The week ahead
Tuesday: ZEW expectations for the eurozone and Germany, plus current situation for Germany
Our thoughts: ZEW (Zentrum für Europäische Wirtschaftsforschung) used to publish surveys for Germany only but have now broadened it to the eurozone. The value of checking this particular report at this time, is that we have seen major drops in emerging markets surveys, as well as in US regional Fed surveys. So far, Europe and the UK have remained buoyant, with PMIs close to 60 for manufacturing and strong services surveys for the eurozone. The ZEW expectations survey may not have the perfect forecasting track record but could be an early signal of the global slowdown broadening to the eurozone, and particularly Germany, which is highly dependent on exports of capital goods to emerging markets.
Wednesday: China CPI (consumer price index) and PPI (producer price index)
Our thoughts: once again, we should look at inflation in China. Producer inflation is feeding into price rises in supply chains globally and China, as the biggest manufacturing exporter is obviously the main culprit. There is, however, an interesting conundrum, insofar as the producer prices don’t seem to feed into consumer prices within China itself. The latest data showed 1% CPI vs. 9% PPI. Inflation worries in the US and other western countries are currently being exacerbated by higher PPI numbers, but does PPI really matter? China may be a good gauge of that equation.
Friday: US PPI (producer price index)
Our thoughts: the market narrative on US equities has gone from worrying about inflation to stagflation, i.e. low growth with rising prices. Actual stagflation could be devastating for investors, so it is important to figure out ahead whether this is a realistic scenario. In that respect, the global supply chain bottlenecks are constantly adding fuel to the inflation debate. Whether PPI adds to consumer prices is still unclear, but markets will nevertheless react as if it does, so the US PPI number will be closely followed, particularly ahead of the next US Federal Reserve (Fed) meeting where monetary policy changes may be decided.
|In local currency||In sterling|
|Index||Last fortnight||YTD||Last fortnight||YTD|
|Hong Kong equities||4.2%||-4.9%||2.6%||-6.6%|
|Emerging market equities||7.8%||1.9%||5.9%||0.3%|
|Government bond yields (yield change in basis points)|
|Current level||Last fortnight||YTD|
|10-year US Treasury||1.32%||7||41|
|10-year German Bund||-0.36%||13||21|
|Current level||Last fortnight||YTD|
|Commodities (in USD)|
|Current level||Last fortnight||YTD|
|Brent oil (bbl)||72.61||11.4%||40.2%|
|WTI oil (bbl)||69.29||11.2%||42.8%|
|Copper (metric tonne)||9431||4.4%||21.4%|
Sources: FTSE, Canaccord Genuity Wealth Management
Central banks/fiscal policy
Jackson Hole speech by Fed Chair ushers in tapering of asset purchases
At the annual Jackson Hole retreat for the US Federal Reserve (Fed), Fed Chair Jay Powell noted that “central banks cannot take for granted that inflation due to transitory factors will fade.” This means that sticky inflation expectations are starting to feature on their radar. Powell said that tapering QE, or asset purchases is likely to begin before year-end, since large bond purchases are not a policy that fits with a supply-constrained economy. Powell did, however, mention that raising interest rates is a totally different decision from tapering QE, saying “the timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate liftoff, for which we have articulated a different and substantially more stringent test.”
Markets were relatively unperturbed by the announcement, although government bond yields rose in the subsequent days.
US economic slowdown starting to be seen in surveys, consumer confidence and payrolls
Surveys: the Chicago Fed National Activity Index surged from -0.01 to 0.53. The Markit services PMI fell sharply from 59.9 to 55.1 and the Markit manufacturing PMI dropped from 63.4 to 61.1.
The Dallas Fed manufacturing survey was down 18.3 to +9.0, slowing down for the 4th month in a row. The Richmond Fed manufacturing index slumped from 27 to 9. The Kansas City Fed manufacturing activity index was more resilient at 29 vs. 30.
The Chicago Business Barometer Index PMI fell for the second time in 3 months by 6.6 to 66.8.
US consumer confidence dropped to a six-month low. The Conference Board’s index fell to 113.8 from a revised 125.1 reading in July, way below estimates. Current conditions fell to 147.3, the lowest reading since April, while economic expectations dropped to 91.4, a 7-month low. This follows the University of Michigan consumer sentiment index at 70.3 vs. 81.2 with current conditions falling to 78.5 from 84.5 and expectations slumping to 65.1 from 79.0.
The ISM (Institute for Supply Management) manufacturing PMI was encouraging at 59.9 up from 59.5 against an expected fall. 15 out of 18 manufacturing industries were growing. The supplier deliveries index stood at 69.5 after topping out in May at 78.8. Prices are starting to slow down, at 79.4, down 6.3. The backlog index rose to 68.2, one of the highest readings ever. New orders rose to 66.7. Manufacturers are having problems competing for labour with unemployment subsidies, hence the employment index falling from 52.9 to 49.
The ISM services PMI fell from 64.1 to 61.7 as estimated, still an exceptionally high level, as the previous month was a record high.
Industry: durable goods orders fell 0.1% in July, with durables ex transportation up 0.8% and capital goods shipments non-defence ex aircraft up 0.9%. Factory orders rose 0.4% in July, or 0.8% ex transportation. Auto sales as published by Ward’s Automotive Group, fell from 14.75 million to 13.06 million (annualised).
Consumer: personal income rose 1.1% in July with personal spending up only 0.3%.
Housing: the Case-Shiller Index of house prices for the 10-city composite accelerated to 18.48% year-on-year in June from 16.6% and the 20-city index up to 19.08% from 17.14%. The Federal Housing Finance Agency’s house price increased for the 13th consecutive month, up 1.63% in June and 18.75% year-on-year, the fastest pace since 1992 when records began.
Existing home sales rose 2% in July. New home sales rose 1%. Pending home sales fell for the second month in a row, down 9.5% year-on-year.
Mortgage applications fell 2.4% after rising 1.6% the previous week with the 30-year mortgage rate unchanged at 3.03%. US construction spending rose 0.3% in July, up 9% year-on-year with residential construction increasing the most.
Inflation: the PCE deflator rose from 4.0% to 4.2% in July, with the PCE core deflator unchanged at 3.6%. The PCE core deflator is the US Federal Reserve’s gauge for inflation. Average hourly earnings rose 0.6% in August to 4.3% year-on-year, up from 4.1% the prior month.
Employment: initial jobless claims fell to a pandemic low of 340K down from 354K with continuing claims down from 2908K to 2748K. Challenger job cuts fell 17% in August or 86.4% year-on-year, with job cuts at a 24-year low. Both sets of statistics were brutally contradicted by a massive disappointment in the monthly non-farm payrolls for August: expected at upwards of 700K, the reading came at a lowly 235K jobs created, falling short of even the most pessimistic forecasts, albeit with 135K of positive revisions to the previous two months. No new jobs were created in the crucial leisure and hospitality sector which had been leading previous payroll data and the COVID-19 delta variant was widely held responsible.
The unemployment rate (U-3) eased as expected from 5.4% to 5.2% and the underemployment rate (U-6) from 9.2% to 8.8% with an unchanged labour force participation rate at 61.7%.
A slowdown in services is being flagged by the PMI
Surveys: the Markit manufacturing PMI edged up to 60.3 from 60.1 whereas the Markit/CIPS services PMI fell sharply from 59.6 to 55.0.
The CBI trends series improved: total orders edged up from 17 to 18, selling prices likewise from 42 to 43. The Lloyds Business Barometer increased from 30 to 36.
Consumer: CBI retailing reported sales soared from 23 to 60 and total distribution reported sales rose from 41 to 45.
Housing: mortgage approvals fell for a second month in July but remained well above pre-pandemic levels. Banks and building societies authorised 75,152 home loans, the least in a year and down from 80,272 in June, but approvals were still above levels of around 67,000 averaged in the six months before the pandemic.
UK house prices rebounded strongly in August with a 2.1% increase in the Nationwide Building Society house price survey, the second-largest gain in 15 years, following a 0.6% decline in July. The annual pace of growth accelerated to 11% from 10.5%.
Will rising inflation spoil Europe’s upbeat surveys in manufacturing and services?
Surveys: the Markit eurozone manufacturing PMI eased from 62.8 to 61.4, whereas the Markit eurozone services PMI was lower at 59.0 vs. 59.8. Consumer confidence fell from -4.4 to -5.3, economic confidence from 119 to 117.5, industrial confidence from 14.5 to 13.7 and services confidence from 18.9 to 16.8. These are all still very high levels.
Inflation: the eurozone CPI (consumer price index) increased for the 8th time in the past 9 months, up 0.3% in August. The headline CPI rose to 3% from 2.2%, the highest since November 2011. Core CPI ex energy and food rose to 1.6% vs. 0.7% the previous month. The PPI (producer price index) jumped from 10.2% year-on-year to 12.1%.
Employment: German unemployment fell for a fourth straight month, with a decline of 53,000 in August. It pushed down the jobless rate to 5.5%, the lowest since March last year. At the same time, companies have been making less use of furlough. The number of people in the programme declined to just over 1 million in July, the lowest since Feb. 2020. The unemployment rate in the eurozone fell from 7.1% to 6.9%, the lowest level since May 2020.
Consumer: eurozone retail sales fell 2.3% in July, bringing the year-on-year growth to 3.1%, down from 5.4% previously.
Chinese services going into reverse whilst the region is affected by supply chain issues
China: industrial profits year-on-year were up 16.4% in July vs. 20% previously. The official (CFLP) manufacturing PMI was softer at 50.1 vs. 50.4 previously, but the non-manufacturing PMI went into contraction in August to 47.5 from 53.3. The tumble was driven by weakness in services, even as policy support buoyed construction. The unofficial Caixin manufacturing PMI fell from 50.3 to 49.2. The Caixin services PMI confirmed the official CFLP non-manufacturing PMI with a drop from 53.1 to 47.2.
Japan: retail sales were up for the second month, up 2.4% year-on-year. The PPI (producer price index) for services was 1.1%, down from 1.3%.
The jobless rate fell from 2.9% to 2.8% with the job-to-applicant ratio edging up a smidge from 1.13 to 1.15. Industrial production fell 1.5% in July for a year-on-year growth of 11.6%, down from 23.0% previously.
Housing starts were stronger, rising 9.9% year-on-year from 7.3%. August vehicle sales were up 4.4% year-on-year, up from 3.3% the previous month.
The Jibun Bank manufacturing PMI was better at 52.7, up from 52.4. The Jibun Bank services PMI fell a little from 43.5 to 42.9. The consumer confidence index was easier at 36.7 vs. 37.5.
Rest of Asia: manufacturing PMIs have been softening in Asia overall, with Singapore dropping 12 points to 44.3, India down 3 points to 53.3 and in South Korea, new orders are at 10-month low and production is falling. Most of it is due to bottlenecks in manufacturing and shipping for capital equipment which is Asia’s big export area.
Oil recovering from a bad quarter
OPEC confirmed its decision to add 400,000 bbl per day of output, which weighed on oil prices for a couple of days. Crude, however, enjoyed a back-to-back weekly gain on a drawdown in inventories. There is also the thought that the extra output pledged by OPEC may be difficult to achieve with current supply constraints. Hurricane Ida in Louisiana also had an impact. As a result, Brent has gone back into backwardation (which is where forward prices are lower than spot prices) and is generally bullish for a commodity.
Gold received a bid from the disappointing payrolls data in the US on Friday.