US non-farm payrolls disappointed
While US non-farm payrolls disappointed, personal consumption was a more positive story. The headline non-farm payroll figure showed 156,000 jobs added in August, falling short of the 180,000 expected, with the readings for June and July also revised down. More importantly wage growth was also soft, with average hourly earnings up 0.1% month on month, down from 0.3% in July and forecasts for 0.2%. The year-on-year figure was unchanged at 2.5% (2.6% was expected).
Whilst these data points carry little weight in isolation, they do add to the conspicuous absence of a clear trend towards consistent wage growth, which is effectively a prerequisite for sustained economic growth. Unemployment also rose 0.1% to 4.4% (no change was expected), whilst underemployment remained at 8.6% and the participation ratio held steady at 62.9%. The consumption data for July provided more reason for optimism, as Personal Income increased from flat to 0.4% month on month (0.3% expected), and Personal Spending rose from 0.1% to 0.3%, though this was slightly below the 0.4% expected. Consumer confidence remains high, with the Conference Board index rising from 121.1 to 122.9 (a dip to 120.7 was expected).
Global business activity over the fortnight was mixed
In the Eurozone, the business economic confidence measure for August from the European Commission improved from 111.2 to 111.9, however the ZEW survey of business expectations offset this with a fall from 35.6 to 29.3. Composite PMIs for the region were solid, rising marginally from 55.7 to 55.8, with the Services sub-index slightly down, but the Manufacturing reading slightly up. Eurozone Consumer Confidence defied expectations for a deterioration, rising from -1.7% to -1.5% (-1.8% was expected). The US composite PMI was also improved, rising 1.4 points to a respectable 56.0, boosted by a strong Services reading even as the Manufacturing gauge slipped.
The headline Durable Goods number provided a bit of a shock, falling -6.8% month on month in July (-6.0% was forecast) after the 6.4% rise in June, however this distortion was driven by the volatile transportation element relating to the Paris Air Show in June. Stripping out transportation, Durable Goods actually beat expectations, growing 0.5% month on month from 0.1% (and expectations for 0.4%). Over in China, the official measure for Manufacturing PMI showed an increase from 51.4 to 51.7 (51.3 was expected), which was corroborated by the private Caixin reading, which rose from 51.1 to 51.6 (51.0 expected). The official Non-Manufacturing PMI measure dipped from 54.5 to 53.4. Taken together, recent data suggest the economy continues to muddle through, though there is no real trend apparent at this stage.
Other events over the last fortnight
- UK Business Investment growth was flat year on year in the second quarter, down from 0.7% in the first quarter and below expectations for 0.3% growth. Business investment growth fell sharply in the run up to the EU referendum and has failed to recover as companies hold off committing to new projects whilst uncertainty continues. There was no change to the second estimate for second quarter GDP, which remains at 1.7% year on year
- US GDP was revised up for the second quarter from an initial 2.6% to 3.0% annualised, boosted by stronger consumer spending as well as modestly higher business investment. The PCE measure of inflation was unchanged at 1.4% year on year as expected, whilst Core PCE cooled 0.1% to 1.4%, again in line with expectations
- Japanese inflation was unchanged at 0.4% year on year, while core inflation was fractionally higher at -0.1% year on year. Industrial Production slowed to 4.7% year on year (from 5.5%, 5.2% expected)
- Eurozone CPI for August came in at 1.5%, up from 1.3% and ahead of the 1.4% forecast. Core CPI was unchanged at 1.2%, as expected
Equities ticked higher over the fortnight, as government bond yields remained tight. The recent rally in industrial and precious metals also continued.
Equities – It was a positive two weeks for equities, albeit with generally limited magnitudes. US equities rose 2.2% over the fortnight (as measured by the S&P 500), with the MSCI United Kingdom rising 1.5%, and the Japanese TOPIX up 1.4%. In Europe, the MSCI Europe (ex-UK) recovered from some weakness last week to finish the period up 0.4%. Emerging markets also had a good couple of weeks, as the MSCI Emerging Markets index returned 2.3%.
Bonds – 10-year UK government bond yields remained tight, dipping at one point below 1.0% intraday, and ending on Friday at 1.06%. 10-year US Treasuries followed a similar pattern and ended Friday at 2.17% whilst the equivalent German Bunds finished the fortnight at 0.38%.
Commodities – Gold continued to rally, breaking through the US$1,300 mark to close on Friday at US$1,325.23/ounce and copper also extended its rally to finish at US$3.10/lb. Oil (the Brent Crude measure) range traded in the low US$50s, finishing the fortnight where it started at US$52.75/barrel.
Currencies – The US dollar continued to be weak, with the Japanese yen as the main strengthener. Sterling closed on Friday at US$1.30, €1.09 and ¥142.
The week ahead
Thursday’s monetary policy meeting of the European Central Bank (ECB) will be in focus for the week. After recent comments and the minutes from the last meeting, there is actually fairly little in the way of policy expectations, with discussions around tapering the Quantitative Easing asset purchase programme likely to be kicked further down the road. However, it will be interesting to see whether there are any comments about the significant appreciation of the euro in the last couple of months. There are also PMI readings from the Eurozone, China and the UK to look forward to this week (details below). Tuesday also sees the US Congress back in session, which could help bring the issues of the US debt ceiling back front and centre in the minds of market participants. Going through the daily breakdown:
Monday: The only data of note is the UK Construction PMI reading, which is reported in the morning (52.0 expected from 51.9). The US is closed on Monday for Labor Day.
Tuesday: Early in the morning, both Japan and China report Services PMI (the private, Caixin reading for China), followed by UK Services PMI later in the morning – markets expect 53.5 from 53.8 previously. Following this, the Eurozone reports Retail Sales (a slowdown from 3.1% to 2.6% is expected). In the afternoon, the US reports Factory Orders for July (-3.3% month on month expected from 3.0% in June) and again, this reading is likely to have been distorted by aircraft for the Paris air show.
Wednesday: The only relevant activity scheduled is in the US, where the ISM Non-Manufacturing Composite PMI reading will be reported (55.5 expected from 53.9), with the Federal Reserve’s Beige Book of anecdotal business activity being released later in the day.
Thursday: Japan releases both its Coincident Index (115.8 from 117.1) and Leading Indicators Index (105.1 expected from 105.9) measures first thing, then all eyes will be on the ECB for its monetary policy meeting.
Friday: It’s a quiet end to the week, with only the Japanese Eco Watchers Survey and UK Industrial Production numbers being of any real note.
This article was previously published on Tilney prior to the launch of Evelyn Partners.