US
Market participants are still confounded on the US Fed’s next policy move. Slack is diminishing and monthly indicators suggest economic activity is gaining momentum – a stage in the cycle that should warrant consensus from Fed officials on normalising the target rate.
Federal Reserve officials have gone out of their way last week to stress that the market is underestimating the odds of an interest rate increase this year; and yet the probability of such a move has fallen back below 50%.
Headline US consumer prices were unchanged in July, due largely to weakness in the energy component. Excluding food and energy, core inflation is now up 2.2% relative to a year earlier. The 12-month change in core consumer prices will mostly send the same signal as the Fed’s preferred measure, the core PCE deflator, but run 0.3% points higher on average.
Given the still-low inflation rate, some Fed officials are now asking if the current monetary policy framework is appropriate for present economic conditions.
US total output rose sharply, marking the second straight monthly gain. The increase was broadly based, with even the once beleaguered manufacturing sector edging higher during the month, and utilities surging on the back of unseasonably warm weather. The advance in manufacturing output is consistent with recent ISM manufacturing readings that suggest activity in the factory sector is stabilising. Manufacturing output excluding motor was also up during the month.
The pulse of the US residential sector also did not disappoint in July. Following strong existing and new home sales activity during the month, housing starts delivered an upside surprise, rising 2.1%. The increase was largely concentrated in the multi-family sector, but single-family also eked out a positive reading. Total building permits slipped 0.1% during the month, but the level was largely unchanged. Multi-family permits rose a strong 6.3% in July, registering a fourth straight monthly gain.
UK
UK Consumer prices in June were reported to have increased by 0.6% compared to July last year. Rises in petrol and food prices contributed to the increased pressure, while downward pressure came from lower prices in housing rental, recreation and culture. Inflation is expected to continue to increase due to the weaker pound in due time.
The UK labour market during the period April to June (not yet reflecting Brexit) continued to show strength. The rate of unemployment was confirmed at 4.9%, in line with the latest release and the employment rate continued to increase to 74.5%, the highest since records began in 1971. However, the driver of employment growth is self-employed people and part-time workers. Job vacancies slowed slightly and could be a first sign of a weakening labour market.
Strong retail sales readings in UK July made it the best July since 2002. Consumers do not seem too worried about the uncertainty after Brexit. In July, retail sales increased by 1.5% compared to June and by 5.4% compared to July last year. Internet sales increased to 13.3% share of total retail sales.
EU
ECB members are beginning to talk about the negative fall out for banks from their interest-rate policy. A further cut in the deposit rate is expected towards the end of the year, whereby the ECB will no doubt exempt the banks from penalties to some extent.
EU consumer confidence figures for August are due this week, the consumer sentiment is expected to be negatively affected by the rising oil price throughout the beginning of August and the post-Brexit vote uncertainty, although this is diminishing.
The continued solid labour market conditions and resilient business sentiment are likely to pull consumer confidence upwards slightly.
EU PMI figures for August are due to be released this week, the index showed resilience to the Brexit vote in July, with only a small decline.
Looking at the August figure, the ZEW investor expectation showed a small improvement in line with the overall market sentiment, hence it is expected to remain around its July level in August.
China
The latest July investment figures in China reveal an alarming picture. In the first seven months of the year, state-owned enterprises increased their investment in fixed assets by 21.8%.
Since state-owned firms are less and less able to finance their investments from retained earnings, they are incurring more debt. The ominous debt levels of Chinese state-owned businesses is thus a reflection of their excessively large investments, with which they are propping up the economy at the behest of the Communist Party.
Any sudden balance sheet cleanup is unlikely any time soon, nor an economic slump of the kind seen when Spain’s real-estate bubble burst. However, the state-run sector is increasingly diverting resources from the private sector, thus undermining the whole economy.
Japan
Growth in the Japanese economy stagnated in Q2 followed a 0.5% quarter-on-quarter growth.
Decline in exports and capital investment undermined economic expansion last quarter, prompting the government to pump 28 trillion yen of fiscal stimulus to spur spending.
Sources: Danske Bank, Haendelsbank, Wells Fargo, HongLeon Bank.