US
While August jobs were a touch disappointing on the headline at +173,000, the big upward revisions to the two prior months and the two-tick drop in the jobless rate to a cycle low 5.1% were solid offsets.
The decent employment report capped a week of generally sturdy economic results. Factory orders for July came in a bit weaker than expectations, but after accounting for upward revisions to June, it was about in-line with expectations.
The key release next week in the US is the University of Michigan preliminary consumer sentiment for September. The August release saw a decline in sentiment over the last two weeks of the month – likely reflecting increased uncertainty on global growth and lower stock prices.
Equity markets have remained lower but gasoline prices have finally started to react to the fall in oil prices, which should support consumer sentiment.
Overall, US economic growth momentum remains buoyant as the recovery shifts into high gear. After rebounding at a 3.7% q/q pace in Q2, the economy is expected to boast a relatively robust 2.5% or better performance in Q3, underpinned by positive momentum in both consumer spending and business investment activity.
Beyond Q3 the outlook remains uncertain, as the fallout from the strong dollar and weak global backdrop temper domestic activity.
EU
ECB president Draghi made it very clear that the ECB is prepared to take further measures. It is likely the central bank will match its word with deeds in December, since it will likely lower its forecasts at that time.
The ECB has two options: it can increase the monthly buying volume from currently 60 billion euros and/or it can officially extend its buying programme beyond September 2016. The consensus is the ECB to prefer the second alternative – a longer duration of purchases.
Indeed, the larger monthly buying volume would have a stronger signal effect in the short term, but this signal could soon be interpreted negatively if markets speculate that the supply of bonds available to the ECB would decline all the sooner and the bank could consequently run into difficulties with the effective implementation of its programme.
If the ECB takes action during the remainder of the year, as expected, the announcement of an extension of the programme would change nothing with regard to the foreseeable future (i.e. in the coming months). The important signal effect of such a decision would be low. Consequently, the ECB will probably accept the risks associated with a higher buying volume in December.
However, this measure will only support the markets, not the economy as a whole. In general, low growth and low inflation are inevitable after the bursting of a debt bubble. That is why the belief that bond purchases would support growth in the euro area was regarded by some with skepticism. And the disappointing data has increased such sentiment.
But instead of stopping the mostly ineffective purchases, the ECB looks set to increase them. Ultimately, such a step will not support growth, but only inflate prices on the financial markets.
Sentix Investor Confidence is due to be released. The figure will be of greater interest than usual this time, as it gives us the first sign on how big a euro-area sentiment effect can be obtained from the market unrest.
Another important event is the release of German industrial production and trade balance figures for July. This may also give an indication of the direct export impact of the economic weakness in China.
UK
Although it is currently not high on the list of things for markets to worry about, the UK’s potential departure from the EU, following a referendum (planned for no later than end of 2017), would have significant ramifications for the UK and the rest of Europe. Many of the economic arguments in favour of a Brexit are unconvincing and it is ultimately a political issue.
But there is a strong sense that the debate is not really about the EU at all. It is part of a wider backlash against globalisation which is evident in many other European countries but finds expression in Britain in anti-EU sentiment.
The primary benefit of EU membership is tariff-free access to a market of 500 million people which facilitates the movement of goods, services, capital and labour (let’s not forget the EU is by far the largest market for UK exports and is an important source of FDI inflows). The financial services is also a major beneficiary of the UK’s membership of the EU, and half of all European investment banking activity is conducted in London.
The economic case for Brexit revolves around two key arguments:
- It will result in lower EU imposed regulation which helps to improve the UK’s growth performance. The UK already has amongst the least regulated product markets and the lowest level of labour protection in the EU; hence the removal of EU legislation would not provide much of a boost.
- Since the UK is a net contributor to the EU budget, the funds could be better spent on domestic projects. Whilst the UK is the second largest gross net contributor after Germany, it is only the fifth largest on a per head basis, and the average contribution over the period 1973-2014 amounted to just 0.35% of GDP.
The majority of the evidence indicates that there are substantial net costs to leaving the EU and it is hard to avoid the conclusion that a Brexit represents a gamble with the UK’s economic and political interest, whose payoff is at best uncertain.
China
In China, focus next week will turn to export figures, credit growth and inflation. Exports have been weak this year with exports to emerging markets in particular taking a hit. The coming months will give an impression of how hard the emerging market crisis is hitting exports to this region and August will give the first signal. However, the data is very volatile so it is hard to gauge a trend from a single number.
The numbers on credit growth (aggregate financing) will also be interesting to see whether the monetary easing is feeding through to actual growth in credit. So far, the credit impulse is still quite weak.
The main lift to growth in China currently is coming from housing, where home sales and house prices have picked up lately.
Sources: BMO Capital Markets, Commerzbank, Danske Bank, TD Economics