The Daily Update: The Week Ahead

We started the week with sentiment on the back foot with US consumer confidence data, the collapse of Kabul, spreading Delta variant and weaker than expected Chinese data. In China Retail sales, industrial production, investment in both fixed assets and property slowed. The ‘surveyed jobless rate’ also unexpectedly rose to 5.1% from 5.0%. The University of Michigan's consumer confidence survey came in at the lowest in a decade. However, an unexpected pick-up in consumption helped lift the Japanese economy by 0.3% in Q2. Consumption was expected to have been flat but instead rose by 0.8%. As a result, the Q1 decline was revised to -1.0% from -1.5%. The strength came from business spending. It rose by 1.7% in the quarter, better than expected, though the Q1 contraction widened to -1.3% from -1.2%.

The themes that were in play at the beginning of the week continued with risk sentiment on the back foot along with safe haven assets moving higher. In the States, we saw retail sales fall short of expectations in July. The headline figure came in at -1.1% m/m in July, the consensus was for -0.3% after a +0.7% gain in June, revised from +0.6%. Excluding autos, sales fell 0.4%, the market was going for +0.2% and ex autos and gasoline sales fell 0.7% again well below the -0.1% expectations. However, the prior two months did show a net upward revision. We also had Industrial production increasing by 0.9%, above the 0.5% expectation, in July after a revised +0.2% rise in June. The stand out was the auto sector output jumping by over 11%; the fastest monthly gain since last July. The gain was largely because of a decision by many auto manufacturers to forego seasonal shut downs this year after a lacklustre Q2.

On the back of the figure, treasuries had a bit of a rollercoaster day as they started off on the front foot, continuing the rally. The fairly strong industrial production number then stalled the rally, erasing all the gains of the overnight session. After all the intraday volatility, yields on the 10-year ended up at less than half a bp lower!

In what will surprise no-one the main event of mid week, the FOMC meeting minutes, showed that the members had a wide-ranging discussion about tapering in which Powell called the Fed’s first ‘deep dive’. The statement was backed up with an entire section devoted to the discussion of timing and composition of asset purchases aptly titled ‘Discussion of Asset Purchases’.

According to the minutes, while ‘Various participants commented that economic and financial conditions would likely warrant a reduction in coming months. Several others indicated, however, that a reduction in the pace of asset purchases was more likely to become appropriate early next year because they saw prevailing conditions in the employment market as not being close to meeting the Committee's 'substantial further progress' standard or because of uncertainty about the degree of progress toward the price-stability goal’.

Asian equity markets underperformed, with HK stocks leading the way. MSCI’s Asia-Pacific Index at the lowest level since December. Alibaba plunged to a record low as concerns mount over further regulatory curbs in China’s tech sector. Oil markets also slump to their lowest levels since May. Markets on both sides of the pond followed Asia with a sea of red. Treasuries continued to be range bound.

On Friday we had the Philly Fed business activity index slip 2.5 points to 19.4 in August (consensus 23.1) from 21.9 in July. Here in the UK we had retail sales. The figures were a big miss falling 2.5% compared to June. Economists had expected them to inch up by around 0.4pc after June’s 0.5pc increase. Non-food store sales such as computers and sports equipment dragged down sales with a 4.4pc drop, while food store sales dipped 1.5pc last month after June's boost from the Euros disappeared.

Other than the UK retail sales it was a quiet end to the week on the Data front. Friday’s markets saw a steadying of stock markets while US Treasury yields rose into the close and the US dollar continued to strengthen with the DXY index up above 93.20.

This week in the US focus will be on the Jackson Hole Symposium with Chair Powell speaking on Friday. We also have August PMI’s and July’s Personal Income and expenditure data, along with home sales and the GDP revisions from the 2nd quarter. Treasury supply comes in the shape of $60bln 2 year, $61bln 5 year and $62bln 7 year. In Euroland we have PMI releases, as we also have in the UK, and in Germany GDP and IFO with Business confidence in France. Japanese Machine tool orders for July and August Tokyo CPI may have a bearing on the Yen and stocks in the Far East and with nothing scheduled for China the focus will be on government statements.