US GDP picked up in the second quarter – weekly update 30 July

A look back over macroeconomic and market events for the week ending 27 July 2018. US GDP picked up in the second quarter, helped by a rush of soybean exports ahead of the imposition of tariffs, but growth is expected to cool in the second half. It’s a very busy week ahead, with three major Central Bank meetings (in the UK, Japan and the US) and US non-farm payrolls on Friday.

US economic data pointed to sustained strength

US economic data pointed to sustained strength, with second quarter GDP growth coming in at 4.1% annualised. This was just below the forecast of 4.2%, but also came with revisions to the first quarter number back up to 2.2% (from 2.0%). There were some interesting details, with personal consumption rebounding more than expected, at 4.0% annualised (up from 0.9%, with 3.0% expected) and business investment expanded at a healthy 7.3% (though this was lower than the 11.5% reading for the first quarter), both clearly responding to the recent tax reform legislation.

Net exports were boosted, but largely from a one-off surge in soybean stocks before retaliatory tariffs kicked in, while inventory was run down over the quarter, partly related to the soybean tariffs. Other data releases didn’t really add much more to the story – Manufacturing PMI ticked up from 55.4 to 55.5 (a fall to 55.1 was expected), but Services PMI fell slightly more than expected, from 56.5 to 56.2 (56.3 was expected). Durable Goods Orders for June rebounded from a -0.4% month on month (mom) contraction in May to 1.0% growth in June, below the 3.0% forecast. Overall, the US economy remains robust, though the outlook is for growth to cool in the second half.

Eurozone PMI numbers were mixed

Eurozone PMI numbers were mixed, with Manufacturing PMI rising from 54.9 to 55.1, beating expectations for a fall to 54.7, but Services PMI slipped further than expected, from 55.2 to 54.4 (55.1 was expected). The Consumer Confidence reading fell from -0.5 to -0.6, though this was slightly ahead of the -0.7 expected. Against this backdrop, the European Central Bank had an uneventful meeting, leaving policy unchanged following the key announcements at the last meeting, and giving essentially nothing away at the press conference.

Last week we also saw the apparent announcement of a ‘truce’ in the trade conflict between the US and Europe during a meeting in Washington between US President Donald Trump and European Commission President Jean-Claude Juncker, which could take a little pressure off in the short term, but by now markets are used to taking such announcements with a pinch of salt.

Last week’s other events

• Japan’s Manufacturing PMI slipped from 53.0 to 51.6 while inflation surprised to the upside as CPI came in at 0.9% year on year (yoy) (from 0.6%, with 0.7% expected). Stripping out energy and fresh food, CPI inflation was a more modest 0.5% yoy (from 0.4% with no change expected)
• In the US, the Chicago Federal Reserve National Activity Index rose from a downwardly-revised -0.45 to 0.43 (0.25 was expected). Meanwhile, the Richmond Federal Reserve Manufacturing Index came in at 20 (from an upwardly revised 21, with 18 the forecast), whilst the Kansas City Fed’s Manufacturing Index cooled from 28 to 23 (25 was expected)
• The UK’s CBI Trends Total Orders measure slipped from 13 to 11 (8 was forecast), while Selling Prices were unchanged at 13 (an increase to 15 was expected). Overall Business Optimism improved from -4 to -3, defying expectations for -6

The markets

Equities moved generally higher on the week, as core government bonds marginally sold off (i.e. yields moved higher)

Equities

It was a more positive week for major equity markets last week. Japan had another good session, with the TOPIX rising 1.8%, with Europe excluding the UK closely behind, rising 1.7%. In the US, the S&P 500 rose 0.6% whilst UK equities returned 0.3% (Europe and UK as measured by MSCI indices). The MSCI Emerging Markets Index returned 1.5%.

Bonds

10-year US Treasury yields rose 6 basis points (bps) to finish the week at 2.95%, with the equivalent UK gilt yields up 5 bps to finish at 1.28%. Ten year German bund yields were 3 bps higher to 0.40% by the end of the week.

Commodities

Gold continued to soften, slipping to US $1,224 per ounce by Friday, while oil was marginally stronger as Brent Crude closed on Friday at US$74.29 per barrel. Copper also regained some poise, rising to $UUS2.79 per lb.

Currencies

The yen was broadly stronger on the week whilst the Euro softened a little. Sterling closed on Friday at US$1.31, €1.12 and ¥146.

The week ahead

It’s a big week this week, with three major Central Bank meetings as well as non-farm payrolls at the end of the week. Wednesday’s Bank of Japan (BoJ) monetary policy meeting has become much more interesting after rumours circulated that the BoJ was considering shifting its monetary policy stance. The rumours were subsequently denied, and 10-year Japanese Government Bond yields have been testing but not convincingly breaking the 0.10% level, which is a key watch point. Any significant policy change would likely now dent the credibility of the BoJ. Later on Wednesday, the US Federal Reserve (Fed) meeting concludes, though no change is expected, and there is no press conference scheduled. There will be a lot of interest on ‘Super Thursday’ as the Bank of England (BoE) meeting concludes – markets are pricing in a greater than 90% probability of a rate hike, bringing the UK base rate to 0.75%, whilst we will also have the quarterly inflation report containing the latest official forecasts from the BoE. Finally, we end the week with the US Non-Farm Payroll release, with forecasts for 185,000 jobs added in July (from 202,000 in June) and Average Hourly Earnings unchanged at 2.7% yoy. The daily breakdown is as follows:

Monday: Japanese Retail Sales data are released early in the morning, UK time. Later in the morning, the UK reports the latest Net Consumer Credit numbers and then the Eurozone gives us the latest business and consumer confidence readings. In the afternoon, the US reports the Dallas Federal Reserve Manufacturing Activity index as well as Pending Home Sales numbers.

Tuesday: Early in the morning, UK Consumer Confidence from GfK and the Lloyds Business Barometer numbers are released, and then a short time later Japan reports Industrial Production for June and labour data before China reports official PMI figures. Later in the morning, the first estimate of the second quarter’s GDP growth for the Eurozone is out (a slowdown from 2.5% to 2.2% yoy is forecast) as well as CPI for July (no change at 2.0% expected). In the afternoon, the US Personal Consumption Expenditures index, the Fed’s preferred measure of inflation, is reported, expected unchanged at 2.0% yoy.

Wednesday: The main focus will be on the BoJ and US Fed monetary policy meetings, but we also have a lot of other data due out as well. A minute after midnight, the British Retail Consortium will update the Shop Price Index for July, and then both Japan and China (Caixin) report Manufacturing PMI. We also have the UK House Price index from Nationwide and UK Manufacturing PMI due out. In the afternoon the US will report ISM PMI numbers before the Fed decision and statement is released at 7pm UK time.

Thursday: UK Construction PMI is reported in the morning, with Eurozone Producer Prices Index numbers also out before the Bank of England’s ‘Super Thursday’ release. In the afternoon, US Jobless Claims will whet the appetite for labour data ahead of NFPs, and the latest US Factory Orders figures will be out as well.

Friday: In the morning a number of PMI releases come out, including Japanese Services PMI, China (Caixin) Services PMI and UK Services PMI as well as Eurozone Retail Sales. In the afternoon, the Non-Farm Payroll report is the highlight – as well as the headline number and wages data, unemployment is expected to drop 0.1% to 3.9%, whilst underemployment and the participation rate will also get some attention. The ISM reading of Non-manufacturing PMI is also due out.