US
Despite a dismal Q2 real GDP reading, the jump in US NFP (non farm payrolls) in July and upward revisions to previous months’ data suggest the overall economy has not lost any steam. Coming in much better than expected, NFP rose by 255,000 jobs, with the unemployment rate unchanged at 4.9%. With upward revisions to May and June, the three-month moving average is now at 190,000 jobs. Gains were broad-based including construction, which posted a positive reading following three straight months of declines.
Providing a pulse of the manufacturing sector, the ISM manufacturing index came in weaker than the consensus estimate, with a reading of 52.6. Although the headline moderated, the underlying components were a bit more promising. The production index edged higher and new orders remained at an elevated level, suggesting the factory sector has a bit more room to grow. The slightly lower headline reading was due to a slip in employment, which fell into contraction territory during the month, and a downshift in supplier deliveries. The weak supplier delivery figure may imply faster delivery times and could be an indication that supply-chain disruptions may be behind.
Fed chatters this week suggest that rate hike this year remains possible. Chicago Fed Chair Charles Evans said that “perhaps one rate increase could be appropriate this year” during a media briefing at Chicago Fed. In addition, Atlanta Fed President Dennis Lockhart said yesterday that it was too soon to rule out an interest rate increase in September’s meeting and instead policy makers should “wait and see how the data come in”. On the other side of the fence, Minneapolis Fed President Neel Kashkari said that low inflation allows the fed to keep rates lower for longer to boost the economy and jobs.
US 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.
EU
ECB’s latest macroeconomic projections for the euro area showed that the economy is expected to grow 1.6% in 2016 (previous: 1.4%) and 1.7% in 2017 and 2018. HICP inflation is expected to remain very low in 2016, at 0.2% (previous: 0.1%), strongly dampened by the past fall in energy prices. For 2017, a significant increase in headline inflation to 1.3% is anticipated while declining economic slacks may push up inflation somewhat further to 1.6% in 2018.
In the EU, most interesting news next week is the release of Sentix Investor Confidence which will be examined to gain additional information about the impact on the euro area from the UK’s decision to leave EU. The figure dropped in July, but the weakness in investor sentiment has only had limited impact on economic sentiment. It is early days and a long period of negotiations may drag out the uncertainty thus resulting in lower investments.
EU GDP growth in Q2 is due for release next week together with the first release of the German figure. The first estimate for the euro area showed economic growth at 0.3% quarter-on-quarter and 1.6% year-on-year, which is still higher than the potential growth rate of the euro area. Domestic demand has been the main driver of GDP growth in recent years, but the higher oil price during Q2 is likely to have been a headwind to private consumption.
UK
During the summer, UK economic indicators and barometers have become significantly more pessimistic. Consumer confidence fell in July and the index reflecting the general economic situation incoming 12 months fell to levels not seen since 2012.
Consumers are more worried due to the high uncertainty surrounding the referendum. Business optimism within the manufacturing sector mirrors the uncertainty among consumers. The CBI survey of 472 firms reported that total new orders and new domestic orders were relatively unchanged, although firms expect these to fall over the next three months thereby highlighting the need for action to raise confidence.
Business optimism fell at its fastest pace since January 2009 in the last quarter. The proportion of firms reporting political or economic conditions abroad as a factor likely to limit export orders over the next quarter climbed to are cord high.
The extent of the UK slowdown could be worse than feared. This was the message from the PMI readings from the UK, which showed a drop in the composite PMI to just 47.5 in July. This was worse than the market feared. It was the largest monthly drop ever recorded and the lowest reading since April 2009, when the world economy was still in the clasps of the great financial recession. Furthermore, UK mortgage approval fell to the lowest level in 13 months as Brexit delivered a blow to consumer confidence. Services sector is shrinking at its fastest pace in seven years.
For the first time in seven years, the BoE decided unanimously to cut the policy rate (the Bank Rate) by 25 basis points to 25 basis points. A new mechanism was introduced (the TFS – Term Funding Scheme) in order to reinforce the transmission of cuts in the Bank Rank to the interest rates. This TFS will be funded by GBP 100 billion. The asset purchase programme will be expanded by GBP 60 billion to a total of GBP 435 billion, although three members voted against the proposition. Buying corporate bonds of up to GBP 10 billion was a new step.
China
The trade balance reading next week will give some input on the strength of exports. The external sector has seen a big tailwind from a 10% depreciation of the trade weighted CNY over the past year and moderate pick-up in the US.
Note that the data are quite volatile and not a good gauge of underlying activity. CPI and PPI readings are expected to show unchanged CPI inflation at 1.9% year-on-year and clearly below the 3% target. PPI inflation has increased over the past months pushed up by higher commodity prices.
Sources: Danske Bank, Haendelsbank, Wells Fargo, HongLeong Bank.