The Jackson Hole symposium will be the main highlight this week in the USA in what will otherwise be a relatively light week for data
- This week’s calendar is relatively light for economic data, with business sentiment surveys and inflation in Europe and jobs data in the US.
- The main focus will be on Fed Chair Powell’s talk at the Jackson Hole central banking symposium. Whether or not he chooses to discuss the yield curve, and its implications on the Fed’s approach to continue tightening policy, it is going to be important for markets.
Summary of last week
- An eventful week for political developments, against a backdrop of limited economic data
- The data suggests growth moderating but still at healthy levels
- Stress in emerging markets continues, although Turkey has experienced some respite for now
Politics dominates news flow
Last week with limited new macro data, it was unsurprising the focus remained on political events. With Turkish holidays for most of the week, the extreme volatility from its currency weakening has abated for now. Instead, the focus was on the 95% devaluation of the Venezuelan bolivar, which added to the chaos of its economic downturn.
An interview with the president of the US created more concerns, as President Trump claimed the EU and China have both been manipulating their currencies, criticised the pace of Fed hikes and demanded some “help” whilst conducting trade negotiations. More focus was on central bank independence, where he ominously stated “I believe in the Fed doing what’s good for the country”. It makes Chairman Powell’s address at Jackson Hole, later on today, even more interesting.
Ironically, given that President Trump clearly seems to favour a weaker US dollar (USD), it was once again one of his tweets that drove the largest USD move on Thursday – versus the South African rand – as he cited that he’s asked Secretary of State Mike Pompeo “to closely study the South Africa land and farm seizures and expropriations”.
The recommencement of trade talks between the US and China was again a focus, and it just so happened the date coincided with the implementation date of US tariffs – an increase to 25% on another $16bn of exports came into effect. With no real progress made it’s no surprise this passed with minimal market reaction. But as we write, the announcement from China to plan resuming the counter-cyclical factor in its yuan fix is worthy of note.
Australian political turmoil came to a head this week, with three more Cabinet ministers resigning from Australian Prime Minister Turnbull’s government and demanding a second ballot of lawmakers to select a new leader. On Friday it was announced that Scott Morrison, the treasurer for the last three years, will become the new prime minister.
Finally, on Brexit, the UK Government published its notices on a ‘no-deal’ Brexit on Thursday, confirming the negative impacts expected to supply chains and the hit to growth and public finances.
Economic data – moderation of growth at still healthy levels
In Europe, markets were looking for confirmation the slowdown in growth had stabilised, and this eventuated. European ‘flash’ preliminary purchasing mangers’ index (PMI) outturns were above consensus for France (53.7 manufacturing, 55.7 services) and the composite PMI in Germany rose to 55.7 in August from 55.0 in July, above the consensus expectation of 55. Both indicate a slight improvement, albeit that the more forward-looking new orders components fell. Our view is this is reflective of a moderation in growth compared to last year, but no signs of anything more concerning.
It was a similar message in the US, with both manufacturing and services flash PMIs (at 54.5 and 55.2 respectively) moderating but at a still-healthy level. US existing home sales fell 0.7% month-on-month to a 5.34m annual rate (expected 5.4m), the slowest pace since February 2016, and reflecting homebuyers increasingly discouraged by higher borrowing costs and rising prices. New home sales also came in below expectations at 627,000 versus 645,000, adding to the string of slightly softer housing data of late.
The FOMC’s August meeting minutes confirmed that the Fed remains positioned to hike in September. What was interesting, in our view, was the growing list of downside risks to the outlook (e.g. housing and fiscal policy), and a more explicit detailing of downside risks specifically from the trade disputes. With no surprises this sets the scene for continued gradual increases in rates.
Equities and yields relatively stable whilst commodities see some support
In a week of light traded volumes, US equities still hit a new record high last Tuesday – at the same time that the US president had one of the worst days (President Trump’s long-time personal lawyer, Michael Cohen, pleaded guilty to eight violations of banking, tax and campaign finance laws, and the president’s former campaign manager Paul Manafort was convicted of fraud).
Much has been made recently of the short positioning in US treasuries, and indeed CFTC data continues to indicate this is at extremes, supporting our view that there are technical as well as fundamental factors at play making owning US government bonds an attractive proposition within a diversified portfolio.
Commodity prices rose moderately during the week as concerns about China’s growth prospects abated. The emerging markets complex more broadly received some respite. This was partly due to less focus on Turkey as markets were on holiday this week, but also the recommencement of trade negotiations between the US and China, though these ended with no real progress being reported. Meanwhile the Australian dollar was driven by political turmoil more than economic data, and gave back its initial gains to end the week unchanged.