Plenty of political noise – weekly update 16 July

A look back over macroeconomic and market events for the week ending 13 July 2018. It was a typically quiet midsummer week, with markets ignoring the political developments and little impactful data coming out. There’s some more macroeconomic data out this week which could be of interest, and the US results season picks up.

Plenty of political noise

There was plenty of political noise last week, with the US preparing fresh tariffs on China and key UK Cabinet ministers resigning over the Government’s latest Brexit proposals.

The US action involves a 10% tariff on an additional US$200 billion worth of Chinese imports, and would potentially start to affect US consumers more directly than the global metals tariff and the relatively limited US$35 billion tariffs on Chinese goods that are already in effect. For now, though, they are still in the early stages of consultation, so imposition remains a little way off.

In the UK, Brexit Minister David Davis and Foreign Secretary Boris Johnson resigned from the Cabinet. This happened on the day after a new Brexit plan had been agreed, which many ‘Leavers’ perceived as being too soft. The resignations rocked the political boat, but there seems little scope for the Government to collapse just yet – although Prime Minister Theresa May potentially faces further rebellion from Eurosceptic members of her own party.

We don’t see these developments as materially impacting our investment outlook for the moment, but they add to the political uncertainty, in turn leading to a higher risk premium being demanded by the market.

Industrial production and other data releases

UK industrial production disappointed, but other data releases came in broadly as expected. UK Industrial Production rose 0.8% year on year (yoy) in May, down from a downwardly-revised 1.6% in April, and a long way below the acceleration to 1.9% that markets had been forecasting. Within that, UK Manufacturing Production rose from a downwardly-revised 0.9% to 1.1%, but again disappointed markets looking for 1.9%.

Eurozone Industrial Production for May picked up from 1.7% to 2.4%, exactly as expected, but the ZEW survey of business economic expectations dipped from -12.6 to -18.7.

With market sentiment sensitive to inflation at the moment, the US CPI numbers were closely watched, but in the end there were no surprises, with headline CPI rising from 2.8% to 2.9% yoy as expected, and core CPI, which strips out food and energy, increasing from 2.2% to 2.3%.

Last week’s other events

• In China, CPI rose 0.1% to 1.9% yoy, as expected. Imports rose 14.1% yoy (from 26.0%, 21.3% expected), whilst exports increased 11.3% (from 12.2%, 9.5% expected). The monthly trade surplus of US$41.6 billion was significantly above the US$27.72 billion expected
• Japanese Bank Lending grew at 2.2% yoy in June, from 2.0% previously. The Eco Watchers Survey showed an improvement in the Outlook gauge, from 49.2 to 50.0 (50.1 was expected), and Core Machine Orders growth accelerated from 9.6% to 16.5% (11.0% was expected)
• In the US, the NFIB Small Business Optimism survey cooled from 107.8 to 107.2, but this was ahead of the 106.9 forecast. On trade, the Import Price Index showed import prices up 4.3% yoy in June (from 4.5% in May), with export prices up 5.3% (from 4.9%). The University of Michigan Consumer Sentiment index slipped from 98.2 to 97.1 (98.0 was expected)

The markets

There was little for markets to really get their teeth into last week, so we saw relatively little movement overall, with equities drifting up and bonds generally unmoved.

One-month performance of major asset classes in sterling terms

Equities

Equity markets shook off the political developments last week to drift slightly higher. The Japanese TOPIX was the strongest performer, gaining 2.3%, whilst in the US the S&P 500 returned 1.6%. This side of the pond, the MSCI Europe ex-UK was up 0.9% whilst the MSCI United Kingdom returned 0.6%. The MSCI Emerging Markets index returned 1.5%.

Bonds

10-year UK gilts and the equivalent US Treasuries were effectively unchanged, yielding 1.27% and 2.83% respectively, whilst 10-year German bunds yields rose 5 basis points to 0.34%.

Commodities

The commodity complex continued to weaken last week. Oil slipped to US$75.33 per barrel, whilst gold was down to US$1,244 per ounce and copper fell to US$2.77 per lb.

Currencies

The Japanese yen continued to weaken last week, whilst the US dollar firmed up. Sterling closed on Friday at US$1.32, €1.13 and ¥149.

The week ahead

There are a few major points to watch for next week, with US earnings season stepping up a gear and Federal Reserve Chairman, Jerome Powell, giving his twice-yearly testimony before Congress on Tuesday and Wednesday. On Monday morning, China releases second-quarter GDP, with markets expecting a 0.1% drop to 6.7% on a year earlier, along with a batch of further data. Closer to home, here in the UK there are some important data releases. Tuesday sees the latest employment data including Average Weekly Earnings (no change at 2.5% yoy expected) and unemployment (no change at 4.2% expected). Following this on Wednesday, UK inflation is reported, with headline CPI expected up 0.2% to 2.6% yoy whilst the core CPI reading is forecast to be unchanged at 2.1% yoy. Retail Sales will also be released on Thursday (see below). The daily breakdown is as follows:

Monday: As well as the second-quarter GDP reading, China will also release the regular batch of data, including Retail Sales (8.8% yoy expected from 8.5%), Industrial Production (6.5% from 6.8% yoy expected) and Fixed Asset Investment (6.0% from 6.1% expected). In the afternoon, the US reports Retail Sales, which are expected at 0.5% from 0.8% month on month (mom).

Tuesday: UK Construction PMI is out in the morning, as well as Eurozone Retail Sales. In the afternoon, the US will report May Factory Orders (no growth mom from -0.8% in April is expected).

Wednesday: Whilst US markets are closed for Independence Day, Services PMI numbers are released from a number of regions, including Japan early in the morning, China slightly later in the morning (52.7 from 52.9 expected), and UK also in the morning (no change at 54.0 expected).

Thursday: Eurozone Retail Sales are out in the morning, and then in the afternoon, aside from ISM Manufacturing PMI, we also have the report on jobless claims and the ADP Employment Change report, which will whet the appetite for the main event on Friday.

Friday: In the early hours of the morning, Japan reports a range of data including the Coincident Index and Leading Index, as well as earnings and household spending data. Later we have UK house prices data from Halifax. US Non-Farm Payrolls will be the main draw, as well as the jobs added and earnings numbers. Associated data such as unemployment (no change at 3.8% expected) and participation rate (forecast for no change at 62.7%) will also be of interest.