Minute-made

A good week for

• The US dollar continued to rise, gaining +0.5% on a trade weighted basis
• Sterling appreciated 0.3-1.0% against main currency pairs

A bad week for

• Equities broadly softened in sterling terms. Non-US markets fell c. -3%, while the US was more resilient (-2%)
• Bonds also declined, led lower by UK gilts (>-1%)

US economy

Bond yields surged last week as markets reacted to central bank guidance and economic data. Minutes from the July meeting of the Federal Reserve Open Markets Committee (FOMC) revealed continued concerns around inflation, with the majority seeing “significant upside risks to inflation” and some seeing renewed strength in home prices as a sign that monetary tightening had fed through fully. In contrast, “a number of participants” favoured “balance[ing] the risk of an inadvertent overtightening… against the cost of an insufficient tightening” and a data-dependant approach. However, this coincided with stronger-than-expected data: retail sales, excluding autos, and industrial production both grew by 1% in July, though industrial production was flattered by a heat-wave-induced jump in utilities output and changes to auto plant seasonal patterns since the pandemic, with fewer factories closing this summer. Guidance from FOMC members at this week’s Jackson Hole Symposium will influence market expectations for US monetary policy, setting the tone for the rest of the year. The pace of expected rate cuts is a likely topic.

China economy

China’s economy offered another source of concern for markets, with further turmoil in the real estate sector. Country Garden, once China’s largest property developer by revenue and considered financially stronger than peers, faces defaulting on debts if it cannot make overdue payments on its bonds by early September. China’s anaemic property market has resulted in weaker home sales, impacting revenues for developers, with tighter regulations requiring them to hold more cash. These factors could prevent the firm from completing building projects, sparking protests from home owners. This occurs the same week that Evergrande, a Chinese property firm that defaulted in 2021, filed for chapter 15 bankruptcy protection in New York, after China’s securities regulator launched an investigation into possible disclosure violations.

Policy support

Beijing officials pledged to support the economy at the recent Politburo meeting, but, so far, limited action has been announced. Officials dropped wording warning against property as an investment asset, which market participants interpreted as a statement of support. Infrastructure funding and consumption subsidies are also expected. However, so far, only rate cuts have been announced. In contrast to the economic dip that followed 2015 economic reforms, policymakers are showing a greater concern for fiscal discipline, limiting the extent to which extra funding is being used to plug the gap of weak growth. However, with confidence weakening further in the real estate sector, concrete steps must be announced in the coming weeks if China’s 5.5% GDP forecast is to be met.

UK inflation

Closer to home, UK inflation continues to cool, despite pockets of strength. CPI fell to an annual rate of 6.8% in July, with core inflation staying at 6.9%. A lower Ofgem price cap mostly drove a fall in utilities prices but month-on-month declines were also more widespread across the basket than in previous months. In contrast, labour market data revealed that wage growth remains resilient, with whole-economy regular pay rising 7.8% year-on-year. This is despite new job openings continuing to decline and rising unemployment. However, wage growth is likely to cool in coming months, as the labour market eases further and inflation falls.

Japan economy

Japan delivered stronger-than-expected growth in the second quarter, with the economy growing by 1.5% quarter-on-quarter. However, digging into the details, this was mostly driven by a 1.8% rise in net trade. Exports increased by 3.2%, supported by a 14% rise in out-bound auto shipments as supply chain shortages eased. In contrast, imports fell by 4.3% while private consumption spending fell by 0.5%, hindered by shrinking real incomes. With inflation expected to cool and greater labour market tightness translating into stronger wage growth, consumption spending should be better supported in months to come. In contrast, the spectacular strength of auto exports in Q2 is unlikely to be repeated. All in all, this makes it likely that the Bank of Japan can afford to take its time in adjusting monetary policy further.

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