Good morning,
US-eh?
Friday’s poor US GDP report took the greenback lower into the weekend session and the Asian session has not seen too much of a recovery. The US economy grew by 1.2% annualised in Q2, sharply slower than had been expected. Consumers were the main catalyst for growth but businesses held back on investment and spending in their droves, fearful over a downturn in global growth and feeling the effects of a stronger USD.
Residential spending also fell off a cliff with a 6.1% fall annualised for the 3 months from April.
Businesses and consumers are not investing at the moment; into plant machinery, equipment, their homes or factories and shops. If this is another facet of the new normal then the low growth, low rates, low returns cycle is set to run and run.
Alongside those poor growth numbers, weak inflation also damaged the dollar with the core PCE measure of inflation, which is tied to consumer spending and strips out food and energy costs, climbed by 1.7% vs 2.1% in the previous quarter.
Market may wait for another year for a Fed hike
Expectations of a Federal Reserve rate hike have been damaged by Friday’s announcement. It was to all intents and purposes a 50/50 split of whether we would see rates higher at the end of the year or not – that probability has now fallen to 36%. Markets are now only pricing in a 50/50 split of a hike or not by September next year.
There is no Fed policy meeting in August but the Jackson Hole Economic Symposium that will take place on August 25-27 this year has typically allowed the Fed Chair to set out a new outlook. We expect a similar speech from Janet Yellen in a few weeks’ time.
China making an effort
News from China this morning has been somewhat confusing with PMI manufacturing releases going in opposite directions. The official number fell to 49.9 from 50.0 in the month previous while the more private measure showed an increase to 50.6 from 48.6. Looking at the big picture and tearing ourselves away from the minutiae we can see that while the Chinese economy is not deteriorating, it certainly isn’t growing with any gusto given the amount of stimulus that has been poured into it.
With China’s release out of the way we focus on Europe and the US. Italy’s number is due at 08.45, France at 08.50, Germany at 08.55, and the Eurozone wide measure at 09.00 with the UK number due at 09.30.
UK final Brexit numbers due
The UK manufacturing number fell to 49.1 in the preliminary estimate with Markit stating that “the downturn, whether manifesting itself in order book cancellations, a lack of new orders or the postponement or halting of projects, was most commonly attributed in one way or another to ‘Brexit’.” We don’t think this is the low point for UK manufacturing however and forecast additional weakness in the coming months. News from the construction sector is due tomorrow with services numbers on Wednesday.
Have a great day.