Weekly macroeconomic and market update 09.07.2015

Conflicting economic data from the US

Another conflicting set of economic data came out of the US. GDP was revised up more than expected, from an annualised 2.3% to 3.7% in Q2 (from 0.6% in Q1), and unemployment fell to 5.1%. However, the all-important non-farm payroll numbers fell short of expectations, adding 170,000 jobs compared to expectations for 220,000.

The US balance of trade conditions also improved with the deficit falling from US$45.2 billion to US$41.9 billion. On the purely economic front, this leaves the Federal Reserve’s interest rate decision this month pretty finely balanced, but global events may well have taken over as the prime concern for the committee. At the time of writing markets appeared to be pricing in a roughly 30% chance of the Federal Reserve hiking rates next week.

Chinese economic figures continue to look weak

Following on from Black Monday (which we wrote about here), data regarding Chinese economic fundamentals continue to look weak, with the official PMI figures for the manufacturing sector dipping back below 50 for the first time since February, indicating economic contraction with a reading of 49.7.

The unofficial – but more widely trusted – Caixin/Markit Manufacturing PMI has been below 50 since March and has deteriorated to 47.3 for August. In response, China’s central bank once again cut interest rates 25 basis points to 4.6 and also cut the reserve requirement ratio by 50bps to 17.5%.

Last week’s other events

• The European Central Bank left monetary policy unchanged at its September meeting, but President Mario Draghi did make comments at the press conference suggesting the Quantitative Easing programme could be increased. Given that much of the world is now looking for clues as to whether events in China would prompt further QE, Draghi’s comments about the “size, composition and duration” of the programme was taken as a hint that just such a move is being prepared. At the same time inflation and growth forecasts were downgraded, and the per-country sovereign debt limit was increased.
• Elsewhere in Europe, retail sales improved in July, growing 2.7% year on year from 1.7% previously and ahead of expectations.
• UK GDP for the second quarter was unchanged at the latest revision, steady at 2.6% year on year. However, manufacturing PMI dipped to 51.5 from 51.9 against expectations.

The markets

The effects of China’s ‘Black Monday’ were felt in equity markets across the globe over the last two weeks, with major markets falling across the board.

• Equities- At the close on Friday the FTSE 100 was at 6043, having fallen below 5800 on China’s “Black Monday” before stabilising. Still, the index was 2.1% lower over the two week period, with other western bourses also suffering. US equites (as measured by the S&P 500) returned -2.5%, whilst Europe (excluding the UK) returned -3.5%. Clearly closer to the epicentre, the Japanese Topix index fell 8.2% over the period, whilst the Hang Seng (Hong Kong) was down 7.0% and China ‘A’ shares had fallen just over 10% before closing on Wednesday for a public holiday.
• Bonds- UK gilts were somewhat lower over the two weeks after initial softening, with 10-year gilts yielding 1.72% at Friday’s close. US treasuries remained above 2% on Friday, at 2.13%, and German 10-year bunds were at 0.67%.
• Commodities- Oil had a volatile period. Brent crude rallied aggressively from the low US$40’s to peak around US$54 per barrel, before stabilising around the US$50 mark and closing at US$49.30 on Friday. Gold was softer over the last two weeks – it was around 3.2% weaker and finished at US$1,122 per oz. Copper strengthened marginally to US$2.32.
• Currencies- Sterling was weaker over the fortnight – it was down 3.2% against the dollar and 4.8% against the yen. The yen continued to strengthen, finishing up 4.5% against the euro and 1.7% against the US dollar, which was otherwise continuing to strengthen.

The week ahead

The week starts with Japanese leading economic index and German industrial production numbers. On Tuesday Chinese trade data are released early UK time, with expectations that the surplus will have increased by US$5 billion to US$48.2 billion. Germany also updates its trade balance, whilst Eurozone Q2 GDP revisions are also due.

The UK has most of the spotlight on Wednesday, releasing balance of trade data which is likely to be fairly steady at a £1.6 billion deficit for July, together with manufacturing and industrial production figures which are also expected to be fairly unchanged at 0.5% and 1.5% year on year respectively. The day finishes with US JOLTS Job Openings data, which are forecast to show 5.3 million job openings.

Japanese machinery orders are first up on Thursday, followed by Chinese inflation which is expected to be around 1.6% for CPI. We are also expecting another month of falling factory-gate price, which has been negative since the first quarter of 2012 but is expected to be falling at -5.5% – its fastest rate since the global financial crisis. In the afternoon the Bank of England releases the MPC decision and minutes simultaneously, as part of the new regime, although there is no press conference. On Friday we have a quiet end to the week. UK construction output is reported, then US PPI inflation data and Michigan Consumer Sentiment readings are released in the afternoon.