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  • Weekly macroeconomic and market update 24 August 2015

Weekly macroeconomic and market update

A look back over macroeconomic events for the week ending 21/08/2015. Economic conditions in China continue to deteriorate, whilst the odds of a September hike for US interest rates are lengthened after the release of dove-ish minutes.

Further signs of trouble in China

There were more signs of trouble in the Chinese economy as flash manufacturing purchasing managers' index (PMI) numbers fell more than expected to 47.1 in August from 47.8 in July. The readings have been below 50 – indicating economic contraction – since February, adding to concerns about the serious headwinds facing the country.

However, official statistics showed that the fall in house prices continued to abate, with new build prices down only 3.7% from a year earlier in July, compared to -4.9% in June and a recent trough on -6.1% in April. The currency was stable through the week following the earlier devaluation, at 6.39 yuan to the dollar, though the equity market weakened amid rumours that authorities were withdrawing some of the measures implemented previously to halt sharp falls.

A September interest rate hike is less likely

Minutes from the US Federal Open Markets Committee struck a relatively dove-ish tone, with no clear indication that an interest hike at the next meeting in September was likely. This meeting was held before the recent yuan devaluation, and taken together market consensus is now firmly against a September lift-off date. According to analysis by Deutsche Bank, the likelihood of a September rate rise had fallen to 38% after the minutes were released, from 48% before the release. Inflation remains soft at 0.2% year on year though core inflation is more robust at 1.8% year on year.

Last week’s other events

  • Following a collapse in support from his own Syriza party during the latest bailout vote, Greek Prime Minister Alexis Tsipras resigned, triggering snap elections in September. He will be hoping to secure a fresh mandate with less opposition from far-left politicians within Syriza.
  • UK inflation was just about positive, with prices up 0.1% from a year earlier in July. Core inflation improved from 0.8% to 1.2%. Still in the UK, retail sales figures (excluding fuel) were strong as expected, up 4.3% in July from 4.1% in June.
  • In the US, the conference board leading index turned negative, at -0.2% month on month from 0.6%. Existing home sales were more positive and the Philadelphia Fed Manufacturing index strengthened to 8.3 from 5.7%.
  • Eurozone manufacturing PMI was unchanged at 52.4 for August, whilst the services PMI reading improved to 54.3 from 5.4 previously. However, consumer confidence was still poor with the flash reading at -6.8 – an improvement from the previous reading of -7.1 but still showing concern in the market.

The markets

Graph 24-08-2015

Equities – All the major markets were materially down last week. The FTSE All-Share shed 5.0%, in the US the S&P 500 fell 5.7%, and European equities (excluding the UK) was down 3.9%. The Japanese TOPIX was 5.4% lower, and in China the Hong Kong Hang Seng index was down 6.6%, whilst on the mainland the Shenzhen China A share index lost 12.4%.

Bonds – Sovereign bond yields continued to fall as investors sought safety. 10-year gilt yields were 7 bps lower at 1.80%, whilst 10-year US treasury yields fell 15 bps but remained fractionally above 2% at 2.05%. German bunds were similarly down with the 10-year at 0.58%.

Commodities – The troubled oil sector continued to suffer last week, as Brent finished the week at US$45.46 whilst WTI struggled to stay in the low 40s. Copper was little changed at US$2.31, whilst gold benefited from broad risk aversion and strengthening to US$1,159.60.

Currencies – The euro had a strong week, gaining 2.3% against sterling and 2.6% against the US dollar. The Japanese yen also strengthened, gaining 1.7% against sterling and 2.0% against the US dollar.

The week ahead

After a quiet Monday, we begin Tuesday with German IFO surveys of current and expected business conditions, then in the afternoon the US has consumer confidence and housing data along with services PMI data, which is predicted to have strengthened to 56. On Wednesday the US releases durable goods orders data, with estimates suggesting a sharp fall to -0.6% month on month from 3.4% the month before (June).

On Thursday the Jackson Hole Symposium kicks off. Although Janet Yellen won’t be attending, there are still plenty of influential speakers which will be closely watched. Later on in the day, we have the official US corporate profits quarterly data for the second quarter, expected to have grown 3.2% quarter on quarter. There is also the second estimate for US GDP in the second quarter and pending home sales data.

The week ends with a flurry of data, starting with inflation, employment and retail sales figures from Japan. In the UK, consumer confidence survey results are released, as well as business investment numbers and any revisions to the Q2 GDP numbers. Later in the morning are the Eurozone business confidence assessments before US personal spending in the afternoon finishes the week off.

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