Pass the heartburn medication, please. Investors had a whirlwind of data and key events to digest last week including monetary policy outlooks released by three major central banks, simmering U.S./China trade tensions, and mixed U.S. economic data. Furthermore, 10-year U.S. Treasuries climbed above the key 3% level midweek, although they hovered around 2.951% at the time of this writing. Despite continuing trade tensions and a lower than expected headline jobs report, upbeat earnings continued to fuel equity markets, with both the S&P 500 and Nasdaq ending the week higher. Over 80% of the companies within the S&P 500 have reported their second-quarter earnings, with nearly 80% of those who have reported beating analysts’ expectations.
I. U.S. Economic Data
- Unemployment – while employers added fewer jobs than anticipated in July (157k vs. 190k), the unemployment rate edged lower to 3.9% from 4%.
- May and June’s revisions reflected 59k more jobs created.
- Wages rose 2.7% y-o-y, which is considered by some economists, a sluggish pace.
- A broader measure of unemployment, which includes part-time and discouraged workers fell to 7.5%, the lowest level since 2001.
- Private payrolls increased by 219k beating expectations of about 185k.
- The stronger data was partly attributed to the recent corporate tax cut.
- Ten-year Treasury yields moved above 3%, the first time since June, on the back of the data.
- July non-manufacturing ISM data declined more-than-expected with the index falling to 55.7% versus 58.6% (expected). Trade tensions attributed to the sentiment. Despite the lower than expected reading, however, a level above 50% reflects the 102nd consecutive month of expansion.
- The trade deficit increased 7.3% to $46.3 billion in June, its biggest increase in almost two years.
- Atlanta Fed raised its third-quarter GDP forecast from an annualized 4.7% to 5%.
II. Federal Reserve unanimously kept rates unchanged between 1.75%-2%, and signaled a rate hike possibly in the coming months, all of which remained in line with market expectations.
- Continued strengthening labor markets and economic activity rising at a strong rate, were among the key takeaways of the Fed’s statement. We interpret “strong rate” as more bullish than the Fed’s June’s statement characterization of “solid” growth.
- August statement also noted strong household spending and business fixed investment.
- The statement ignored recent concerns by President Trump that continued increased rates may stymie growth.
- Post meeting, the Fed Funds Futures market indicated a 91% likelihood of a rate increase in September and 68% in December.
III. Bank of England raised rates to the highest level in almost a decade, hiking their key rate from 0.5% to 0.75%.
- The bank expects one to two more quarter-point rate increases through mid-2021.
- Inflation pressures outweighed the continued uncertainty surrounding Brexit and trade war concerns. The bank expects inflation to be around 2.09%, above its 2% target in about two years.
- BoE also revised downwards their growth expectations for the global economy, due to increased trade tensions. The bank now expects the global economy to grow by 2.75% this year, down from its 3% prediction in May.
IV. Bank of Japan – as largely expected the BoJ kept rates unchanged and adopted forward guidance policy for the first time by noting it will keep rates low for “an extended period of time”.
- Persistent low inflation continues to have the BoJ on an easy monetary policy path relative to its counterparts globally (such as the Fed, BoE, BoC, and etc).
- The bank widened its target range for its 10-year benchmark, tolerating a rise of up to 0.2%, up from 0.1% previously.
- BoJ Gov. Kuroda also suggested that the bank’s pace of asset purchases could fall below from its target of JPY 6 trillion a year.
- The bank revised its inflation outlook down, with core consumer prices rising 1.1% in the current fiscal year, relative to a previous expectation of 1.3%. Further, estimates for fiscal 2019 (1.5%) and 2020 (1.6%) were also revised downwards by three and two basis points respectively.
IV. Other
- Trade Tensions increased between the U.S. and China as the Trump Administration threatened to more than double proposed tariffs on an additional $200 billion of Chinese goods to 25%, up from 10%. China retaliated by threatening an additional $60 billion of levies on U.S. goods.
- BMA believes that a 25% tariff could boost inflation in the U.S. driving the USD higher and prompt the Fed to hike rates faster than the forwards currently project.
- The U.S. Senate also approved a bill that tightens U.S. reviews of Chinese corporate deals and restructures export controls over which U.S. technologies can be sent abroad.
- All three major U.S. stock indices dropped on Thursday on the back of the news.
This week:
Domestically, the market will be focused on key CPI data to be released at the end of the week. Given recent trade tensions, a focus will be on CNY July trade data mid-week. Both the Australian and New Zealand central banks are expected to meet this week as well.
Other key data/events include:
- AUD central bank decision (Tuesday)
- CNY trade data (Wednesday)
- NZD central bank decision (Wednesday)
- CNY PPI/CPI (Thursday)
- EUR Economic Bulletin (Thursday)
- U.S. July CPI data (Friday)
- GBP GDP (Friday)
- CAD July Unemployment data (Friday)
U.S. Economic Data includes:
Redbook index (Tuesday), JOLTS jobs openings, consumer credit change, API crude oil stock, MBA mortgage applications (Wednesday), EIA crude oil stock change, PPI (Thursday), weekly jobless claims, July CPI data, Baker Hughes oil rig count.
Overseas Economic Data includes: GBP retail sales (Monday), JPY overall household spending, NZD central bank inflation expectations (Tuesday), AUD central bank rate decision, JPY leading economic index, German industrial production, German trade balance, CAD Ivey Purchasing Manager Index, JPY current account and trade balance, CNY trade data (Wednesday), AUD housing data, AUD consumer confidence, NZD central bank rate decision, JPY machinery orders, JPY foreign bond and stock investments, AUD consumer inflation expectation (Thursday), CNY PPI/CPI, Swiss unemployment rate, EUR economic bulletin, CAD housing starts, CAD new housing price index, NZ Business PMI, AUD RBA monetary policy statement (Friday), GBP Q2 GDP, GBP June GDP m-o-m, GBP industrial/manufacturing production, CAD July unemployment data.
