Markets last week |
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The week was marked by a sharp drop in Chinese shares due to Beijing’s regulatory crackdown. Technology and education (after-school tuition) company shares retreated strongly at the beginning of the week, dragging China, Hong Kong and other Far Eastern stock markets down. Western investors showed concerns that the Chinese authorities could be driving foreign investors out of various sectors. The Chinese market watchdog held calls with banks, including foreign banks, to reassure them and indeed Chinese markets partly recovered later in the week.
For the rest of the world, some of the largest companies reported their Q2 earnings, which were supportive for equities. Approximately one-half of firms have reported so far and anywhere from 60% to 90% of them have beaten estimates, depending on the region, with the US at the top of the range. Energy, materials, financials and discretionary sectors have done best.
Economic data and surveys were still positive globally during the week. An apparently disappointing US Q2 GDP growth was actually still very strong once a drawdown in inventories was taken into account. The Core PCE (personal consumption expenditures) deflator, which is the main inflation gauge for the US Federal Reserve (Fed) hit a 30-year high. Previously, the Fed had produced an uneventful meeting which hardly moved markets, whilst, under the surface, the US Government and Congress have been working on a bipartisan infrastructure legislative bill, which is starting to get mentioned.
At the end of the week, Asian shares were the biggest losers, in particular the greater China markets, with the UK the most resilient. The sectors that did best were materials and energy, followed by financials whereas information technology was at the bottom. Government bond yields eased. The US dollar’s recent strength was dented, with sterling resuming its leadership among developed currencies. Commodities were stronger overall, with copper and oil reflecting ongoing global growth. |
The week ahead |
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Monday: US ISM (Institute for Supply Management) manufacturing PMI
Our thoughts: the ISM manufacturing PMI peaked three months ago at 64.7, but remained above a very high 60 level. The expectation is for more of the same this month, which would cement a protracted economic upswing, rather than a quick flash-in-the-pan. Beyond the top level, though, the ISM provides a rich tapestry of details about the economy: prices paid, new orders, backlogs vs. inventories, employment, etc. Will sky-high prices abate even a little? Will the stuttering employment component finally move higher? Given the massive drop in inventories at the GDP level, are manufacturers rebuilding their pipeline or are the bottlenecks thwarting them? Are the new orders large enough to guarantee a long tail of future business? This ISM could guide investors to a view on the economy for the balance of the year.
Thursday: Bank of England Monetary Policy Committee (MPC) meeting
Our thoughts: the MPC may not be as visible as the Fed on monetary policy and most large British companies have a significant international business component. The MPC’s decisions, however, will still move UK markets. Right now, there is an expectation of the Bank of England raising rates roughly at the same time as the Fed. With the Fed being very patient, considering inflation to be “transitory” and the furlough scheme in the UK just beginning to unwind, you could make the case that the MPC will also be very patient. In addition, they have just lost their most hawkish member. In principle, therefore, the BoE meeting should be a non-event, but will it or will we have some surprise? The asset purchase programme may start to be reduced (‘tapering’) before the US and that might rattle markets.
Friday: US employment data
Our thoughts: a stonking 950K new jobs are expected to have been created in July. Are investors going to be disappointed once again? Jobless claims are not quite behaving as the markets would like them to, stuck round the 400K mark for over a month now. Will enough new jobs have been created whilst children are not back to school, pandemic unemployment insurance is still being paid in many states and COVID-19 cases are soaring in certain areas (South particularly)? The unemployment rate (U-3) is estimated to fall from 5.9% to 5.6%, although it is the underemployment rate (U-6), currently at 9.8%, which the Fed follows closely. Also, what will hourly earnings tell us about wage inflation? All these issues may impact the markets on Friday. |
Markets for the week |
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Central banks/fiscal policy |
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No waves from Fed
The US Federal Reserve (Fed) meeting hardly moved markets. Chair Jay Powell noted that the economy “has made progress” toward its goals, although short of the “substantial progress” required for a change in policy. Powell said that the labour force participation was still being affected by health concerns, childcare issues and unemployment insurance, but he expected a very strong labour market. The supply side of the global economy was unable to keep up with demand, due to robust re-openings and large bottlenecks. Inflation is still viewed as transitory. The clock has probably started ticking on the Fed tapering its purchases of government and mortgage bonds, but it was not officially announced. Out of 11 Fed voting members for next year, seven are in favour of keeping rates next year as they are now and that includes the Chair who has extra voting power.
St. Louis Fed President James Bullard offered a different opinion, recommended that the Fed start tapering its asset purchases this autumn and be finished by the first quarter 2022. He commented that “inflation is going to moderate, but we don’t know how much it’s going to moderate and if it doesn’t moderate then we’re going to have to gently bring inflation back down to 2%”.
The US Congress made progress on a potential US$548bn infrastructure bill, but the final announcement is yet to come. |
United States |
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US economy firing on most cylinders (growth, surveys, consumption) with housing and employment a tad softer
Inflation: the PCE (personal consumption expenditures) deflator rose again but did not quite exceed or even match estimates, unlike previous readings. The headline PCE deflator remained at 4.0% after a 0.5% month in June, whereas the core PCE deflator (which is the Fed’s main inflation gauge) edged up from 3.4% to 3.5%, below expectations but a 30-year high nonetheless. The embedded inflation expectations within the |University of Michigan sentiment index eased a smidge, from 4.8% to 4.7% for 1-year inflation and from 2.9% to 2.8% for 5-10-year inflation.
Surveys: the Dallas Fed Manufacturing Index slowed for the third month in a row, from 31.3 to 27.3. The Richmond Fed manufacturing index rose from 26 to 27, which also happens to be a 17-year high.
The Conference Board’s consumer confidence index improved for a sixth straight month to a fresh pandemic record to 129.1 from 128.9. The gauge of current conditions rose to 160.3, also a pandemic high. The share of consumers who said jobs were “plentiful” increased to a 21-year high and the share who plan to buy appliances was the highest since the end of 2017.
The MNI Chicago PMI soared from 66.1 to 73.4, way above estimates.
The University of Michigan sentiment index rose marginally from 80.8 to 81.2 driven by a small increase in expectation amid an unchanged current conditions index.
Housing: new home sales fell for the third consecutive month, down 6.6% to 674K annualised, down 19.4% year-on-year to the lowest since April 2020. Median new home prices fell 5% to US$361,800. Pending home sales fell 1.9% in June, after a strong previous month, up 8.3%.
The Case-Shiller index of house prices for May rose yet again to 16.61% year-on-year from 14.84% the previous month, with the narrower 20-city index at 16.99%. The FHFA (Federal Housing Finance Agency) house purchase-only price index was up 1.7% in May compared to 1.8% the previous month.
The average for a 30-year mortgage loan in the US rose to 2.8% for the first time in a month. MBA mortgage applications rose 5.7% after a big drop the previous week.
Industry and trade: durable goods orders rose 0.8% in June, though the prior reading was revised up to 3.2%. Core capital goods shipments rose 0.6%. The advance goods trade balance (deficit) widened from $88.2bn to $91.2bn.
Employment: once again, jobless claims disappointed. Initial claims remained higher than expected at 400K, down from 424K, whilst the four-week average increased 8k to 395k. Continuing claims rose from 3263K to 3269K, above estimates.
Growth: the Q2 GDP missed forecasts above 8%, at 6.5% (annualised), due to a drawdown in private inventories, following a revised 6.3% in Q1. Personal consumption was very strong, though, up 11.8% and the core PCE (personal consumption expenditures) soared from 2.7% to 6.1%. The GDP price index soared from 4.3% to 6.0%, a number not seen in several decades.
Personal income grew 0.1% in June whereas personal spending surged 1.0%, as consumers used savings to bolster spending. |
United Kingdom |
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Employment and mortgage borrowing improving
Retailing: the CBI sales series was mixed with retailing reported sales falling from 25 to 23 but total distribution reported sales up from 40 to 41. The BRC shop price index fell 1.2% year-on-year.
Housing: the Nationwide House Price index surprised by falling 0.5% in June for a 10.5% year-on-year growth, as the stamp duty holiday is starting to wear out.
Employment: the number of jobs supported by the UK government furlough programme fell to the lowest level since the start of the pandemic. At the end of June, the number of people getting support from the Coronavirus Job Retention Scheme was 1.86 million, almost 600,000 fewer than a month earlier and the proportion of the business workforce on furlough fell to 4.9% in early July.
Credit and money supply: net consumer credit fell from £0.4bn to £0.3bn, although net lending secured on dwellings soared from £6.8bn to £17.9bn. Money supply growth abated, with the year-on-year growth down from 7.4% to 6.9% in June. |
Europe |
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Confidence improving in eurozone
Surveys: the IfO German business confidence unexpectedly slipped for the first time in 6 months to 100.8 from 101.7 in June. The current assessment improved from 99.7 to 100.4 whereas the expectations fell from 103.7 to 101.2. In manufacturing, almost two thirds of all companies are experiencing supply problems, shortages of raw materials, delivery delays and rising costs.
GfK consumer confidence in Germany remained stuck at -0.3, defying estimates of an increase. French consumer confidence eased from 103 to 101.
Eurozone confidence improved, with economic confidence up to 119.0 from 117.9, industrial confidence up to 14.6 from 12.8 and services confidence at 19.3, from 17.9.
Employment: German unemployment dropped 91K with the claims rate moving to 5.7% from 5.9%.
Inflation: the German CPI (consumer price index), EU harmonised, surged from 2.1% to 3.1%, above estimates and the highest in over a decade. For the eurozone as a whole, though, core CPI was only 0.7%, with the headline CPI at 2.2%, up from 1.9%.
Growth: eurozone GDP grew by 2% during Q2 (not annualised), beating estimates, with Spain and Italy at the top among the large countries and Germany and France lagging. |
China/India/Japan/Asia |
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Softer Chinese growth
China: industrial profits were up 20% year-on-year in June, down from 36.4% the previous month. This series peaked three months ago. The official manufacturing PMI fell to 50.4 vs. 50.9 the previous month whereas the non-manufacturing PMI was steadier at 53.3 vs. 53.5. The unofficial Caixin manufacturing PMI, though, fell from 51.3 to 50.3, the lowest level since February 2020 in the middle of the pandemic in China.
Japan: the Leading Index was unchanged at 102.6 with the Coincident Index slightly lower at 92.1 vs. 92.7. |
Oil/Commodities/Emerging Markets |
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After a significant correction from May to June, the copper price rallied back close to the US$10,000 level per metric tonne, despite China sell down its strategic reserves to keep a lid on import costs. Other commodities have been well bid, with oil rising 3%. |
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