US
GDP growth expanded at a 1.2% pace in the second quarter with consumer spending serving as the key driver of overall economic activity.
Structures, equipment investment, government spending and inventories all subtracted from growth. Looking ahead to the remainder of the year, growth is expected to remain around 2.0% over the next couple of quarters, with consumer spending and housing serving as the key supports to GDP growth.
Fed officials decided against a rate increase but signalled that improving economic conditions and greater labor market utilisation will likely lead to a rate hike later this year.
The statement from the FOMC indicated that Fed officials felt the economy was expanding at a moderate rate and noted that labor market indicators pointed toward some increase in labor utilisation in recent month.
A new sentence attracted a lot of attention as the FOMC stated that “near-term risks to the economic outlook have diminished”, meaning that the statement is more hawkish than the statement in June despite the UK voting to leave the EU just a week after the June FOMC meeting.
US durable goods orders fell again in June implying that the headwinds facing the manufacturing sector are likely to continue in the months ahead.
Core capital goods orders rose slightly in June; however, the series remains down 6.6% on a three-month annualised basis. On net, weakness is likely to persist in the manufacturing sector over the next several quarters thus creating little incentive for firms to invest in equipment purchases.
UK
Economic activity surprised on the upside in Q2 as GDP growth picked up to 0.6% quarter-on-quarter, indicating that the economy was in relatively good shape prior to the Brexit referendum. There is no real breakdown of the GDP data yet but services grew 0.5% and the industrial sector grew 1.2%. Construction activity, however, declined 0.4% quarter-on-quarter.
Against the backdrop of the EU referendum, BoE Governor Carney has indicated that in his view “some monetary policy easing will likely be required over the summer.”
To some extent the BoE has already delivered, with a reduction in banks’ countercyclical capital buffer expected to raise their effective lending capacity by the equivalent of almost 9% of GDP. But the MPC is expected to follow up with a cut in bank rate.
This indicates a reduction of 25 bps next week is possible, taking it to just 0.25% (ever deeper into all-time low territory). More QE might have to wait.
The UK’s decision to leave the EU is expected to shave about 0.5% off the Eurozone’s GDP in 2016 – 2017 by fuelling uncertainty, hurting trade and tightening monetary and financial conditions.
The ECB is likely to respond by providing additional liquidity and potentially front-loading asset purchases. A 10 bp cut in the repo rate is also possible. These measures are likely to come on top of the six-month extension of the asset-purchase programme that the ECB is expected to announce in September.
EU
The Economic Sentiment Indicator (ESI) rose from 104.4 to 104.6 in July, better than expected. This rise indicates that the uncertainties stemming from the UK’s decision to leave the EU have not affected the Eurozone economy in any material way–at least not yet. Thus, the ESI replicated the message from the preliminary PMI figures and suggests that the pace of annual economic growth has been sustained into Q3.
Consumer confidence did edge down, but sentiment in both the service and industrial sector picked up. On a national level there was improvement in Germany and Italy (the latter a bit surprising given the country’s vast banking troubles), whereas sentiment in Spain and France deteriorated.
The Eurozone economy slowed down in Q2 2016 by growing 0.3% on a sequential basis (not annualised) compared to a print of 0.6% during the first quarter of the year.
Growth was in line with expectations and shows that the region’s economy was already slowing down before June’s Brexit decision. Growth was a bit higher than expected on a year-earlier basis, posting a rate of 1.6% versus expectations of 1.5%.
China
At the beginning of the year many investors worried about a hard landing in China. China’s growth since then printed more strongly than expected.
There are some encouraging signals of economic rebalancing, but the road ahead is still bumpy as debt remains a key concern for the economy, as well as the concentration of investments in state owned infrastructure.
The Caixin manufacturing PMI, a private gauge of Chinese industrial activity, fell to 48.6 in June – remaining below the 50-threshold since early 2015. The index is expected to increase but stay in contractionary territory in July with consensus looking for a 48.8 print next week.
The service-sector component of the Caixin PMI, also being released next week, has been faring better as of late and is in expansion territory at 52.7.
Japan
The Bank of Japan (BoJ) is increasing its purchases of ETFs but has kept the policy interest rate and bond purchase programme unchanged at -0.1% and JPY 80 Trillion, respectively.
The BoJ is keeping the door open for additional easing in September as it awaits the government’s fiscal easing package. The announcement is a disappointment and the BoJ’s decision is negative for risk and global bond markets.
The market reaction has been relatively modest given the significant disappointment: USD/JPY dropped 2.5 figures and initially dipped below 103. Markets are still speculating on a large fiscal stimulus package, which is likely to be announced next week
Sources: Danske Bank, Commerzbank, Haendelsbank, Wells Fargo, BNP Paribas.