Politburo to the rescue?

A good week for

• Emerging markets and Japan led equities higher, rising over +2% in sterling terms
• Oil rallied c. +5% in US dollar terms

A bad week for

• Bonds softened modestly, with US and UK government bonds down c. -0.4%
• Sterling eased against the Japanese yen

China

Announcements after a key Chinese political meeting boosted the outlook for China’s economy last week. The Politburo met on Monday, pledging greater economic support, acknowledging the challenges to growth. Key areas included housing, which has suffered since regulations were tightened for real estate developers. Officials dropped wording warning against property as an investment asset, which market participants interpreted as a statement of support. Infrastructure is also set to receive a boost, with local governments urged to accelerate investment. Consumption was also in focus, especially autos, electronics and appliances. Finally, the Politburo pledged to further ease monetary policy to support growth. Chinese assets rallied on the news, boosting the emerging markets equity region. More stimulus is expected in coming weeks and months.

Japan monetary policy

The Bank of Japan (BoJ) announced an adjustment to monetary policy last week. The Bank will keep its Yield Curve Control (YCC) policy nominally in place, whereby the bank uses asset purchases to keep bond yields at an agreed level, currently 0.5%. However, the Bank announced that it would implement this policy with greater flexibility, allowing yields to rise to 1%. The tweak is a significant easing of the YCC policy, and has come earlier than many expected, not least because the BoJ implemented a review earlier this year, which it said was likely to take 18 months. Japanese bond yields rose sharply ahead of the meeting, as news of the announcement was revealed in the press. The yen also rallied in sympathy with the move in bond yields. While Japan is enjoying more favourable wage and inflation dynamics, inflation is expected to cool later this year, which may remove some of the impetus for monetary policy tightening.

US monetary policy

Despite the BoJ’s surprise announcement, it was the US Federal Reserve (Fed) that analysts were most focussed on last week. The Fed announced a widely expected 0.25% hike to interest rates at the latest Federal Open Market Committee (FOMC) meeting, with very few changes to the monetary policy statement compared to the prior meeting. The content of the press conference suggests that the Fed is now in data-dependant mode once again, with no clear inclination on the path of monetary policy. With inflation expected to continue to fall this year, trends in employment are likely to be especially key, with official labour market statistics out later this week.

Eurozone monetary policy

Like the BoJ, the European Central Bank (ECB) also surprised markets in its monetary policy guidance. The ECB went ahead with a 0.25% rate rise as expected, taking the refinancing rate to 4.25%. However, unexpectedly, the Council altered the language of the statement significantly. The ECB will now ensure that rates are being “set at a sufficiently restrictive level” rather than being “brought to a sufficiently restrictive level” in June. President Lagarde’s comments at the press conference echoed this shift, with Lagarde retiring the phrase “the ECB still has ground to cover“ and stating that “we might hike, or we might hold, but we won’t cut”. As in the US, the ECB appears to be in data-dependant mode. While inflation remains high in some parts of Europe, it is now falling faster than had been expected, and a period of weaker growth is expected to help it decelerate further.

Business confidence

Global business confidence continued to soften in July, as last week’s business surveys attested. Recent months have seen a continued weakening of manufacturing sentiment, as businesses report softer new orders and cost pressures. This likely reflects the unwinding of post-pandemic backlogs and weaker economic growth in most of the world’s regions. However, the softening of services data is a more recent event, as post-pandemic services demand fades. France and Germany reported some of the bleakest readings, with Germany reaching a post pandemic low for the manufacturing sector. US manufacturing sentiment improved in July, though demand remains weak, with existing backlogs supporting output. Manufacturing demand is expected to continue to slow this year, acting as a drag on global growth.

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