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The Week in Global Markets
Financial markets summary:
– EUROPE: A week before the next likely ECB rate cut, European (and global) stock markets suffered another decline, mirroring the experience from early August. Major stock indices declined across all of the largest economies, as government bond yields declined. The macro picture turned particularly negative for Germany where core orders (excluding large-scale orders) declined and industrial production shrank again, particularly driven by the weakness in the auto sector. The euro and the British pound strengthened against the US dollar week-on-week.
– UNITED STATES: As the expectations for further narrowing of the yen-dollar interest rate differential keep increasing and the JPY appreciates against the USD, stock markets in the US once again sold off this week. Additionally, a pullback from the AI trade and some signs of waning optimism about it seem to have contributed to this as NVIDIA and other chipmakers dropped significantly and caused the major indices to suffer significant declines. The NFP and JOLTs reports also disappointed, paving the way for markets to price in a higher probability for a bigger rate cut by the Fed this month (50bp). The US government bond yield curve uninverted this week, as 10y yields fell substantially in response to the negative jobs data.
– ASIA-PACIFIC: The major Japanese stock indices Nikkei and TOPIX dropped significantly this week on the strengthening yen, expectations for the next interest rate hike and the stock market developments in the US. The 10-year JGB yield fell to 0.86%. Chinese stock declined on disappointing corporate earnings releases and manufacturing PMIs.
– BITCOIN: Bitcoin brought additional stress to investors this week, as the swings in the largest cryptocurrency left it down below $54k, leading to the liquidation of nearly $50m of leveraged derivatives positions across all cryptos in 1 hour, according to CoinGlass data. The expectation is that the next big move will come around the Fed rate cut and will depend on the magnitude, the economic data and the Fed statement.
policy rate overview
The Bank of Canada cut its key policy rate by 25bp to 4.25%, in line with expectations. The reasoning of the central bank includes weak growth which could mean that a larger rate cut could make sense going forward. Inflation dropped to 2.5% in July which is still above target but the governor said that they would prefer to “guard against the risk that the economy is too weak and inflation falls too much“. Economists expect that if the economic weakness persists, the BoC could go for a more substantial 50bps rate cut in October or December.
The Polish Central Bank kept its interest rates unchanged at 5.75%. This comes after better-than-expected GDP growth in Q2 and still quite high inflation readings. At the moment, high interest rates remain a significant issue for both current and future borrowers, especially in light of the government’s potential withdrawal from the housing loan subsidy program.
highlights from Germany
Industrial production declines again
German industrial production disappointed in July, dropping -2.4% MoM / -2.7% 3m-3m / -5.3% YoY in real terms. The decline was in most manufacturing sectors – the auto industry was hit particularly hard (-8.1% MoM); there was a decline in the manufacturing of electrical equipment (-7.0%) and the manufacturing of fabricated metal products (-3.8%). Production in energy-intensive industrial branches declined by 1.8%. The production of capital goods declined by 4.2%, the production of intermediate goods decreased by 2.8% and the production of consumer goods was down 1.2%. Outside industry, a 1.9% decrease in energy production was observed in July 2024. Production in construction grew by 0.3% MoM.
Another disappointing month in construction
The situation in the German construction sector remains dire: activity fell at a faster rate amid particular weakness in the housing sector, driving a steep downturn midway through Q3, although there was some resilience seen in civil engineering. The good news is that the outlook is slightly less pessimistic and that the decline in new orders eased a bit, while price pressures also moderated. However, weak demand conditions continued to undermine the construction sector’s performance and job cuts continued to deepen. Firms cited a general reluctance among customers, linked in part to high interest rates.
Large-scale orders driving an increase in manufacturing new orders in July
Real new orders in manufacturing were up 2.9% MoM in July 2024 after seasonal and calendar adjustment. The orders were up 1.7% on a 3m-basis and +3.7% YoY. Excluding large-scale orders, however, new orders in July 2024 were down 0.4% MoM, and they were 1.0% higher 3m/3m. The main driver for the increases were higher orders in the “manufacture of other transport equipment” sector (aircraft, ships, trains, military vehicles), where new orders were up 86.5% MoM due to several large-scale orders. The growth recorded in the manufacture of electrical equipment (+18.6%) also had a positive contribution. There was a notable decline in new orders in the “manufacture of machinery and equipment” sector (-6.1%).
New orders in the capital goods and intermediate goods sectors were up 3.5% and 4.4%, respectively, in July 2024 on the previous month. By contrast, new orders in the consumer goods sector were down 5.8% MoM. New foreign orders rose by 5.1%, with new orders from the euro area increasing by 5.9% and orders from the rest of the world by 4.6%. Domestic orders remained unchanged. Real turnover in manufacturing (seasonally and calendar adjusted) in July 2024 was down 2.3% MoM
highlights from Europe
A sharp downturn in construction
PMI survey data pointed to the eurozone construction sector remaining in decline midway through Q3. New orders fell markedly, leading to a further reduction in construction activity and sustained retrenchment of employment and purchasing. Moreover, the contraction was broad-based across the three monitored economies and the 3 sectors. Companies remained pessimistic regarding the year-ahead outlook. The overall reduction in activity reflected declines across the three largest eurozone economies in August. Activity in Germany decreased at the sharpest rate in three months, while there were slightly softer contractions in France and Italy.
A slight pick-up in retail sales
The volume of retail trade up by 0.1% in the euro area and by 0.2% in the EU MoM in July, but still remained lower for both compared with July 2023. The monthly development was driven by increases in food, drinks, tobacco, as well as non-food products (except automotive fuel). The highest monthly increases in the total retail trade volume were recorded in Croatia, Austria, Slovakia and Slovenia. The largest decreases were observed in Luxembourg, Romania and Cyprus.
highlights from The United States
ISM Services rises more than expected, but manufacturing is still contracting
The ISM Services index for the US increased to 51.5 in August, which was more than expected. There was a slight improvement across most categories except employment which edged down slightly. All readings were still above 50 but going sideways. The 10 services industries reporting growth in August are: Arts, Entertainment & Recreation; Mining; Transportation & Warehousing; Other Services; Information; Health Care & Social Assistance; Finance & Insurance; Public Administration; Educational Services; and Utilities. The 7 industries reporting a decrease in the month of August are: Agriculture, Forestry, Fishing & Hunting; Retail Trade; Construction; Wholesale Trade; Accommodation & Food Services; Management of Companies & Support Services; and Professional, Scientific & Technical Services.
Unlike the strong reading in services, the manufacturing PMI remained in contraction territory and came in at a lower level than expected for August. The 5 manufacturing industries reporting growth in August are: Primary Metals; Petroleum & Coal Products; Furniture & Related Products; Food, Beverage & Tobacco Products; and Computer & Electronic Products. The 12 industries reporting contraction in August are: Textile Mills; Printing & Related Support Activities; Nonmetallic Mineral Products; Plastics & Rubber Products; Electrical Equipment, Appliances & Components; Fabricated Metal Products; Transportation Equipment; Wood Products; Machinery; Paper Products; Chemical Products; and Miscellaneous Manufacturing.
Non-farm payrolls rise less than expected while job openings also serve a negative surprise
The July JOLTS report had the lowest reading since Jan 2021 at 7.673m vs. 8.10m expected. Markets shifted into Treasuries as a safe haven while stocks pulled back. JOLTS Quits rate ticked up slightly to 2.1%, which is around the median since 2000. However, the hires rate actually rose to 3.5% but this is still below the 3.8% median hires rate since 2000 and remains on a downward trend. Layoffs are relatively low but ticked up to 1.1%. The US economy added economy added 142K jobs in August which was below expectations of 164K. The unemployment rate for July just came in at 4.2% in line with expectations. Job gains were observed in construction and health care. In any case, nonfarm payroll growth continues to slow and downward revisions pull the trend lower – the revisions reduced reported employment for June and July by 86K.
highlights from The United Kingdom
A solid rebound in construction
UK construction companies indicated a sustained recovery in total business activity in August, although the pace of expansion eased slightly since July. The main contributing factors were robust new order growth and a more supportive economic environment. There is more optimism about the near-term outlook. Commercial activity was the best-performing segment. A number of firms noted a boost from rising sales enquiries and the release of new orders following the general election. Civil engineering activity meanwhile expanded at only a moderate pace that was notably weaker than in July. Residential work was the only sub-sector to gain momentum,
with growth accelerating to its fastest since September 2022.
Author: Nikolay
Founder of MoneyCraft
