Insight Investment’s global economic outlook for the week ahead (week starting 6 August 2018)

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Outlook : US re-imposes tariffs on Iran and Chinese trade data in be in focus, along with US CPI

Trade tensions and tariffs should remain in focus next week and the first phase of the restoration of US economic sanctions on Iran are scheduled to kick in. Keeping with the trade theme, on Wednesday we get sight of Chinese trade data for July which will be an obvious focal point. US tariffs on $34bn of Chinese goods took effect that month so these numbers will be closely watched and more rhetoric from the Trump administration is likely to make regular headlines.

On the macroeconomic data front the calendar for the second week of the month is far lighter. US inflation takes centre stage with producer and consumer prices and the US consumer price index (CPI) print for July (released on Thursday), is probably the highlight. Headline CPI is expected to nudge up to 3% year-on-year. In the UK, second quarter GDP data (due Friday) is expected to show some pick-up which would provide some added justification for the BoE’s rate hike this week.  Before that we have UK house price data and a range of manufacturing indicators both from the UK and mainland Europe to contend with.

In the Asia-Pacific region, the Australian central bank meets on Tuesday and is expected to keep rates at 1.5%, while towards the end of the week (Friday) we get Japanese GDP data, which should show some rebound in the second quarter after a soft start to the year.

Market and economic review

Trade fears return as central banks guide rates higher, while data points to divergent economic strength

It was a choppy week for markets that in broad terms saw both equity and bond markets struggle. In government bond markets, the message from central banks provided a reminder that, to various degrees, policy normalisation was very much on the agenda. Hard economic data really played second fiddle to geopolitics and trade. On the bottom-up front, US Q2 2018 earnings-per-share growth now stands at 24% year-on-year – above pre-season estimates (20%) with positive surprises well above average.

This week heavyweights such as Caterpillar and Apple posted good returns and solid guidance. Indeed, the rally in Apple stock saw the company become the first $1 trillion market cap company.

Results from other regions were solid although at a lower level. With corporate earnings now largely in the rear-view mirror, market attention is shifting elsewhere. Escalating trade concerns and macroeconomic data releases weighed on China and emerging markets more than they did on their developed counterparts.

Minor adjustments to central bank policy: US and UK guide towards gradual tightening

Markets had to absorb the information from key central bank meetings over the week. The Bank of Japan (BoJ) meeting was perhaps the most eagerly anticipated. In the end, policy rates were unchanged as widely expected but there were minor tweaks to their stance including a reference to allowing upward and downward movement in the 10-year Japanese government bond yields, while the BoJ has also shifted ETF purchases from tracking the Nikkei 225 Index to the Topix Index. We don’t view these adjustments as significant. They are aimed at repairing the damage to market functioning that super-easy policy was inflicting and at increasing the sustainability of policy. But given that their inflation forecasts were cut (to 1.5% from 1.8% for FY19 and to 1.6% from 1.8% for FY20), the central bank remains some way from its achieving its target.

Japanese government bond yields ended the week higher, but that came against a backdrop where global government yields were generally higher. As anticipated, the US Federal Open Market Committee (FOMC) concluded its meeting this week with no change to interest rates. Although a press conference wasn’t scheduled, which could have conveyed any changes in the FOMC’s thinking, the accompanying press statement emphasised the “strong” position of the economy and suggested that rate hikes in September and December remained highly likely, barring major shocks.

The July US labour market report did not provide any major surprises.  The payrolls release is always volatile and a slightly softer number was actually very close to consensus, once revisions were taken into account, while the unemployment rate (3.9%) and the keenly watched wage data were all in line with expectations.

In the UK the Bank of England raised rates by 25bp as expected to 0.75%, with the only surprise being the unanimity (9-0 vote) behind the move. There was no change to the asset-purchase programme and the statement signalled a message that further gradual tightening was to be expected. Brexit uncertainty continues to limit credence the market attaches to any longer-term guidance as to the path of interest rates, and on that front there were tentative signs of a softening in the EU’s position on the latest UK proposals for negotiation. Prime Minister May is meeting French President Macron for further talks while the EU’s chief negotiator Michel Barnier appeared to hint at a solution to the key Irish border issue.

Activity data dump: strength in the US and stability in Europe while softness in Asia highlights trade sensitivity

Elsewhere on the data front, the start of the week saw some important releases including a raft of purchasing managers’ indices (PMIs) giving an update of manufacturing and services activity across the major economies. The relative strength of the US was reaffirmed by the closely watched ISM manufacturing coming in at a lofty 58.1 (slightly off its February high of 60.8). Euro area PMIs were broadly unchanged on the month but have declined most sharply year-to-date. We saw a further moderation in China and other emerging market countries, particularly in Asia where a number of the country-specific press releases noted the concern over tariffs cited by survey respondents.

The ongoing tariff dispute between the US and its key trading partners has been the key market focus of late and, after reaching some form of truce with the European Commission last week, hopes of some progress with China were buoyed by reports of face-to-face negotiations between trade representatives earlier in the week. China has expressed its willingness to engage in negotiations but warned against counterproductive US bullying tactics.  Against that background the subsequent announcement that President Trump had asked his US Trade Representative to consider raising the proposed levy on US$200bn of Chinese imports to 25% (from the 10% previously proposed), was taken badly by markets. The Chinese Ministry of Commerce immediately vowed to implement appropriate countermeasures. After the initial risk-off move, US and to a degree European risk assets regained their poise but Asian equity markets and China in particular remained on the back foot as the week ended. As trade tensions have built, so have expectations of further policy easing by the Chinese authorities. Market participants continue to put downward pressure on the Chinese yuan with this week making the eighth week of consecutive declines.

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