Low inflation likely to persist globally. “The Week in Review.”
Last Week Review
U.S. and China implement more tariffs but agree to further trade talks. Global equities began last week on poor footing following weak manufacturing data and more tariffs including the U.S. implementing 15% tariffs on about $125 billion of Chinese goods and China issuing 5-10% tariffs on some U.S. imports, including crude oil and animal products1. Global equities finished last week up 2.0% on optimism of renewed high-level trade talks in October and additional stimulus measures taken by China’s central bank2. However, both countries are unlikely to make large concessions to reach a trade deal in the near term. Emerging market equities (2.4%) led all major regions last week, followed by non-U.S. developed markets and the U.S. at 2.1% and 1.7%, respectively3. Reviewing fixed income markets, the yield curve steepened slightly last week, with the 10-year Treasury yield finishing 2 basis points above the 2-year yield4.
Manufacturing data weighs on markets. The ISM manufacturing Purchasing Managers’ Index (PMI) entered contractionary territory (below 50) for the first time since 2016 last Wednesday. The 49.1 reading means that all major developed regions are now experiencing a shrinking manufacturing sector. The manufacturing PMI in China improved to 50.4 – back in expansionary territory – after two months below 50. Making up a larger portion of the U.S. economy, the services sector maintained a healthy 56.4 reading. The services sector is also much healthier globally, including China’s services PMI which remained comfortably in expansionary territory at 52.1.
U.S. jobs report modestly disappoints versus expectations. While U.S. manufacturing sector metrics have declined, the U.S. labor market has remained strong throughout 2019. August’s jobs added figure of +130k was modestly below surveys, but still remained somewhat close to the 2019 year-to-date average of 158k jobs added. Wage growth ticked down to 3.2% year-over-year (y/y) after moving higher in July while the unemployment rate stayed at 3.7%. The modestly disappointing jobs report is unlikely to materially change the Fed’s mindset leading up to its September meeting.
U.K. Parliament blocks no-deal Brexit push. The House of Commons passed legislation to prevent Prime Minister Boris Johnson from driving the U.K. out of the European Union (EU) in late October without a deal. Shortly after, the House of Commons also rejected Johnson’s call for a snap election on October 15, which he planned to use as a way to exit the EU with or without a deal. However, an eventual general election is likely the next step in the Brexit saga. Though a wide variety of election and eventual Brexit outcomes are possible, the lower likelihood of a no-deal Brexit boosted the pound from a low of 1.19 to 1.23 versus the U.S. dollar5.
This Week Preview
European Central Bank expected to ease policy this week. Markets are widely expecting the European Central Bank (ECB) to cut its main policy rate further below -0.4% this Thursday in order stimulate the slowing European economy. An asset purchase program is anticipated by many investors though some ECB officials have recently tried to dampen expectations for a large program. Although investors widely expect easier policy, some question how effective lower interest rates and asset purchases will be at boosting growth. This meeting will be the second-to-last meeting for ECB President Mario Draghi before Christine Lagarde assumes the role in November6.
Low inflation likely to persist globally. Falling U.S. breakeven rates and economist surveys are pointing to low inflation. In this week’s release, U.S. headline Consumer Price Index (CPI) is expected to remain flat at 1.8% y/y, while core CPI is expected to move higher to 2.3% y/y. Surveys show Germany’s CPI reading stabilizing at 1.4% y/y. Contained inflation will likely encourage central bankers in their push to ease policy in hopes of moving closer to targeted inflation levels.
No major changes expected in China economic data. China economic data releases this week include fixed asset investment, industrial production and retail sales. The first two metrics are expected to remain very close to prior levels, while modest improvement is anticipated in retail sales.
Unless otherwise noted, all opinions expressed in this post are those of the author and do not necessarily represent the views of Northern Trust. Information contained herein is current as of the date appearing only and is subject to change without notice.
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- 1. The Economic Times, Reuters. Trump slaps $125 bn more in tariffs; China retaliates. Retrieved on 09Sep2019 from https://economictimes.indiatimes.com/news/international/business/china-u-s-to-collect-additional-tariffs-on-each-others-goods/articleshow/70930624.cms.
- 2. Bloomberg, MSCI World Index returns 02Sep2019 – 06Sep2019.
- 3. Emerging Market Equities Index returns 02Sep2019 – 06Sep2019. MSCI World ex-U.S. IMI Index returns 02Sep2019 – 06Sep2019. Bloomberg, MSCI U.S. Equities IMI Index 02Sep2019 – 06Sep2019.
- 4. Bloomberg, 10-Year Treasury Rate 02Sep2019 – 06Sep2019. Bloomberg, 2-Year Treasury Rate 02Sep2019 – 06Sep2019.
- 5. Castle, Stephen. The New York Times. U.K. Lawmakers Batter Johnson Again, Defying Him on Brexit Election. Retrieved on 09Sep2019 from https://nytimes.com/2019/09/04/world/europe/brexit-boris-johnson-parliament.html.
- 6. Hickey, Shane. The Guardian. German Lenders stick up for savers as ECB rate cut looms. Retrieved on 09Sep2019 from https://www.theguardian.com/business/2019/sep/08/europe-central-bank-interest-rates-recession-germany