The Daily Update: The Week Ahead

Early in the week we had the release of China’s July official PMI’s, manufacturing and non-manufacturing both slowed from the previous month but remained in expansion at 50.4 and 53.3 respectively.

In manufacturing the sub-indices showed general weakness with only employment a little stronger, input and output prices fell hard from the lofty levels of May although remaining in expansion. Forward looking new orders and export orders also weakened reflecting a softening in momentum from the demand side, this is thought be similar to other countries where we have seen a recent sharp rise in some prices, accompanied by supply side constraints, putting downward pressure on consumer consumption. The official non-manufacturing PMI index was affected by a slowdown in the construction sector although the service sector remained robust, but this is thought to be before the impact of the further closing down of certain provinces and cities due to the most recent outbreak of the Covid delta variant. The opposite was seen in the Caixin services PMI which bounced to 54.9 from 50.3 previous which helped steady the stock market from the turmoil seen in the last weeks due to the government edicts in technology learning and property.

Next we had Eurozone manufacturing PMIs with Germany the only country beating expectations pushing up the overall Eurozone index to 62.8 versus 62.6 expected. The services and composite PMIs were below expectations in every country with the Eurozone composite dropping from 60.6 in June to 60.2 in July. The UK numbers were the reverse of Europe as the composite jumped to 59.2 from 57.7 last time.

US economic data was mixed early in the week, the manufacturing PMI was stronger than the calls while the ISM manufacturing index came in much weaker as did the ISM prices index while factory orders and Durable goods were all stronger by quite a margin. However, the Non-Farm Payrolls (NFP) release for July on Friday afternoon was the strongest report for a while with 934k jobs added as well as a further 119k from previous revisions. The unemployment rate fell from 5.9% to 5.4% and hourly earnings came in at 4% year on year, a very strong report which now has observers looking towards the Jackson Hole symposium in the last week of August for a taper announcement.

The Bank of England left interest rates unchanged at 0.10% along with their corporate bond buying target of 20bln and the Gilt purchases at 875bln. They also forecast that inflation will peak higher than expected at around 4% but this is thought to be transitory. They warned of some “modest tightening over the next three years to keep price growth under control”. The members gave more clues about their approach to removing stimulus, saying they will start to unwind their 875 billion-pound ($1.2 trillion) quantitative easing program when the interest rate reaches 0.5%. That’s facilitated by the central bank’s decision on Thursday to embrace the possibility of sub-zero policy.

In markets the S&P closed near the all-time highs spurred on by the encouraging NFP data while bond yields climbed with the ten year UST closing at 1.30% having been at 1.13% mid-week and the US dollar as measured by the DXY index traded up to 92.77 from below 92 earlier in the week. European stocks followed the US market closing strongly and even China’s stocks recovered from the selloff late July spurring other markets in the region to fare much better. Gold continued to struggle trading down to 1745 from the 1900 level seen in July and oil followed suit down over $7 on the week now just above $69.

This week we will certainly hear from the Fed members, let’s hope they have the same song sheet for a change, with the release of the US July CPI and PPI numbers the focus. In the UK the Q2 GDP and Industrial Production (June) will be of note. In the Eurozone we have further CPI releases and the German ZEW survey with a mixture of Industrial Production indicators Europe wide. In China we have had this morning the YoY CPI and PPI numbers at 1% and 9% a little stronger than the calls.