Markets last week |
The long-awaited correction in the apparently unstoppable technology equity bull market was halted on Thursday, as the US technology sector fell 6% in one day, dragging other sectors down. Other markets had been less buoyant in the run-up to this correction, with energy and financials lagging the main indices, government bond yields falling, the US dollar bouncing back and equity volatility rising sharply. Different markets reacted in different ways. The more cyclical European market was more defensive and even the technology-driven Chinese market fell much less than its US counterparts. During the equity correction late in the week, government bond prices also fell, raising long-term yields. The dollar rally started earlier in the week when comments from the European Central Bank came out stating that it feels uncomfortable with the euro’s strength. This boosted the US dollar vs. other currencies. Gold remained in the lower US$1,900s during the equity correction, signalling a not wholly risk-off environment. US employment improved to about half of the distance between the peak in payrolls in February and the bottom in April, with an addition of 1.37 million jobs in August. Markets are not fully confident that the speed of employment recovery will be the same in the future and so the jobs report did not stop the market drop on Friday. At the end of the week, Japanese and emerging market equities were the most resilient, whereas the UK market was hit hardest. Oil prices took a beating, whilst copper actually went up. The US holiday today may make markets quieter across the world. |
The week ahead |
Monday: UK British Retail Consortium like-for-like sales for August Our thoughts: the UK consumer has been hit for six over the last few months, but the BRC like-for-like retail sales have done very well over the last four months after a massive drop. There is hope that the eat-out-to-help-out scheme and the many sales discounts, not to mention the return to school, will add another good month to the tally. The last reading was a strong 4.3% growth. It is unrealistic to expect a similar number, but growth could still be meaningful. Tuesday: Chinese Producer Price Index (PPI) Our thoughts: China is almost single-handedly responsible for lower inflation across the world over the last 10 years, as it has exported industrial deflation. The PPI is the dual gauge of manufacturing activity in China and real prices, given the tendency of the CPI (consumer price index) to be more controlled. A negative number is still expected and, indeed, world inflation might soar if there was a positive number, but it’s also important to see a less negative PPI marking the continuance of the manufacturing recovery that is needed to buttress the rest of the Chinese (and world) economy. The previous reading was -2.4%. It will also be interesting to watch whether the CPI abates, as expected, from +2.7%. Higher producer inflation and lower consumer inflation is the ideal combination for China. Friday: US jobless claims Our thoughts: employment in the US is the focus for economists and markets alike. As the pandemic unemployment insurance starts to wind down, the question is how many more jobs will be lost this week and also whether the continuing claims fall meaningfully from the current more than 13 million mark. Some state statistics are somewhat distorted by the complicated rules on unemployment benefits but the expectation is that future numbers will be more accurate and more reflected of the state of the economy. It goes without saying that in the pre-election period, a lower reading would help incumbent President Trump vs. his challenger Biden. |
The numbers for the week |
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Central banks/fiscal policy |
A quiet week for central bank announcements The French Government’s €100bn virus fighting plan was finally launched, with nearly one-third of spending going into green energy. Michael Saunders, of the Bank of England spoke on Friday and stated that additional easing might be appropriate with “risks lying on the weaker side of growth” and hence “a more persistent inflation undershoot”.
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United States |
Job recovery continues but slows down The ISM manufacturing PMI, an important bellwether, rose to 56.0 from 54.2. The strong showing was helped by new orders at 67.6 and production at 63.3, both above 60 for the second month. Backlogs grew and inventories are low, so this bodes well for the near future. The ISM services index fell somewhat from 58.1 to 56.9, although the absolute level is still very high. Factory orders and durable goods orders for July were strong, though in line with estimates. Initial jobless claims rose by 881K, less than expected and continuing claims fell from 14.5 million to 13.3 million. This better picture was somewhat marred by applications under the Pandemic Unemployment Assistance programme jumping. The monthly addition to non-farm payrolls was 1.37 million jobs, in line with expectations, but 240,000 of those jobs were created by the population census and hence have a limited life. The unemployment rate fell from 10.2% to 8.4% and the underemployment rate from 16.5% to 14.2%, but the employment participation rate was stuck at 61.7%, still not recovering the 63% pre-pandemic level. Average hourly earnings jumped 0.4% for the month or 4.7% year-on-year. |
United Kingdom |
Strong house prices but the rest of the economy is not as buoyant The Nationwide Building Society survey of UK house prices rose by 2%, the highest increase in August for 16 years. On an annual basis prices rose 3.7%. House prices have now reversed the May-June losses. The Markit/CIPS UK construction PMI fell sharply, though, from 58.1 to a still positive 54.6, indicating a slowdown in the recovery momentum. New car registrations fell 5.8% in August after a sharp rise the previous month. |
Europe |
Stalling recovery? The Eurozone services PMI eased to 50.5 vs. 50.1 last month, with France 51.6 and Germany at 52.2 beating expectations but Spain and Italy dropping below 50. German factory orders disappointed, rising 2.8% in July below estimates and the August construction PMI was also softer at 48.0 vs. 49.7. |
China/India/Japan/Asia |
China: the unofficial Caixin services PMI was almost unchanged at 54.0 vs. 54.1. Japan: the services PMI was unchanged at 45.0, still in contraction territory. |
Oil/Commodities/Emerging Markets |
Oil prices corrected together with the sharp equity fall on Thursday and finished the week down 6%, whereas copper prices were slightly higher. Unusually, during the market correction, gold did not rally and ended the week down by less than 2%. |
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