The US economy held steady
The US economy held steady as the Federal Reserve (Fed) seems even more likely to announce balance sheet reduction at its September meeting. The composite PMI reading from Markit improved 0.3 points to 54.2, with the Services composite unchanged as expected, but a solid beat on the Manufacturing index (53.2 from 52.0, 52.3 expected). The headline Durable Goods reading surged from -0.8% to 6.5% month on month, well ahead of expectations for 3.7% – however, this figure was flattered by a spike in aircraft orders which were up 131%.
Stripping out transportation, orders actually slowed from 0.3% to 0.2% month on month, disappointing forecasts for 0.4%. The first reading of Q2 GDP came in at 2.6% annualised, only slightly shy of the 2.7% estimate, and up on a downwardly revised 1.2% in Q1. The mixed theme was also reflected at the Fed, which left policy unchanged with a fairly balanced statement – however, a change with regard to normalising the balance sheet (by which they mean reducing it) “relatively soon” suggests an announcement is likely at the next meeting, with implementation shortly after.
Eurozone PMI figures were somewhat softer
The Composite reading fell from 56.3 to 55.8 (56.2 was expected), driven by a weaker Manufacturing reading (56.8 from 57.4, 57.2 was expected) as the Services measure, like the US above, was unchanged (at 55.4, in line with forecasts). Despite the dip, these readings remain strongly indicative of continued economic expansion. Economic Confidence was marginally improved (111.2 from 111.1, 110.8 expected) and Consumer Confidence was unchanged at -1.7.
Last week’s other events
- UK GDP for the second quarter grew at 1.7% year on year, down from 2.0% in the first quarter, but in line with expectations. The CBI reported an uptick in Business Optimism from a reading of 1 to a reading of 5 (forecast was 0), but Consumer Confidence slipped from -10 to -12 (-11 was expected)
- Japanese Manufacturing PMI was marginally lower, at 52.2 from 52.4, whilst the Coincident Index was slightly improved at 115.8 from 115.5. Retail Trade picked up marginally, coming in at 2.1% year on year from 2.0%, but this disappointed market expectations of 2.4%. Headline CPI inflation was unchanged at 0.4% year on year as expected
We were back to a subdued week in markets, with only limited movements in equities and bonds, whilst the commodity complex was generally stronger.
Equities: UK equities were down -0.9% by the end of the week (MSCI United Kingdom), whilst US equities were flat (S&P 500) and the MSCI Europe (ex-UK) returned 0.2%. Japan’s TOPIX index slipped -0.5% and the MSCI Emerging Markets index was 0.4% up on the week.
Bonds: UK gilt yields drifted up two basis points (bps) on the 10-year to finish the week at 1.21%. 10-year German bund yields rose three bps to 0.54% and US 10-year Treasury yields were four bps higher to 2.29%.
Commodities: Oil rallied back above the US$50 mark for Brent Crude, which ended the week at US$52.52/barrel. Gold was also stronger, rising to US$1,268.40/ounce and copper followed suit, rising to US$2.87/lb.
Currencies: Sterling was broadly stronger as the US dollar weakened during the week. Sterling closed Friday at US$1.31, €1.12 and ¥145.
1 month performance of major asset classes
The week ahead
Another reasonably busy week, especially at the back end, with the Bank of England Monetary Policy Meeting concluding on Thursday and US Non-Farm Payrolls (NFPs) on Friday. Starting in reverse order with NFPs, the street is forecasting 180,000 jobs added, but wages may be of more interest as markets look for broader evidence of a tight labour market – markets expect 2.4% year on year from 2.5% for average hourly earnings.
Ahead of that, the Bank of England output will be closely scrutinised on Thursday – no change in policy is likely, but the meeting does come with the latest economic projections through the quarterly Inflation Report, so there will no doubt be plenty for people to digest. It’s also quite a busy week for the Eurozone, with Q2 GDP out on Tuesday, where an increase from 1.9% to 2.1% year on year is expected, as well as CPI inflation, Retail Sales and PMI numbers all due out – details below. There’s also data out of Japan, including Industrial Production and PMIs, so plenty to get our teeth into. The daily breakdown is:
Monday: Japanese Industrial Production is released in the early hours of the morning, with a mild slowdown from 6.5% to 4.8% year on year expected. Chinese Manufacturing and Non-Manufacturing are also out in the morning, along with UK Consumer Credit data. Eurozone inflation will be reported at 10am UK time, with no change at 1.3% year on year expected at the headline, and 1.1% for core (again, no change).
Tuesday: More early morning data is out with Japanese and Chinese (Caixin) Manufacturing PMI data out before 3am UK time. We then have UK house prices before the Eurozone GDP data, which will also come with the Manufacturing PMI reading (no change at 56.8 is forecast). In the afternoon, US Personal Income and Spending data are released, together with PCE inflation data and the US ISM Manufacturing PMI reading.
Wednesday: A quiet day mid-week, with only Japanese Consumer Confidence, UK Construction PMI and US ADP Employment Change data out, though the latter could get some attention as market participants attempt to read the tea leaves ahead of Friday’s NFPs.
Thursday: There’s quite a lot of data on Thursday, in addition to the focus on the Bank of England. Japanese and Chinese (Caixin) Services PMI are out early in the morning, with Eurozone and UK Services PMI out slightly later on, as well as Eurozone Retail Sales. After the Bank of England reports, we have US Services PMI from Markit reported (no change at 54.2 expected) along with Factory Orders.
Friday: After a busy week, US employment data are the only notable releases on Friday. As well as the forecasts for 180,000 Non-Farm Payroll jobs added and Average Hourly Earnings dipping from 2.5% to 2.4% year on year, economic forecasts suggest unemployment will fall 0.1% to 4.3%.
This article was previously published on Tilney prior to the launch of Evelyn Partners.