French survey contrasts with flash PMIs

Chris Scicluna
Emily Nicol

French business survey provides more encouragement than the flash PMIs:
Contrasting with last week’s flash PMIs which suggested a notable loss of momentum in both manufacturing and services as the pandemic revived over recent weeks, the latest INSEE French business survey pointed to ongoing improvement in conditions in August. Indeed, the headline business climate index rose for a fourth successive month and by a substantive 7pts to 91, 38pts above April’s trough albeit still some way below the long-run average (100) and well below February’s pre-pandemic level (105).

Perhaps reassuringly, all major sectors reported improvement in the INSEE survey. Manufacturers (for which the headline climate index rose 11pts to 93) saw the biggest improvement, with firms reporting an increase in new orders and all sub-sectors happier bar chemicals. However, manufacturing firms revised down by 4ppts their investment forecasts for this year, expecting a drop in capex of 11%Y/Y in nominal terms in 2020. In the other sectors, the improvement in services (up 6pts to 94) was also relatively broad-based, although firms in hospitality continued to report weak conditions. And the retail index (up 5pts to 93) also posted another increase.

Today’s INSEE survey also pointed to much better conditions in the labour market. In particular, reflecting more favourable developments in the services sector, the employment conditions index rose a sizeable 12pts to 88, 39pts above the April trough albeit still 17pts below February’s level.

Later this morning, ECB bank lending figures for July are due. The previous set of data showed that growth in loans to households was steady at a respectable 3.0%Y/Y, supported by mortgage lending. And while growth in lending to non-financial corporations slowed slightly, it remained very strong at 7.1%Y/Y. Meanwhile, ECB Chief Economist Lane will participate at the Jackson Hole economic symposium on a discussion surrounding ‘Crisis management in the COVID-19 economic shutdown’.

A soft end to Q2 for Japanese construction:
With activity in Japan’s services sector having rebounded in June (+7.9%M/M) and manufacturing production also posted the first positive growth (+1.9%M/M) since January, today’s all industry activity figures inevitably reported a jump in total output at the end of Q2. But the rate of growth of 6.1%M/M fell a touch short of expectations and followed a pace of decline in May that was steeper than previously estimated (-4.1%M/M) to leave it down 10.8%Q/Q in Q2 and still 10% below the pre-pandemic peak. The additional weakness partly reflected another soft reading in construction activity that month, with the 2.2%M/M drop driven by a more than 3%M/M decline in private sector work. In contrast, public sector work moved sideways in June.

Despite the latest decline, overall construction output has suffered a less severe contraction than those in services and manufacturing since the outbreak of the coronavirus, underpinned by ongoing public sector building work (up a little more than 9½% from the pre-pandemic level) thanks to repeated government stimulus packages. Indeed, the level of industrial production in June was still down by almost one fifth from January’s peak, while tertiary output was 8% lower, albeit with living and amusement-related services activity unsurprisingly still down a much steeper 32% since the start of the year. The pickup in the number of new Covid-19 infections in July seems highly likely to have slowed the recovery in the services sector in particular, which – given that it accounts for around two-thirds of overall output – will in turn limit the recovery in GDP too.

Drop in Australian private capex a little less sharp than feared:
Yesterday’s ABS construction figures came in well ahead of expectations, with work done falling just 0.7%Q/Q in Q2 (compared with the BBG expected decline of 7%Q/Q). Today’s private capital expenditure data also beat (the very downbeat) expectations, although still reported a marked contraction, with total investment down a hefty 5.9%Q/Q in the second quarter to leave it 11½% lower than a year earlier. While the weakness was widespread, it was led by the “other selected industries” component, pointing to a big hit in services. The drops in manufacturing (-4.5%Q/Q) and mining (just -1.2%Q/Q) were more moderate.

Nevertheless, there was a sizeable drop in equipment investment – which will feed into next week’s GDP release – of 7.6%Q/Q, to subtract around 0.3ppt from GDP growth. Admittedly, this was still smaller than might have been expected given the disruption caused by the pandemic and indeed was more moderate than in many other major economies. As such, there appears to be some modest upside risks to forecasts of next week’s estimate of Q2 GDP, although the contraction is still likely to be of historical magnitude. But as a separate ABS survey suggested that more than one third of businesses expect to find it difficult to meet financial commitments over the next three months, firms unsurprisingly remain downbeat about the outlook for investment growth, with today’s capex release reporting investment for the financial year as a whole is expected to be down almost 10%Y/Y.

UK car production struggles to get out of first gear:
SMMT car production figures for July suggested that the recovery in UK auto manufacturing is lagging well behind that of its peers. UK car production was still down a steep 20.8%Y/Y last month, far inferior to the equivalent drop of just 6%Y/Y in Germany. UK car production for the domestic market was down a steep 37.1%Y/Y while the number of cars produced for export was down a more moderate 16.8%Y/Y. Overall, the July figures left production in the first seven months of the year down 39.7% compared to the equivalent period in 2019.

US – Powell back in the spotlight:
Of course, the main focus today will be on the start of the Fed’s Jackson Hole economic symposium, where Chair Powell will kick off the event. After last week's FOMC minutes provided no substantive new information on the Fed’s strategic policy review, hopefully Powell's speech can offer greater insights into what to expect when the outcome of the review is eventually published, most likely following the FOMC’s meeting on 16 September. Of course, expectations are for a move to some version of an annual inflation-targeting (AIT) strategy, which would see the Fed seek a period of above-target inflation when the economy is at or near full employment to compensate for periods of sub-target inflation at times (such as the recent norm) when the economy has been less buoyant. While such an approach has been increasingly priced over recent weeks – manifesting itself in real rates on US TIPS below -1% and break-even inflation rates rising above 1.70% – the precise definition of the strategy to be agreed is uncertain and could have market ramifications.

In terms of economic data, all eyes will be on the weekly jobless claims numbers, which surprised on the upside a week ago with a reading for initial claims back above 1.1mn. These will be accompanied by July’s pending home sales figures as well as a revised estimate of Q2 GDP (current estimate of -32.9%Q/Q annualised) and, later on, the Kansas City Fed manufacturing activity survey results for August.

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