currency. Government bond yields rose again, with gilts moving up eight basis points over the week. Equities were generally lower, with the exception of Hong Kong and China shares which recovered a small part of their previous losses. Energy was the only rising sector amid a sea of red, with information technology at the bottom.
The third quarter was volatile. In US dollar terms, equities were down 0.6%; in sterling terms, though, they were up 2.2%. Japan had the best returns, up 7.5% in sterling terms, despite a fall recently; emerging markets fared worst because of China; the US beat the UK, which in turn beat Europe. Financials, energy, information technology and healthcare were the best sectors over the quarter and materials the worst. Bonds were flat to slightly positive, despite the strong move up in yields over the past month. Brent oil rose 2.8% but copper was down 5%. Gold was down in dollar terms but up in sterling terms.
The week ahead
Thursday: Caixin China PMI Services
Our thoughts: was the CFLP (China Federation of Logistics and Purchasing) non-manufacturing PMI surging from 47.5 to 53.2 a fluke? The Caixin services PMI should be able to answer that question. In a world of supply chain disruptions, skills mismatches and bottlenecks, manufacturing has been resilient and services have generally suffered. China is the exception, where the roles have been reversed. Before economists spend a lot of time analysing the potential reasons why, it would be good to know whether the numbers still apply. The expectation is for a recovery in the Caixin services PMI, although not quite to the 50 threshold between expansion and contraction.
Thursday: Japan surveys (eco watchers, leading index and coincident index)
Our thoughts: nobody buys Japanese equities for the strength of the domestic economy. Nevertheless, macro data still matter for market sentiment and surveys should give a picture of how consumers and businesses alike are faring given supply chain issues. The leading index and coincident index are forecast to get worse but the Eco Watchers Surveys are expected to soar, both for the current situation and the outlook. Will these apparently incongruous numbers have a different outturn? Japanese statistics can sometimes baffle economists but nevertheless move markets.
Friday: US employment data
Our thoughts: it’s currently hard to tell whether employment matters more than inflation in the US. It’s normally always the case but the recent price spikes seem to have flipped the priorities on their head. Beyond the current bottleneck-induced inflation, will the jobs market run out of unemployed people soon? This would be more likely to stir the Fed into hiking rates than the current supply chain issues. The market is expecting half a million new jobs to be created after a disappointing previous month. Of the 22 million jobs lost last year during the pandemic, some 16 million have been recovered, so we are still somewhat away from tightness in the jobs market, but the speed of job creation will determine whether we have lift-off in rates one year hence or later. Other data will be mined, such as average hourly earnings, labour force participation rate and in which sectors the new jobs are being created.
Markets for the week
|In local currency||In sterling|
|Index||Last week||YTD||Last week||YTD|
|Hong Kong equities||1.60%||-9.80%||3.20%||-8.90%|
|Emerging market equities||-1.50%||-3.50%||-0.60%||-2.80%|
|Government bond yields (yield change in basis points)|
|Current level||Last week||YTD|
|10-year US Treasury||1.46%||1||55|
|10-year German Bund||-0.22%||0||35|
|Current level||Last week||YTD|
|Commodities (in USD)|
|Current level||Last week||YTD|
|Brent oil (bbl)||79.28||1.50%||53.10%|
|WTI oil (bbl)||75.88||2.60%||56.40%|
|Copper (metric tonne)||9128||-2.20%||17.50%|
Sources: FTSE, Canaccord Genuity Wealth Management
Central banks/fiscal policy
Deluge of communications from the Fed. BoE Governor sounds hawkish
Two US Federal Reserve (Fed) members took early retirement, ostensibly for equity trading: Robert Kaplan from Dallas and Eric Rosengren from Boston. Both members ranked on the hawkish side of the Fed, so, this could be moderately dovish for monetary policy.
Various other Fed members spoke, reinforcing the taper message, but clarifying that raising rates is a long way into the future. Lael Brainard said “no signal about the timing of liftoff should be taken from any decision to announce a slowing of asset purchases.” New York Fed President John Williams and Chicago Fed President Charles Evans echoed guidance issued last week. Williams said “there is still a long way to go before reaching maximum employment,” which is a precondition for rate increases. Evans said he had pencilled “a first move” toward higher rates into his projections for 2023 and a “very gentle incline” thereafter. Minneapolis Fed President Neel Kashkari saw inflation easing: “we don’t want to overreact to short-term price movements.”
Bank of England (BoE) Governor Andrew Bailey adopted a more hawkish tone. He said that a rate rise would happen very soon “if the committee felt that inflation was becoming embedded in companies’ pricing plans and general wage demands”. But he qualified that by saying that “monetary policy should not respond to supply shocks which do not become generalised through their impact on inflation expectations.”
President Christine Lagarde said the European Central Bank (ECB) should be wary of withdrawing stimulus too quickly, reasserting her view that inflation isn’t getting out of control in the euro area. There are “no signs that this increase in inflation is becoming broad-based across the economy. The key challenge is to ensure that we do not overreact to transitory supply shocks that have no bearing on the medium term.”
US Treasury Secretary Janet Yellen warned that her department will effectively run out of cash around 18 October unless legislative action is taken to suspend or increase the federal debt limit, putting pressure on lawmakers to avert a default on U.S. obligations. A day of Fed hearings on Capitol Hill created more tension than it solved, with Fed Chair Jay Powell looking less likely to be reappointed by President Biden.
Japan has a new prime minister: Fumio Kishida who as the new head of the ruling LDP will automatically become PM. Kishida is a supporter of monetary easing and the 2% inflation target (which is way above Japan’s actual inflation rate).
Mixed surveys and high inflation, but housing buoyant and jobs improving
Industry: durable goods increased for the fourth month, up 1.8% and 20.7% year-on-year. Shipments fell slightly but unfilled orders and inventories rose. Ex transport, durable goods were up only 0.2% and 17.3% year-on-year. Construction spending rose 8.9% year-on-year, down from 10% the previous month. Total vehicle sales, as reported by Wards, fell further from 13.06 million annualised to 12.18 million.
Surveys: the Dallas Fed manufacturing index slowed for the fifth month, falling 4.4 to +4.6, the lowest level in over a year, with orders falling but prices, production and employment rising. The Conference Board’s consumer confidence index fell for the third month, down 5.9 to 109.3, with both the present situation dropping 5.5 to 143.4 and the expectations index down 6.2 to 86.6. The Richmond Fed manufacturing index fell 12 to -3, the first negative number (i.e. indicating contraction) in a year and a half. The MNI Chicago PMI slowed from 66.8 to 64.7, although the index still indicated the fifteenth straight month of growth.
The bellwether University of Michigan sentiment index improved from 71.0 to 72.8, with current conditions rising from 77.1 to 80.1 and expectations from 67.1 to 68.1.
The ISM (Institute for Supply Management) manufacturing PMI was stronger than expected, rising from 59.9 to 61.1, with new orders remaining high at 66.7, employment climbing over 50 from 49.0 to 50.2, prices paid increasing again from 79.4 to 81.2 and backlog orders falling from 67.8 to 64.8. Customer inventories are still very low.
The Markit manufacturing PMI edged up further from 60.5 to 60.7.
Housing: US home prices, as measured by the Case-Shiller index of property values, surged 19.7% year-on-year in July, the biggest jump in more than 30 years. The 20-city price measure gained 19.9% in comparison. The FHFA (Federal Housing Finance Agency) house price index increased again, up 19.2% year-on-year, a record high. Pending home sales rose 8.1% in August, but are still down 6.3% year-on-year. MBA mortgage applications fell 1.1% over the week and down 4.5% year-on-year. 30-year mortgage rates have edged up to 3.01%, from 2.88%, according to Freddie Mac (Federal Home Loan Mortgage Corporation).
Employment: initial jobless claims posted a third consecutive increase, from 351K to 362K, mainly due to two states: California and Michigan. The increase in claims in Michigan was related to chip shortages and production cutbacks in the auto industry. The expiration of pandemic-era programmes on 6 September led to a small drop in continuing claims, from 2820K to 2802K.
Inflation: the PCE (personal consumption expenditures) deflator rose a little from 4.2% year-on-year to 4.3%, the highest rate since 1991, with the core PCE (i.e. the Fed’s inflation gauge) staying at 3.6%, one-tenth above estimates. Personal income was up 0.2% in August, down from 1.1% the previous month, whereas personal spending rose 0.8%, up from a small negative previously. The University of Michigan survey inflation expectations eased slightly from 4.7% to 4.6% for one-year inflation and moved up from 2.9% to 3.0% for 5-10-year inflation.
Few numbers but generally positive
Surveys: the Markit manufacturing PMI was stronger at 57.1 vs. 56.3.
Housing: the UK Nationwide house price index took a breather in September, up 0.1% with the year-on-year growth rate falling to 10% from 11%.
Growth: second quarter GDP has now been revised up to 5.5% , with growth in government spending surpassing the growth of consumer spending whilst investment lagged. UK GDP is still down 3.3% since pre-COVID-19 before third quarter numbers are published.
European surveys holding up despite inflation soaring
Surveys: in Germany, the GfK Consumer Confidence Barometer for October rose from -1.1 to +0.3, above expectations. Confidence in the euro-area economy unexpectedly rose in September. The European Commission’s monthly sentiment gauge rose to 117.8 from 117.6, despite bottlenecks and other supply issues. Selling price expectations rose across industry, services and retail. The eurozone manufacturing PMI was almost unchanged at 58.6 vs. 58.7.
Inflation: the CPI (consumer price index) rose sharply in many European countries, with Germany jumping to 4.1% from 3.4%, France up to 2.7% from 2.4%, Spain up to 4.0% from 3.3% and Italy up to 3.0% from 2.5%. The overall eurozone CPI jumped to 3.4% from 3.0%.
Unemployment: Germany’s unemployment remains unchanged at 5.5% and Italy’s at 9.3%.
Sales: German retail sales increased 1.1% in August for a small 0.4% year-on-year increase.
Surprise Chinese services PMI and better Tankan in Japan
China: industrial profits growth slowed to 10.1% in August from 16.4% the previous month.
The non-manufacturing PMI rebounded to 53.2 from 47.5, whilst the manufacturing PMI was essentially stagnant (49.6 down from 50.1 for the CFLP and 50.0 up from 49.2 for the Caixin). Anecdotally, half of China’s regions are suffering power shortages now, which has a significant impact on industry.
Japan: August economic data took a turn for the worse, with industrial production down 3.2%, rising 9.3% year-on-year (down from the previous 11.6%), and retail sales down 4.1%, still negative year-on-year, which is an outlier globally. Housing starts were up 7.5% year-on-year in August, down from 9.9% the previous month. The jobless rate remained at 2.8%, with the job-to-applicant ratio tightening from 1.15 to 1.14.
The Tankan survey for the third quarter generally showed an improvement over the previous quarter and expectations. The large manufacturing index rose from 14 to 18, the large non-manufacturing index from 1 to 2, the small manufacturing index from -7 to -3 and the small non-manufacturing index from -9 to -10. The consumer confidence index rose from 36.7 to 37.8.
Gold did not follow government bond prices down last week, eking out a small gain on the week.
Oil was more defensive than industrial metals, continuing its positive run for the past 6 weeks in expectation of this week’s OPEC+ meeting. Copper, aluminium and nickel were down sharply whereas iron ore had a strong recovery.