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Markets last week |
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The market recovery was swift, but not definitive, as we still saw some wobbles in the middle of the week. During the course of this correction, we have seen the technology sector bear the brunt of the losses, but the energy sector fared every bit as poorly. The most defensive sector was materials, indicating that cyclicality is still positive throughout the industrial world. The equity moves were not followed in other markets. The US dollar, which is normally a risk-off currency, did not rise. Government bonds were generally not bid on by investors and growth-sensitive commodities, like copper, did not fall in sympathy with equities. Fundamentally, very little has changed during the market volatility. Economic data have not shown any deterioration anywhere. As we are approaching the US election, the uncertainty regarding the result rises, however, and may start to affect markets, in particular after such a strong run during the summer. Sterling bore the brunt of currency moves, as comments by PM Boris Johnson on the EU negotiations heightened risks of a hard Brexit and weighed on sterling as well as UK equities. The pound fell against both the US dollar and the euro by 3.6%. Government bond yields eased somewhat, gold was flat and oil fell more than 6%. Over the week, European and Japanese equities did best, with the US still in the eye of the storm of the correction. |
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The week ahead |
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Monday: Chinese monthly data Our thoughts: the monthly data dump from China covers industrial production, retail sales, investment and the jobless rate. It provides an excellent picture of growth in different sectors of the Chinese economy. Whereas the manufacturing side in China has recovered very strongly, other areas, such as the consumer, services and employment, have been less buoyant. It is important to see a pivot from industry to the consumer and hence the retail sales number will be watched carefully. Also, the Chinese jobless rate surged from 5.2% at the beginning of the year to 6.2% in February at the peak and has been declining since. The estimated rate is 5.6%, which would show a progressive normalisation of the employment in China.
Wednesday: UK inflation (CPI, RPI, PPI) Our thoughts: UK inflation tends to be higher than in comparable developed countries and it will be interesting to watch the movement here in light of the recovery from the lockdown. The CPI (consumer price index) is the most relevant number, but the RPI (retail price index) is used in the property market and is always higher. Many rentals are indexed on RPI and its absolute level will be crucial to the sustainability of many leases. The latest CPI was 1.0% and the RPI was 1.5%. An increase is possible given the resumption of many retail activities (such as the eat-out-to-help-out scheme). Most of these hikes would be expected to be temporary, but a sharp spike might spook markets. Wednesday: US Federal Reserve (FOMC) meeting
Our thoughts: the US Federal Reserve (Fed) Open Market Committee (FOMC) is meeting on Wednesday and will be issuing a full commentary. No changes in rates or quantitative easing are expected, but, in light of the recent speech by Chair Jay Powell at Jackson Hole, Wyoming, the language used by the Fed Chair after this meeting will be watched very carefully. The concept of Average Inflation Targeting and even Flexible Average Inflation Targeting was broached in the Jackson Hole speech, but its practical implementation will be followed closely and hence the Fed’s language may have a further impact on markets. Markets are expecting the confirmation that an upward drift in inflation will be tolerated. |
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The numbers for the week |
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Central banks/fiscal policy |
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The ECB does not wish to intervene in currency markets The European Central Bank (ECB) left its rates unchanged. The President, Christine Lagarde, commented that the European economy would see an upgrade in growth in 2020, before stabilising in 2021. She also said that the ECB does not target a particular exchange rate for the euro and does not wish to overreact on its strength. This helped the single currency bounce back after a previous small drop. |
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United States |
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Jobs recovery slowing despite small business optimism Surveys and housing: there was a strong NFIB Small Business Optimism survey in the US, with the index rising from 98.8 to 100.2, still shy of the peak earlier this year, let alone in 2018, but an improvement nonetheless. MBA mortgage applications rose 2.9% during the week of 4 September. Employment: the JOLTS job openings rose from 6 million to 6.6 million, although it’s a July reading. Initial jobless claims were unchanged at 884K and continuing claims rose from 13.3 million to 13.4 million, although the market was expecting a fall in claims. The Pandemic Unemployment Assistance programme also increased, with claims rising 90,000. Inflation: input inflation fell, with the PPI (producer price index) rising by 0.3% in August, down from 0.6% the previous month, and core PPI (ex food, energy, trade services) remaining at 0.3%. The CPI (consumer price index) rose from 1.0% to 1.3% and the core CPI (ex food and energy) from 1.6% to 1.7%. Real average weekly earnings fell from 4.2% to 3.9%. |
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United Kingdom |
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Better numbers all round, but some of them are old now The BRC like-for-like sales YoY rose from 4.3% to 4.7% in August, above estimates. The RICS house price balance soared from 13% to 44%, above estimates. GDP was up 6.6% in July, driven by construction output 17.6%, with manufacturing up 6.3% and services up 6.1%, but of course these are old numbers now. The visible trade balance was worse for the month, with a deficit of £8.6bn vs. £6.5bn. The Bank of England/TNS inflation reading for the next 12 months eased from 2.9% to 2.8%. |
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Europe |
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Small improvements The Sentix eurozone investor confidence index was a bit better at -8.0 vs. -13.4. German industrial production was weaker in July, at 1.2% vs. the previous month up 9.3%. French industrial production was up 3.8% in July, down from 13.0% the previous month. The German trade balance surged from a surplus of €15.5bn to €19.2bn in July. The French trade balance also improved, from a deficit of €8bn to only €7bn. |
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China/India/Japan/Asia |
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Better producer prices in China and machine tool orders in Japan China: Chinese foreign exchange reserves were almost unchanged at US$3.16trn (by far the largest foreign exchange reserves in the world). The Chinese PPI was a smidge worse than expected, at -2.0% in August up from -2.4%, with CPI in line with estimates at +2.4% vs. +2.7%. Japan: the July Leading Index CI rose from 84.4 to 86.9 whereas the coincident index was more subdued, at 76.2 vs. 76.6. The eco watchers survey (outlook) rose from 36.0 to 42.4 in August. Machine tool orders, recovered from -31.1% YoY in July to -23.3% in August, showing that manufacturing is indeed doing better globally. Money supply rose, with the money stock M2 up from 7.6% year-on-year to 8.6% in August and M3 up from 6.5% to 7.1%. |
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Oil/Commodities/Emerging Markets |
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Oil prices were hit by continued oversupply and the end of the driving season in the US. Copper was more resilient, though. |
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