US
The closely watched August employment report came in below expectations, topping off a full week of economic data releases. Since Chair Yellen’s speech last Friday, the Fed’s case for an interest rate hike was strengthened by solid personal income and spending gains, increased consumer confidence and continued job growth.
According to the US consumer confidence release on Tuesday, consumers were more confident about the present situation and more optimistic about future conditions. Of those surveyed, more consumers reported that jobs were plentiful and more expected income growth in the next six months. More consumers were confident that now is a good time to purchase a home or major household items, providing further evidence that confidence in the consumer to support economic growth is well placed.
The S&P CoreLogic Case-Shiller home price index rose modestly in the nation and appreciation in some cities showed signs of cooling in June. Pending home sales, a leading indicator for existing home sales by one or two months, rose 1.3% in July following two months of deceleration. Historically low mortgage rates and continued job creation appears to have sustained a moderate pace of home sales into the late summer season, though demand is unlikely to accelerate significantly for the remainder of the year.
The ISM manufacturing index unexpectedly dipped below 50 in August, signalling US manufacturing contracted after six months of positive readings. The headline dropped from 52.6 to 49.4 in the month, and the sub-indices were largely disappointing. Friday’s employment report confirmed downsizing at US factories, with durable goods producers cutting 14,000 jobs in August, highlighting that manufacturers are still challenged by the soft global economic outlook, headwinds from the stronger dollar and weak commodity prices.
UK
Lending was softer but there was no slump. Net lending growth fell in July, as did the number of mortgage approvals, which fell to an 18-month low. This could be a reflection of a slowdown in the housing market. As uncertainty is still high, this pace will likely continue during the rest of the year as buyers within the housing market likely will wait and see what happens. As a consequence, housing price inflation slowed during the summer.
The UK PMI for the manufacturing sector increased in August to a level consistent with growth within the sector, implying that sentiment overreacted in July in the wake of Brexit. Next week PMI data for the services sector will become available, which will give an indication of the whole economy due to services’ large share.
The only real data released after June 23 is retail sales for July, which was published last week, and that sales were partly boosted by tourists taking advantage of the weaker GBP. The PMI for the construction sector increased as well. A number of companies noted that demand had been more resilient than expected and there were some signs of a re-bound in client confidence, according to Markit.
EU
Annual flash EU HICP inflation was unchanged in August at 0.2%, lower than the expected increase to 0.3%. The flash numbers revealed that energy prices added to inflation, while service prices subtracted from inflation. Service inflation decreased to 1.1% from previously 1.2% and annual core inflation thus decreased to 0.8% (as expected) from previously 0.9%. While energy prices expected to pull up headline inflation significantly in the coming months (due to the annual base effect), there are still few signs of domestic cost pressure. This is attributed to the general slack on labour markets in the eurozone. Core inflation even proved to be weak in Germany (flash CPI numbers released yesterday), where labour market conditions are considerably tighter than the eurozone average.
While the EU unemployment rate fell it did not decrease to 10.0% (from previously 10.1%) as expected. The number of unemployed persons fell by 37,000 in July, almost matching the average pace of declines over the past year. The unemployment rate moved sideways for a third month, however, and unemployment rate is unlikely to resume a decrease in the months ahead as suggested by the ECFIN unemployment expectations.
The main event next week is the ECB meeting on Thursday. The ECB is expected to remain on hold at the meeting. The ECB has stressed that more data is needed before the growth and inflation outlook can be fully reevaluated. Initial figures suggest resilience in economic sentiment following the UK’s decision to leave the EU, so ECB is likely to maintain its current stance.
QE purchases re expected to be maintained at the current pace, although it will eventually extend the programme beyond March 2017. Regarding TLTRO II, the ECB has stated “additional demand could be expected for the forthcoming TLTRO II operations”, which supports the view that the ECB will maintain a patient stance until the allotment results of the second TLTRO II auctions (due to be published on 22 September).
China
China’s official manufacturing increased nicely to 50.4 in August from 49.9 in July. Consensus had expected a slight decline. The manufacturing PMI from Markit fell from 50.6 to 50.0, in line with the consensus estimate, but the Markit PMI did not fall enough to fully reverse the surprising jump in July.
Both manufacturing PMIs are now at or above the 50 threshold, which at least in theory marks the division between expansion and contraction. The PMI figures indicate that industrial production growth increased in August. This is likely to be interpreted as a sign that the part of the industrial sector that is not affected by the ongoing process of reducing overcapacity in heavy industry is faring quite well. It thus seems as if the effect of past economic policy easing has not fully faded yet. This in turn makes fresh monetary policy easing less likely, which is something global stock markets might not like.
Japan
BOJ governor Haruhiko Kuroda said that he will not hesitate to ease policy if needed at the Jackson Hole annual meeting. Amid its monetary policy review due by September, Kuroda said “there is no doubt that there is ample space for additional easing in each of the three dimensions,” referring to BOJ’s packages of asset buying, monetary base guidance and negative interest rate, signalling that BOJ might boost stimulus next month to push up inflation.
Data bag came in mixed this week. On one side of the coin, growth of household spending and retail trade were negative. On the other side, retail sales and housing starts were positive contributors to economic growth.
Sources: Danske Bank, Haendelsbank, Wells Fargo, HongLeon Bank.
