US
New home sales jumped 12.4% in July. In contrast, existing home sales fell last month, and look to be restrained by low inventories and deteriorating affordability. The increase puts sales back at levels that have not been seen since before the recession. While new home sales can be noisy from month to month, sales are up 12% year-to-date.
Three themes come out of Chair Yellen’s presentations: (1) inflation rising to 2% over the next two years, (2) some estimates show real neutral rate close to zero, and (3) asset purchases and forward rate guidance put appreciable downward pressure on long-term interest rates.
US manufacturing data were also mixed. The good news is that durable goods orders bounced back strongly in July, increasing 4.4%. Core capital goods orders, which exclude aircraft and defense, rose 1.6% and point to improvement in equipment spending in the months ahead. Durable goods orders had been the lone holdout that would indicate a potential bottom in the manufacturing sector after a tough year. The strong back-to-back readings in core capital goods orders now look more aligned with the rise in industrial production and manufacturing employment in each of the past two months.
UK
The latest UK CBI industrial survey of 505 firms found that export order books reached a two-year high, suggesting that the depreciation of Sterling since the end of last year may be feeding through to stronger overseas demand. Chemical manufacturers accounted for just over half of the improvement in export orders, with less than one third of the 17 manufacturing sub-sectors reporting export orders being below normal. Despite the improvement in exports, total order books were largely unchanged but remained comfortably above the long–run average. Output growth maintained a healthy pace, al-though a little weaker than in the three months leading up to July.
The UK retail sector continues to show robust growth. The CBI survey of 131 firms, of which 58 were retailers, showed that the volume of sales grew modestly over the year despite expectations of a further drop this month. However, sales volumes appear set to be broadly flat over the next month. The volume of orders placed upon suppliers fell for a fifth consecutive month, although retailers expect them to grow somewhat in the year to September. While grocers’ sales were broadly flat in the year to August, clothing reported a strong month for sales volumes. Growth in internet sales volumes accelerated over the same period, outstripping expectations, with broadly similar growth expected next month.
Many economists believe the Brexit shock will have a considerable dampening effect on the euro zone economy. But signs of such a shock have not yet materialised. Between July and August, economic sentiment did not change markedly. While the manufacturing PMI lost 0.2 points to 51.8, its services peer gained 0.2 points to 53.1. Both indices remain within their tight range in place since early 2015, which still indicates a moderate speed of expansion for the euro zone economy.
Amid signs that Brexit fallout is starting to weigh down on the UK’s economy, manufacturing PMI and construction PMI due next week may indicate whether downside risks may escalate in the near term. The Bank of England has increased asset purchase target to £435 billion early this month. Any signs of abrupt slowdown from incoming data may prompt BoE to ease again.
EU
One of the key figures comes on Wednesday when the unemployment data for July is released. The unemployment rate has steadily closed in on the NAIRU at 9.7% since 2013, but since May, it has lingered at 10.1%. This level is expected to persist in July. Looking forward, as the unemployment rate raises close to the NAIRU, an upward pressure on wages is likely.
HCIP inflation data is also due next week. Year-on-year inflation has been rising marginally every month since April 2016, the rise may continue in July. Although the oil price decreased in July, the 2015 base effects will keep upward pressure on inflation and the effect is likely to continue in the short term and cause a sharp increase in inflation towards the end of 2016. Even if inflation approaches ECB’s 2.0% target, the ECB will recognise that it is not on a sustainable 2.0% path yet as we find their core inflation forecast too optimistic.
China
China’s official manufacturing PMI has increased to 50.2 in August from 49.9 in July, thereby closing in on Markit’s manufacturing PMI, which jumped to 50.6 in July from 48.6 in June. We do not expect the surprising July jump in Markit’s PMI to be reversed and foresee only a small decline to 50.5 in August. The strong manufacturing confidence reading in July was not confirmed by the hard data that followed, as industrial production growth fell in year-on-year terms and increased only slightly in month-on-month terms.
The official manufacturing PMI actually did fall in July, and that has likely led many to assume that the rather volatile Markit PMI was the one that was incorrect in July. In fact, consensus expects Markit’s PMI to decline to 50.2 and the official PMI to remain unchanged.
The MNI business sentiment indicator, which receives less attention despite being timelier, jumped in July in line with Markit’s PMI and remained high in August. The official PMI is expected to catch up with Markit’s PMI in August. If this is correct, it will be good news, as it will indicate that the part of the industrial sector that is not affected by the ongoing process of reducing overcapacity in the heavy industries is faring quite well.
Japan
Japan’s industrial production and services sector activities gathered steam in June and boosted overall economic activities before the turn of the month.
Meanwhile, coincident index and leading index were higher in June from the previous month, signalling a pick-up in business activities and better assessment of the economy in the next few months.
Sources: Danske Bank, Haendelsbank, Wells Fargo, HongLeon Bank, Commerzbank.
