Markets had a good week, starting with President Trump fast-tracking some virus treatments and optimism about a vaccine, followed by hopeful comments both from the US and China about progress on the phase 1 trade deal between both countries and ending the week on a high, driven by Federal Reserve Chair, Jay Powell stating a long-term policy of patience with inflation. In addition, Trump hinted he would not stop the WeChat app for the US and Moderna released the results from its Phase 1 vaccine trial showing that it produced consistently high levels of neutralising antibodies among both young and old people. The Powell speech came at the annual central bank symposium at Jackson Hole, although this time by webinar. The Fed Chair stated that after eight years of inflation significantly below the 2% target in the US, he was ready to tolerate inflation above 2%. This confirmed what the markets already believed and led to a moderate sell-off in government bonds, a recovery in gold and a further boost to the equity market. Risk appetite returned with the US yield curve (2-10) steepening to 55 bps, government bond yields rising across the board, copper and oil stronger. After a correction, the gold price headed back up to the high US$1,900s, due to increased long-term inflation expectations. US shares were the star, with technology dominating and energy falling. Other markets were mixed, but sterling strength clipped UK investors equity returns. |
The week ahead |
Wednesday: UK Nationwide House Price Index Our thoughts: housing is always an important component of the UK economy but, against the current backdrop of furloughs and low services activity due to the pandemic, housing has become even more of a stalwart of the overall economy. After 5 heavily negative months, the Nationwide House Price Index rebounded sharply 1.7% last month. The current expectation is for a moderate 0.5% rise. Any significant deviation from that estimate could move risk markets and sterling. Thursday: US ISM services PMI Our thoughts: the recovery in services in the US has been softer and slower than in manufacturing due to the large employment drop in services hit by social distancing (restaurants, bars, hotels, business travel). It was therefore surprising to see the ISM services PMI at a very strong pre-COVID-19 level in the last two months. Given base effects, there is a risk that the next reading might disappoint. If the strength persists, though, it could boost the worst hit sectors (travel and leisure, hospitality) and confirm a broadening of the economic recovery. Friday: US Employment Report Our thoughts: the non-farm payrolls job creation number is always watched very closely by the markets. This time round, after a 20.8 million drop in jobs during April, which has only been partly recovered (9.3 million in the last 3 months), this statistic will move markets, one way or another. The expectation is for a moderate job creation of less than 1.5 million but a lot depends on whether President Trump’s executive orders extending the Federal employment supplement at a reduced rate of US$400/week will have an impact on the number of new jobs. |
The numbers for the week |
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Central banks/fiscal policy |
Jackson Hole speeches moved markets The annual Jackson Hole symposium took place by webinar on Thursday and Friday last week. It was attended by many top central bankers, including Chair Jay Powell of the US Federal Reserve (Fed), Bank of England (BoE) Governor Andrew Bailey and Bank of Japan’s Kuroda. Powell’s speech was eagerly expected and confirmed that the policy mandate is symmetric and that the 2% inflation target was not a ceiling. Powell said that “maximum employment is a broad-based and inclusive goal. This change reflects our appreciation for the benefits of a strong labour market, particularly for many in low- and moderate-income communities.” The Fed will target “inflation that averages 2% over time” and will aim to bring inflation above the 2% target following periods when inflation runs below that level, meaning that there should be inflation moderately above 2% for some time, given that since 2012 the Fed’s inflation gauge just averaged 1.4%. The Fed’s focus on employment was emphasised by the record long expansion in the last cycle which created the best job market in 50 years without any signs of unwanted inflation. The market perceived the speech as all but guaranteeing unchanged rates for many years and hence was seen as equity-friendly. The higher inflation tolerance helped the gold price rebound. The next day, BoE Governor Bailey, in his first major international speech since his appointment in March, said The Bank of England has plenty of firepower left, including negative interest rates if needed. After a rise in gilt yields following Powell’s speech, Bailey’s speech brought them back down. |
United States |
Weaker sentiment surveys but stronger data Surveys: the Conference Board measure of US consumer confidence dipped from 91.7 to 84.8 in August, with both the present situation and expectations components falling. Conversely, the University of Michigan sentiment survey edged up from 72.8 to 74.1, mostly driven by higher expectations. The Richmond Fed survey rose from 10 to 18 and the Kansas City Fed manufacturing activity index increased from 3 to 14. Industry: US durable goods orders rose +11.2% in July, with core capital goods orders ex aircraft up 1.9% and shipments up 2.4%. The manufacturing rally was helped not just by housing but also by the auto sector. Retail inventories rose 1.2% in July and wholesale inventories fell -0.1%. Employment: initial jobless claims were pretty close to consensus with an extra 1 million claims and continuing claims at 14.5 million. Housing: pending home sales were up a strong 5.9% in July. Consumer: personal income rose by 0.4% in July and personal spending by 1.9%. In previous months income had outstripped spending due to the various unemployment payouts. Prices: inflation rose moderately; the PCE (personal consumption expenditures) deflator was up 1.0% year-on-year in July, up from 0.9% previously, but the core PCE (which is the Federal Reserve’s inflation gauge) increased to 1.3% to 1.1%, still way below the Fed’s 2% target. |
United Kingdom |
Small improvements Sales: the CBI retailing reported sales fell from +4 to -6 and the total distribution reported sales from -3 to -9. Surveys: the Lloyds business barometer improved from -22 to -14. |
Europe |
More fiscal spending
Fiscal policy: the French government will present a €100bn stimulus plan this week and Germany added €10bn to the job-preserving subsidies to extend them to the end of the year. This adds to the record fiscal support in the region. Surveys: the IFO business climate survey in Germany from 90.4 to 92.6 with expectations and current assessment both contributing. French surveys are better. Consumer confidence unchanged at 94, business confidence up from 84 to 91 and manufacturing confidence from 82 to 93, above expectations. Eurozone economic surveys improved in August: economic confidence rose from 82.4 to 87.7, industrial confidence from -16.2 to -12.7, services confidence from -26.2 to -17.2 and consumer confidence stayed put at -14.7. In Germany, however, the GfK consumer confidence index fell from -0.2 to -1.8. Money supply: eurozone M3 money supply rose from 9.2% year-on-year to 10.2% in July. Consumer: French consumer spending disappointed, rising marginally from 0.5% year-on-year to 0.6%, below estimates of 2.6%. |
China/India/Japan/Asia |
China: Chinese industrial profits rose 19.6% in July. The official manufacturing PMI was slightly off at 51.0 vs. 51.1 but the non-manufacturing PMI rose from 54.2 to 55.2. Japan: Prime Minister Abe resigned due to ill health and his party, the Liberal Democratic Party (LDP) will immediately choose a successor. He has been the longest serving PM with eight consecutive years in office and has given his name to an economic policy system: Abenomics. The Japanese stock market fell upon the news. |
Oil/Commodities/Emerging Markets |
Gold had a bit of a roller-coaster ride over the week, falling to the low US$1,900s as a risk-on rally set in, but then recovering after Chair Powell’s speech confirming the looser inflation policy. Oil prices were helped by hurricane Laura, as it hit the oil-producing region of the Gulf of Mexico. |
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