Powell confirms QE taper could start this year, but rate normalisation still some way off
The key focus at the end of last week was, of course, Jay Powell’s much-awaited speech to the Jackson Hole symposium. In his remarks, Powell indicated that while “substantial further progress” – required to initiate the QE taper – had been achieved with respect to lifting inflation, it had not yet been achieved with respect to the Fed’s employment mandate. However, as indicated in the minutes of the July FOMC meeting, Powell indicated an expectation that the latter condition could be met over coming months, which could allow the taper to begin later this year. Thus depending in large part on the outcome of this coming Friday’s August employment report, the Fed now seems likely to announce the QE taper at either the 22 September or the 3 November meeting. While that alone might have triggered some weakness in bond markets, importantly, Powell emphasised that the test for normalising interest rates is “different and substantially more stringent”. He emphasised that while labour market conditions are improving, there is still considerable ground to be covered to reach maximum employment and that the pandemic continues to threaten activity. Powell also spent considerable time defending the Fed’s view that recent inflation pressure will prove transitory and that responding to the current elevated inflation rate may do more harm than good. So, the overall tone of Powell’s remarks remained dovish and cautious.
Investors heartened by Powell’s remarks, sending equities and bond prices higher
Investors greeted Powell’s remarks warmly. Wall Street had already opened positively following news of a much sharper than expected narrowing of the merchandise trade deficit in July, a larger than expected lift in personal incomes in July and a core PCE inflation rate that was in line with market expectations. Powell’s remarks further boosted the equity market, with the S&P500 going on to close up 0.9% – more than erasing the previous day’s decline and so setting a new record high. The Nasdaq advanced 1.2%, similarly setting a fresh record high. Commodity investors also appeared pleased with Powell’s remarks, with both oil and metals moving higher. In the bond market, the yield on the 10Y note – which was sitting near 1.36% just before Powell spoke – erased its mid-week increase to close at 1.31%. Meanwhile, Powell’s remarks took the wind out of the greenback’s sails, with the currency losing ground against all its major counterparts, including the yen.
Against that background, during a quiet start to the week for local data, equity markets have reopened with a positive tone in the Asia-Pacific region. Japan has led the gains, with the TOPIX increasing marginally above 1.0% to a more than two-week high. A larger than expected lift in retail sales in July perhaps helped to underpin sentiment, albeit further explaining why the government is struggling to bring the current record virus outbreak under control. That outbreak continues to weigh on PM Suga’s cabinet approval rating, which remained at a record low of 34% this month according to the latest Nikkei/TV Tokyo poll. While bourses also saw solid gains in Singapore and Taiwan, gains were smaller in Hong Kong and South Korea. Meanwhile, bucking the trend ahead of tomorrow’s likely weaker official PMI readings, China’s CSI300 declined modestly.
In the Antipodes, Australia’s ASX200 increased only modestly and bond yields nudged lower after New South Wales reported a fresh record of 1,290 new virus cases over the past day, continuing an unrelenting uptrend despite two months of gradually tightening restrictions (cases fell slightly to 73 in Victoria). There was little reaction to the ABS’s release of the Q2 business indicators, which reported solid growth in wages and profits but little change in manufacturing and wholesales sales. And with business inventories rising less than expected, today’s data further point to no more than modest growth in Q2 GDP, which will be reported on Wednesday. By contrast, in New Zealand equities rose solidly and longer-term bond yields nudged higher after just 53 new virus cases were reported today – down 30 from the day before and the least in five days. And with all those cases occurring in the Auckland region, PM Ardern confirmed that regions south of Auckland would be able to move to slightly less stringent restrictions from midnight tomorrow.
Japan’s retail sales lift further in July as spending on fuel increases
This week’s Japanese data flow kicked off today with METI releasing news on retail spending during July. After declining steeply in April and May, spending rebounded 3.1%M/M in June. Today’s data indicated that despite the re-imposition of state of emergency conditions in some prefectures, this recovery continued in July with spending increasing a further 1.1%M/M – an outcome that was firmer than the consensus expectation. As a result, annual growth in spending increased to 2.4%Y/Y from just 0.1%Y/Y in June, and the level of spending reached its highest level since the onset of the pandemic (indeed, the highest since the month before the consumption tax increase on 1 October 2019). That said, the increase in July appears narrowly focused, with a further 1.6%M/M lift in spending on fuel – now up more than 27%Y/Y – the only subgroup to report (seasonally-adjusted) growth during the month. Spending on household machines – which outperformed at the onset of the pandemic – fell a further 7.1%M/M in July to the lowest level since May last year. Spending on general merchandise also declined 0.5%M/M but remained up 1.0%Y/Y while, after recovering sharply in June, spending on apparel and accessories fell 9.3%M/M but was still up 2.9%Y/Y from last year’s very depressed level.
Given today’s result, retail spending in July was 3.1% above the average monthly level through Q2. A much better indication of overall consumer spending should be provided by next week’s release of the BoJ’s Consumption Activity Index for July, although we note that the latter significantly understated the strength of private consumption spending in Q2 (at least as currently reported).
Plenty of data still ahead in Japan this week
Looking ahead to the remainder of this week’s diary, the coming two days are especially busy. A key focus tomorrow will be the IP report for July, with the market expecting output to have declined a little over 2%M/M – as signalled by last month’s bias-adjusted estimate by firms – following a 6.5%M/M rebound in June. Also of interest will be what firms have to say about the outlook for production over the remainder of this quarter. In light of the re-imposition of state of emergency conditions in the Tokyo area – since followed elsewhere – tomorrow’s household employment data for July will also be of interest, while housing starts and construction orders readings for July and consumer confidence data for August will also be released tomorrow. On Wednesday, the MoF will release the results of its survey of corporations for Q2, which amongst other things will cast light on potential capex and inventory revisions when the Cabinet Office later releases its second estimate of GDP growth in Q2. News on vehicle sales in August will also be released, as will the final Markit manufacturing PMI survey results for August. In addition, BoJ Deputy Governor Wakatabe will give a speech via webcast to local business leaders in Hiroshima. The pace slows down later in the week, with August monetary base data due on Thursday and the final results of the Markit services PMI survey on Friday – the latter of interest to see whether the large preliminary decline is partially revised away, as has tended to be the case in recent months with the release of the final report.
China’s August PMIs likely to point to a further slowing of growth momentum in August
The economic focus in China this week will be on the various PMI reports, starting tomorrow with the official PMIs for August. In light of recent virus outbreaks, unsurprisingly the consensus estimate in Bloomberg’s survey looks for a further slowing in China’s growth momentum. The manufacturing PMI is expected to have declined 0.3pts to 50.1 – with such a slowing also indicated by the steep decline in the price of iron ore over the past month – while the non-manufacturing PMI expected to have declined 1.3pts to 52.0. If these forecasts prove correct, the former would represent an 18-month low and the latter a six-month low. The Caixin manufacturing PMI is released a day later followed by its services counterpart on Friday, with both expected to mimic the softening expected in the official PMIs.
German politics to remain in focus as SPD’s Scholz comes out top in first leaders’ TV debate
With less than a month now to go before Germany’s general election, the contest to succeed Angela Merkel as Chancellor will continue to attract increased attention this week. With Finance Minister Olaf Scholz, leader of the SPD, seemingly coming out top in yesterday’s first televised debate between the party leaders, the weekend also brought a third poll suggesting that his centre-left party is now ahead in the contest for the Bundestag, with INSA placing the SDP on 24%, 3ppts ahead of the CDU/CSU, and the Greens and Free Democrats on 17% and 13% respectively.
Flash data to show euro area inflation further above target at 9-year high
Beyond the politics, this week’s euro area economic data calendar is a busy one, most notably bringing first indications of inflation in August. The flash euro area HICP figures come tomorrow and we expect them to show that the headline inflation rate took a further step up this month, by 0.5ppt to 2.7%Y/Y, which would be the highest since March 2012. This will principally reflect pandemic-related base effects, including those related to the timing of summer sales and Germany’s VAT cut. So, having fallen to just 0.7%Y/Y in July, core inflation will also have jumped in August, to around 1.4%Y/Y, which would be the strongest for six years. As a taster, the preliminary August inflation figures for Germany and Spain will come today.
Among other new data due, today will bring the European Commission’s comprehensive business and consumer surveys. Consistent with the findings of the flash PMIs and other national confidence surveys, the headline Economic Sentiment Indicator is expected to have fallen back in August, from a record-high 119 in July, signalling some inevitable moderation in the pace of recovery. Softer readings are expected from the manufacturing and services sectors alike as supply challenges and the spread of the delta variant lower expectations about the near-term outlook. And the consumer index is likely to confirm the drop seen in the flash release, by 1.1pts to -5.3, a four-month low. Nevertheless, euro area unemployment figures for July (Wednesday) are likely to report a further modest decline in joblessness, while German labour market data for August (tomorrow) should do likewise. But euro area retail sales figures for July (Friday) might well post a decline after two consecutive months of strong growth, as households pivot spending from goods to services.
A quiet week ahead for UK data after today’s Bank Holiday
With UK financial markets closed today for a public holiday, a relatively quiet calendar kicks off tomorrow with the release of the BoE’s lending data for July. In June, the amount of secured loans rose a whopping £17.9bn, compared with an average £5.3bn in the twelve months leading up to the Covid outbreak, as home buyers rushed to take full advantage of the government’s stamp duty tax holiday. With this having started to taper last month, we expect to see a notable slowdown in mortgage lending. Meanwhile, with restrictions having continued to ease, we might well see a pickup in consumer credit, which in June remained relatively subdued to be still more than 2% lower than a year earlier. Like in the euro area, the final August UK PMIs are also due for release, with the manufacturing survey published on Wednesday, followed by the services and composite indices on Friday. In contrast to the euro area, the UK’s flash PMIs signalled a more pronounced slowdown in the pace of recovery in August, as supply shortages continued to impact the manufacturing and services sectors alike. Indeed, the headline composite output PMI fell for the third consecutive month and by a sizeable 3.9pts to 55.3, the lowest reading since February but nevertheless a level that is still historically elevated.
Pending home sales ahead in the US today; thereafter, a busy week of data leading up to Friday’s August employment report
A busy week for US data – building up to Friday’s all-important August employment report – kicks off today with just the release of pending home sales data for July and the Dallas Fed’s manufacturing survey for August. This will be followed tomorrow by the Conference Board’s consumer survey for August that, in common with the University of Michigan’s survey, is likely to have softened due to concerns about rising virus cases and high inflation. The Chicago PMI for August and the S&P/CoreLogic and FHFA house price indexes for June are also released tomorrow. On Wednesday, Daiwa America’s Mike Moran expects the ISM’s manufacturing index to report a modest 1.5pt decline to 58.0 in August, consistent with the slightly less robust tone coming through in recent regional surveys. The ADP employment report will likely only be of passing interest to investors given its recent failure to track the official payrolls count. Meanwhile, the construction spending report for July will likely confirm that the sector has lost its earlier vigour.
Thursday will bring the second release of labour productivity and unit labour cost data for Q2, which should reveal only minor revisions given last week’s small revisions to GDP growth. Meanwhile, a trade deficit of $70.5bn should be reported for July – a substantial $5.2bn narrowing driven by a much smaller deficit on merchandise trade – while factory orders are likely to have increased only modestly in July given the small decline in durable goods orders reported last week. On Friday, most attention will centre on the official employment report, which will go some way to determining whether the Fed announces QE tapering at its next meeting in September or perhaps delays until the following meeting in November. Mike Moran anticipates a further 750k lift in non-farm payrolls – also the consensus estimate according to Bloomberg – and a modest 0.1ppt decline in the unemployment rate to 5.3% (the latter constrained by a likely increase in labour force participation). The ISM services survey for August is also released on Friday. In light of rising virus cases, Mike expects the headline index will decline 3.1pts from last month’s record high to 61.0, thus continuing to signal very favourable conditions in the sector.
Australia’s business indicators point to growth in profits and wage and salary incomes in Q2
In the run-up to Wednesday’s release of the national accounts for Q2, today the ABS released its Business Indicators report for that quarter. The report revealed that the volume of manufacturing sales declined 0.2%Q/Q in Q2 following growth of 1.7%Q/Q in Q1. This marked the first decline since the slump in activity in Q2 last year, but given base effects associated with that pandemic-driven slump annual growth increased to 8.1%Y/Y from -0.7%Y/Y previously. Sales in the wholesale sector increased just 0.2%Q/Q. This follows three successive quarters in which sales had increased 4%Q/Q or more, and so annual growth increased to 13.8%Y/Y. The report also pointed to only a small 0.2%Q/Q increase in inventories, which given a 2.4%Q/Q increase last quarter implies a substantial negative contribution to growth. Nominal company operating profits increased 7.1%Q/Q in Q2, driven by continued strong growth in the mining sector due to booming commodity prices. As a result, profits stood a record level and were up 5.5%Y/Y. Meanwhile, nominal wages and salaries also continued to recover, rising a further 2.0%Q/Q in Q2. These incomes also thus achieved a new record high and were up 8.1%Y/Y.
Aussie Q2 GDP report the focus this week, albeit prospects for Q3 much bleaker
Turning to the week ahead, further information on activity in Q2 will come tomorrow with the release of both the Balance of Payments – and thus data on net export volumes – and public sector spending figures. In addition, the ABS will release data on building approvals during July – likely weaker given the virus outbreak – and the RBA will release its money and credit aggregates for July. On Wednesday, notwithstanding virus-related disruptions, the national accounts for Q2 are likely to point to further growth in GDP. However, in comparison to recent quarters growth is shaping up to be very modest – perhaps no more than 0.5%Q/Q – but annual growth is likely to exceed 9%Y/Y due to base effects associated with last year’s lockdown. Of course, given the current virus outbreak, any growth recorded in Q2 is likely to be more than unwound in the current quarter. The same day will also bring the CoreLogic house price index for August and the final Markit manufacturing PMI reading for August. On Thursday, the ABS will release its international trade report for July and housing finance figures for July. The data flow concludes on Friday with the release of the final Markit services PMI reading for August, after which attention will turn quickly to next week’s RBA Board meeting – one that could well see the RBA backtrack on last month’s decision to retain its plan to taper asset purchases next month (not that this would achieve much).
Business survey, housing data and trade indexes ahead in New Zealand this week
This week’s Kiwi economic data kicks off tomorrow with news on building approvals for the month of July. More interest will centre on the ANZ’s Business Outlook survey for August – also released tomorrow – although it is doubtful that the survey will capture much of the impact of the recent virus outbreak and associated national lockdown. The CoreLogic house price index for August will follow on Wednesday, while on Thursday the countdown to the Q2 GDP report will continue with Statistics New Zealand publishing the Overseas Trade Indexes for Q2, taking already released value data and attributing movements to changes in volumes and/or prices.