US
Market volatility picked up this week after a post-Brexit summer slumber, with moves dominated by speculation on whether we have seen seen the bottom for longer-term global interest rates. Weaker than expected retail sales and industrial production data for August suggested modestly slower growth in 16H2, while stronger inflation data is consistent with absorption of economic slack. The tumble is more than an anomaly given the contraction in the August ISM manufacturing index, and soft readings in other manufacturing indicators.
US credit availability, as measured by the Senior Loan Officer’s Survey, remains favourable, with a modest number of banks indicating they were more willing to make consumer loans during the quarter, and further easing in standards for residential loans. Greater credit availability suggests continued gains in credit growth, and a lower savings rate, which should imply some upside risk to real PCE.
Although the Fed appears ready to move, mixed economic data, low market expectations of a September rate hike and lack of consensus among FOMC members suggest the Fed will be on hold at this week’s meeting. Inflation has been the sticking point for the FOMC, with the core PCE deflator still below the Fed’s explicit target and recent inflation readings mixed. Led by petroleum, import prices dipped during the month and wholesale prices were flat, while consumer prices edged higher.
UK
August CPI was unchanged from July at 0.6% year-on-year, which was lower than the consensus estimate (0.7%) and the BoE’s forecast (0.8%). Price inflation was pushed up by fuel prices but pulled down by accommodation, alcohol and clothing prices. It is, however, widely expected that CPI inflation will resume its upward trend in the coming months due to the significant weakening of the GBP. The Bank of England expects the CPI to increase by 0.7% in 2016 and 1.9% next year.
Labour market data came in better than feared in the three months up to July. Employment growth rose to 174,000, up from 171,000 in June. The consensus estimate was 172,000. The unemployment rate remained unchanged at 4.9% as expected. The headline average earnings growth moderated slightly to 2.3% year-on-year, down from 2.4% in June. The timelier claimant count measure of unemployment increased by 2,400, which was more than expected (1,800), after falling by 3,600 in July (revised up from -8,600).
As expected, the BoE kept its monetary policy stance unchanged at this week’s meeting. The decision was unanimous. The BoE said near-term data had been stronger than expected, but that the view of the “contours of the economic outlook” had not changed. If the economy developed in line with the August inflation report, the MPC still expected a further cut in the bank rate to its effective lower bound later this year.
In terms of data releases in the UK, the Rightmove house prices will become available on Monday and the CBI industrial survey on Thursday, both for September. In terms of political events, the UKIP conference in Bournemouth begins today and the deadline for voting in Labour’s leadership election is on Wednesday.
EU
In the euro area, Thursday sees the release of consumer confidence figures for the euro area. Consumer confidence has declined over the past three months from -7.0 in May to -8.5 in August but this is still a high level pointing to solid growth in private consumption. In September, the oil price has increased, pointing towards lower consumer confidence, but the labour market continues to improve, which supports solid consumer confidence.
Friday gives us the September PMI figures. Overall, PMI figures are expected to improve moderately, reflecting an ongoing recovery. The order-inventory balance for the manufacturing PMI showed a promising increase in August, signalling an increase in manufacturing PMI in September despite a moderate decline in figures for August. However, services PMIs look like they have a more sluggish outlook for September. The services PMI figures were revised down, led by the German services PMI being revised down to 51.7 (from an initial estimate of 53.3). In addition, business expectations fell to a 20-month low in August supporting a weaker outlook for the services sector.
China
The monthly economic indicators improved in August. As has been the case so many times before, the main driver of the improvement was infrastructure investments. Growth in overall fixed investments rebounded strongly following four months of declines. The headline year-to-date growth was unchanged at 8.1% year-on-year. But the outcome was better than expected by consensus and corresponds to a jump in the ordinary growth rate (which is not published) from 3.9% year-on-year to 8.2%.
Chinese Industrial production growth also picked up more than expected to 6.3% year-on-year in August from 6.0% in July, despite the fact that several factories were forced to shut down production in the weeks ahead of the G20 summit to lower air pollution. This is another sign that the part of the industrial sector that is not affected by the process of reducing overcapacity is faring quite well.
As growth has stabilised, it appears that Chinese authorities have turned the focus to “risk control” for the time being. Property policies have been tightened in the big cities. Early this month, China’s southern Xiamen city, where home-price gains led the nation last month, banned some buyers from purchasing homes, joining larger hubs in trying to cool soaring property prices. Additionally, in recent weeks China’s central bank has started to offer money via 14-day and 28-day reverse repos, while controlling the liquidity injection via 7-day reverse repos. This new tac tics suggests that the central bank intends to contain the leverage ratio in bond trading activities.
Japan
Following its meeting on 20/21 September, the Japanese central bank will present a comprehensive assessment of its unconventional monetary policy. Medium-term, the discussion about potential further stimulus measures is likely to result in another rate cut. With the BoJ already holding more than one third of Japanese government bonds, increasing bond purchases has its limits.
Sources: Danske Bank, Haendelsbank, Wells Fargo, Commerzbank, TD Economics.
