The Daily Update: The Week Ahead

The week started with markets on the quiet side with not only the UK bank holiday, but also many still digesting the comments from Fed Chairman Powell in his speech at Jackson Hole on Friday as well as looking forward to the payroll report on Friday. Powell said that if economic conditions evolved as expected, it ‘could’ be appropriate to reduce asset purchases ‘later this year’. Since the July FOMC meeting progress has been made in the labour market, however, the rise in the delta still casts a shadow.

With regards to Inflation, he believed that the ‘substantial further progress’ test for tapering had been met. But he stressed the likely temporary nature of current high inflation figures. He warned that tightening in response to a temporary surge in inflation could mean “the main policy effects are likely to arrive after the need has passed.” He did concede that the Fed is focused on incoming data and inflation expectations and emphasized that the Fed would respond if sustained higher inflation ‘were to become a serious concern’.

Mid-week we had the release of China’s PMI numbers, which showed the service industry contracted in August for the first time since the height of the pandemic early last year. The manufacturing PMI was a little lower than expected at 50.1 from last month’s 50.4 and below economists’ forecast of 50.2, however the real shocker was the non-manufacturing PMI. It slumped to 47.5 from the August figure of 53.3. The median forecast was for a pullback to 52.0. This drove the composite to 48.9, its first reading below the 50 boom/bust level since February 2020. The composite peaked in May at 54.2 and has fallen in each of the following three months.

However, it was not all doom and gloom in Asia, with Japan’s data better than expected. Yes, Industrial output fell 1.5% in July, however it followed a 6.5% jump in June and was better than the 2.5% drop predicted. Additionally, the unemployment rate unexpectedly slipped to 2.8% from 2.9%, and the job-to-applicant ratio rose to 1.15 from 1.13, defying forecasts for a decline. Lastly, housing starts jumped more than expected, coming in at 9.9% well above the eyed 5.3%.

The Nasdaq also took out a new high, up nearly 19% on the year, with most other equity markets on the quiet side. Oil continued to trade with a $68 handle after the OPEC+ alliance agreed a plan to boost production hoping demand will be there. Bitcoin broke 50k for the first time since mid-May.

The ADP in the States again confirmed that US firms have continued to create far fewer jobs than expected. Last month private payrolls increased by just 374,000, well below the market's estimates of 625,000. Unsurprisingly, the bulk of the new jobs created were in the hospitality and leisure industry, adding just over 200,000 positions. Last month's numbers, along with the previous month, are the lowest since the turn of the year, and suggest that companies are continuing to struggle to fill vacancies, with the delta variant of COVID-19 appearing to be a significant headwind still.

Late on Thursday, in a shock move, the Japanese Prime Minister Yoshihide Suga announced that he will not run for re-election as party leader later this month, ending his tenure after just one year. Even with his disastrous approved ratings (at an all-time low of less than 32%), there was wide expectation that Suga would still be re-elected as LDP leader, as an election must be called by late October

It was quiet and steady going into Friday as the markets waited for the US jobs data ahead of the long weekend in the States. The market estimates were for 725,000 jobs along with an unemployment rate of 5.2%. However, the ADP numbers did suggest a risk that the payroll figures could come in on the low side of expectations. So it was. The actual number of jobs added was indeed closer to the whisper at 235k with the previous month’s figure revised up to 1.053m from 943k. The unemployment rate was on the nose at 5.2 % versus the prior month’s reading of 5.4% and the participation rate fell slightly to 61.7%. Not that it caused any upward pressure on US treasuries, in fact the opposite happened after a brief rally, with bonds being offered across the curve and a bear steepening move that persisted for the rest of the session.

The week ahead will again start on the quiet side with the Labor Day holiday in the US. FOMC speakers will be a key focus this week to see how they react to NFP numbers, comments will be scrutinized for clues about the policy reaction. PPI is on Friday.

We also have the ECB on Thursday along with GDP figures in Europe as well as Japan and China inflation. ECB updated forecasts on inflation along with decisions about the future of PEPP will draw attention. The Reserve Bank of Australia and the Bank of Canada also meet.

Enjoy your week ahead.