Broadly speaking, the macro data out so far this week has been downbeat. Starting with Asia, August PMI surveys released over the last two days, including out of China, Japan, Taiwan, South Korea and Vietnam all point to further deceleration of growth in August. Chinese Caixin Manufacturing PMI was shown to have dropped to 49.2 from 50.3 in July, following in the footsteps of the drop to 50.1 from 50.4 in the official NBS manufacturing PMI during Tuesday’s Asia session. The worsening of business sentiment in the region, which is a lead indicator for a slowdown in economic growth, is partially as a result of rising Covid-19 infections- vaccination rates in Asia remain well below that of North America and Europe. Another problem the region continues to face is high freight costs, high input costs and other ongoing supply chain disruptions (remember that the major East Asian economies are heavily dependent on manufacturing and exports). On a more positive note, China data may improve in September with the country seemingly having got the late July/early August Covid-19 outbreak under wraps, but the latter issues noted above look set to continue to weigh on growth and the spate of recent week data bolsters the argument for further easing from the PBoC.
Sticking with an overview of the macro data out thus far this week, Tuesday also saw the release of US data which adds to the evidence that the resurgence of the pandemic (driven by delta variant infections) in the past few weeks is taking a toll on activity. The Conference Board’s August Consumer Confidence index fell to a six-month low of 113.8, down from 125.1 in July and well below forecasts for a much more modest decline to 124. The survey revealed that rising Covid-19 infection rates in the US and inflation were the major concerns being cited by consumers. We also had the release of another widely followed regional August PMI survey, this time out of Chicago; the headline index fell to 66.8 from 73.4 in July, below the expected drop to 68.0. Other regional August PMI surveys, as well as the nationwide preliminary Markit PMI survey, all fell in August, primarily as a result of rising concerns amongst businesses about the impact of rising Covid-19 infections. ISM Manufacturing PMI data, the highest quality and most widely followed US manufacturing PMI is set for release at 1500BST today and is set to move inlock step with the rest of the already released US PMIs this month and continue to moderate from the highs reached back in June; economists expect the headline index to fall to 58.6 in August from 59.5 and will be a key event watched by markets today.
To summarise all of the above economic chat in plain English; lead indicators show that Asian economies are slowing and that the US economy is now slowing too. But US and European equities are not at all worried; the S&P 500 currently trades comfortably at record levels with futures this morning in the 4530s and the Stoxx 600 is just below record levels as it this morning trades comfortably above the 470 level. Current global economic conditions are being described by some equity analysts as “goldilocks” conditions. The argument goes something along these lines; yes, growth is slowing in some of the world’s most important economic regions, but expectations are very much that global growth will remain well in positive territory (i.e. no one is talking about another recession, which is a much bigger risk to stocks than a growth slowdown) and, as a result of the global slowdown (and its expected negative impulse on long-term inflation), central bank monetary policy is set to remain historically accommodative, meaning global developed market bonds will continue to offer poor returns (making stocks comparatively more attractive) and equities will continue to derive the artificial boost offered by “cheap money”.
In the immediate future, the main driver of global equities will be US labour market data, as this is set to be a crucial determinant of the Fed’s QE tapering timeline. ADP’s August estimate of national employment change is out at 1315BST this morning and will be closely watched as it helps market participants set expectations for Friday’s crucial August jobs report, despite historically having a poor track record of predicting the official NFP number. There has also been quite of lot of focus on the European economy this week given the heap of key data already released this week, which have by and large been more positive than the Asia and US data released. Final Markit PMIs in the region for August were out this morning and remain at comparatively elevated levels and this morning’s Eurozone-wide labour market numbers showed a continued fall in unemployment in the bloc (coming in as expected at 7.6%). Meanwhile, yesterday’s Eurozone-wide HICP (consumer price inflation) showed a steeper than expected rise to 3.0% YoY and Q2 French GDP growth was better than expected. This morning’s German Retail Sales numbers for the month of July were very weak which is a cause for concern, but Eurozone bond yields nonetheless continue to advance, with the German 10-year at six-week highs and pressing on into the mid-0.30s% having been under -0.5% not two weeks ago.
Characteristically hawkish comments from the known ECB hawks over the past two days have likely added some fire under the recent move higher in Eurozone yields too; Holzman said the ECB was in a situation where it could think about reducing emergency bond purchases, adding that he expected the issue to be discussed at the meeting, while Knot said he expected the ECB to start reducing the pace of its emergency bond purchases at next week’s meeting, with a view to ending them in March. Fellow ECB hawk Weidmann is set to give remarks soon and could also call for a slowing of bond purchases after the next meeting. Bond analysts have also cited an announcement out of Germany about the issuance of a new 30-year bond as contributing to the recent rise in Eurozone yields. Despite the rise in Eurozone yields, which is at present outpacing the rise in US yields (US 10-year yields currently trade just above 1.30%, only about 7-8bps above the lows set two weeks ago and are still well below recent highs in the upper 1.30s%), EURUSD is struggling to advance convincingly beyond the 1.1800 level. The argument for a move higher in the pair based on new information out this week is strong, but the big picture for the pair remains bearish for the pair, many FX analysts continue to suspect. After all, the ECB hawks have historically been in the minority at the ECB and the bank’s recently announced change to its inflation targeting strategy means that it is likely to be a very long time before we get meaningful policy normalisation from the ECB. Meanwhile, it seems likely that the Fed will start hiking within the next year and a half, meaning the US rate advantage is set to grow.
Sticking with FX markets, the DXY is this morning hanging out just above the 92.50 mark having recovered a little from yesterday’s drop, with FX market participants in wait and see mode ahead of key data releases today and then on Friday. GBPUSD is flat around 1.3750 and trading well within this week’s ranges as it ignores slightly better than expected final PMIs out of the UK this morning, given that manufacturing growth was still shown to be at its weakest in six months. AUD is outperforming slightly despite weak China data and continued negative domestic Australian Covid-19 related news flow regarding infection rate (which remain elevated) and lockdown (which are expected to be extended); AUDUSD is up about 0.4% to just under 0.7350, perhaps aided by stronger than expected Q2 GDP growth data out last night, though this data is seen as out of date given the economy is now expected to be in recession in Q3 due to lockdowns. Speaking of GDP; Canadian GDP yesterday was in line with expectations and showed the Canadian economy growing at a modest pace of 0.7% QoQ. This barely moved the Loonie at the time and USDCAD is this morning trading ever so slightly lower just to the south of the 1.2600 level, but still within this week’s ranges. The broadly risk on market feel (stocks are at/close to highs, at least) is weighing on the FX havens, with JPY down about 0.3% on the day versus the US dollar, despite positive fiscal news out of Japan overnight (PM Suga is set to order the compilation of a new economic package and budget by the end of the week) and strong Japanese company profit data out overnight. USDJPY is pushing on towards 110.50 this morning and CHF is down about 0.25% this morning against the buck, despite stronger than expected Swiss PMI data out this morning.
Finishing with a quick check on crude oil markets; WTI has been choppy and swinging between the mid-$68.00s and $69.00 handle, but trades with a modestly positive bias. Prices are likely garnering some support from last night’s private weekly inventory numbers from API, which showed a larger than expected draw of 4M barrels in the week ending on the 27th of August. Traders will now eye official inventory data from the EIA at 1530BST for confirmation. The main focus of today will be on OPEC+, who are set to meet from 1600BST; sources suggested the cartel has recently upgraded its outlook for oil demand in 2022, which should bolster the argument to go ahead with the planned 400K barrel per day output hike in September. Attention will also continue to be on events in the Gulf of Mexico, where the vast majority of the region’s near 2M barrel per day in daily oil production was recently taken offline by Hurricane Ida. Traders will now assess the recovery of output back to normal levels and whether there is any divergence between the rate of recovery of refining versus oil production activity, and whether that might result in the formation of any crude oil supply build-ups.
