Markets struggle in Asia following further modest gains on Wall Street
After rebounding strongly over the previous two days, a quieter day on Wall Street left the S&P500 with a modest advance of just 0.2% led by gains in the technology sector. It was a similarly quiet day in the bond market, with the 10Y UST yield closing down just 1bp at 1.28% as initial jobless claims unexpectedly popped back above 400k and existing home sales increased fractionally less in June than analysts expected (with homebuilder DR Horton also reporting weaker orders). The greenback was also little changed overall, but gained slightly against the euro after the ECB’s latest guidance implied that rate hikes in the euro area were no more than a distant prospect.
Since the close US equity futures have rallied a few tenths further, buoyed by post-close earnings reports from the likes of Twitter even as Intel stock declined in extended trade. Against that background, and with Japanese markets again closed for a public holiday, equity markets in the Asia-Pacific region have nonetheless struggled to make headway, with reports of rising coronavirus cases perhaps again dampening investor sentiment. Those reports included cases linked to the Olympics, which just hours out from the opening ceremony have increased to 110. In Mainland China, the CSI300 is presently down just over 1%, with healthcare and consumer staples leading the market lower. Stocks are down similarly in Hong Kong, with newswires reporting that China is considering handing down a serious penalty to ride hailing giant, Didi Global, following last month’s US IPO. Stocks are presently flat in South Korea and modestly weaker in Singapore.
In Australia, the ASX200 was also steady, even as flash PMI data for July pointed to a pandemic-induced contraction in service sector activity. New coronavirus cases recorded a welcome decline in Victoria over the past day, but unfortunately rose to a new high of 136 in New South Wales, sparking a further tightening of movement restrictions in parts of Sydney. And so with the lockdown in Sydney now certain to be extended further past the end of next week, New Zealand announced the suspension of the Trans-Tasman quarantine-free travel bubble for at least eight weeks. Even so, AGCB yields have simply tracked the modest decline in USTs yields.
UK retail sales up in June perhaps supported by the European football championships; consumer confidence slightly firmer too
Retail sales in Great Britain rose ½%M/M following a drop of 1.3%M/M in May. Given the volatile monthly profile since the start of the year and having jumped by more than 9%M/M in April, this left sales 9.5% higher than the pre-pandemic level and up a whopping 12.2%Q/Q in Q2, having contracted by more than 6%Q/Q in Q1.
Within the detail, growth in June was driven by rebound in spending at food stores (4.2%M/M, following a decline of 5.5%M/M in May), with anecdotal evidence suggesting the jump was partially linked to the Euro 2020 football championship. Auto fuel sales continued to rise (2.3%M/M) too as domestic travel increased as lockdowns eased and ongoing international travel restrictions encouraged staycations. In contrast, non-food store sales fell in June (-1.7%M/M) for the first time since January, with a hefty drop in sales at household goods stores (-10.9%M/M), reportedly partly associated with shortages of certain items – furniture and electrical goods – due to supply-side issues. This notwithstanding, sales of such items were still significantly higher than their pre-pandemic peak. And overall, sales at non-food stores were up 37%Q/Q (boosted by the re-opening of non-essential stores in April). But while the amount spent online fell for the second successive month in June, the proportion of online retail spending (26.7%) still remained high by historical standards.
Despite the recent spike in coronavirus cases, today’s GfK consumer confidence survey suggested that households remained broadly upbeat at the start of Q3. In particular, the headline sentiment index rose 2pts to -7 in July – the sixth consecutive month the index has improved or held steady – returning to its pre-pandemic level for the first time. While households were a little less optimistic about the general economic situation over the coming twelve months than in June, this was still significantly higher than a year ago. And a higher share of consumers assessed it a good time to buy durable goods, with the major purchase index up 7pts to +2 in July, the first positive reading since February 2020. So, while at the margin sales of goods might well give way to increased spending on services as the final restrictions were removed this month, and the current sharp spike in coronavirus cases close to January’s peak clouds the near-term outlook, today’s survey suggests that overall household consumption will likely maintain a steady uptrend over coming months.
The UK’s flash PMIs – due later this morning – might also point to a slight moderation in the pace of recovery at the start of Q3. However, the composite PMI is expected to remain close to June’s record high of 62.2 thanks to robust conditions in both manufacturing and services. But not least given the sharp rise in coronavirus cases over the past month we may see some levelling off in business optimism while supply bottlenecks are likely to have intensified amid staff shortages due to the need for self-isolation associated with the ‘pingdemic’.
Flash PMIs likely to flag downside risks to output from delta variant and supply bottlenecks
While it tweaked its forward guidance on rates (but not asset purchases) to suggest that there will be no hikes for years to come, yesterday the ECB was broadly upbeat about the economic outlook, judging that the recovery remained on track and suggesting that the risks remained broadly balanced. Consistent with that assessment, but also in line with yesterday’s Commission and INSEE confidence indices, the flash PMIs today are likely to remain at relatively high levels by historical standards, albeit perhaps also suggesting a modest easing in momentum due to the spread of the delta variant, the associated tightening of restrictions in certain countries, as well as the severe flooding recently impacting Germany, and certain other countries. However, according to the latest Bloomberg survey, the euro area services activity PMI is expected to rise 1pt to 59.3, which would be the highest since June 2006. Meanwhile, the euro area manufacturing PMI is expected to fall back by almost 1pt from the prior month’s series high, albeit remaining elevated at 62.5. The manufacturing PMIs also seem bound to continue to report backlogs of work close to record highs and ongoing strong input price pressures in the sector. Overall, the euro area composite output PMI is expected to rise ½pt to 60.0, which would also be the highest since June 2006.
Flash PMIs likely to remain elevated in the US today
This week’s US economic diary also concludes with the flash PMI readings for July, which despite a recent uptrend in new virus cases seem likely to remain near the very elevated levels seen in June. A slower day for corporate reporting will see just a handful of S&P500 companies share their results, but the pace will pick up substantially next week with over a third of the S&P500 scheduled to report.
Aussie service sector PMI slumps in July as lockdowns curtail activity
The only economic news in Australia today were the flash Markit PMIs for July. Due to their short history, these reports tend to command less market attention than the NAB’s more established business survey. Nonetheless, it was notable that the composite PMI output index slumped 11.5pts to a 14-month low of 45.2.
In the detail, unsurprisingly, the slump was driven by the service sector – clearly impacted by the lockdowns in Greater Sydney and the state of Victoria (the more recent lockdown in South Australia may weigh further when the final figures are released). The headline services PMI – the business activity index – plunged 12.6pts to a 14-month low of 44.2. After being at a record high as recently as April, the new orders index fell a similar 11.4pts in July to a 14-month low of 44.1. The halt to activity also took its toll on the employment index, which fell 5.1pts to a nine-month low of 50.7. As to be expected, the virus outbreak had a much smaller impact on the manufacturing sector, although the headline manufacturing PMI still fell 1.8pts to a four-month low of 56.8. While the output index fell a much larger 4.7pts to a 13-month low of 51.8, the new orders index fell just 2.3pts to 54.4 and the new export orders index fell just 1.2pts to 51.7. Moreover, despite the virus outbreak, the employment index increased 0.9pts to 55.9, marking the highest reading in the history of the survey. On the pricing front, in the services sector the output prices index fell 3.1pts to a four-month low of 53.4, whereas the equivalent index in the manufacturing sector fell just 0.2pt to a still very elevated 61.4 – a level that likely reflects both high rates of capacity utilisation and ongoing supply bottlenecks.