The publication yesterday of the latest set of Fed policy meeting minutes provided little clarity on the likely path ahead for rates, most notably perhaps highlighting the wide range of views among FOMC members. Like Chair Powell, most officials viewed the July cut as a mere mid-cycle adjustment. But while “several” FOMC members favoured unchanged policy last month, a couple favoured a 50bp rate cut. So, by and large, there was nothing to upset yesterday’s broadly positive mood in US equity markets, with the S&P500 closing up 0.8% on the day. In Asia, however, the major stock indices today were decidedly mixed. The TOPIX closed little changed on the day, despite a very strong showing from the services sector in the flash Japanese August PMIs, which suggested that demand is likely being brought forward ahead of October’s consumption tax hike (detail below). Meanwhile, China’s CSI300 closed up just 0.3%, and the Hang Seng was down about 1% as the Hong Kong protests continued to weigh.
In bond markets, initial losses suffered by USTs immediately after publication of the Fed minutes were reversed in Asian time, with yields about 2bps or more now down from their peaks. But ahead of today's release of the account of the July ECB meeting – which might just provide more clues on the nature of the easing package likely to be forthcoming next month – most euro area govvies are a touch weaker after some stronger French and (to a much lesser extent) German PMIs (the flash euro area PMIs are due shortly). BTPs, however, are outperforming again as Italian President Mattarella has reportedly given the leaders of the Five Star Movement and centre-left Democrats until Monday to propose a Prime Minister to lead a new coalition – if they don’t, a new general election will be called. Finally, sterling is stable ahead of today’s bilateral between Boris Johnson and Emmanuel Macron, after yesterday saw Angela Merkel politely but firmly place the ball in the court of the UK PM to find the (non-existent) solution that could maintain an open border on the island of Ireland if and when the UK leaves the Customs Union and Single Market. Macron today might be expected to be a whole lot blunter than his German partner.
After a dire Reuters Tankan survey at the start of this week, which signalled a notable deterioration in both the manufacturing and non-manufacturing sectors alike, the main focus in Japan overnight was the August flash PMIs. But these suggested that conditions were somewhat more stable in the middle of the quarter. For example, the headline manufacturing PMI edged slightly higher for the second successive month, albeit the 0.1pt increase still left the index below the key 50 level for the fourth consecutive month. The output and new orders components were also a touch firmer, although similarly remained in contractionary territory for the eighth consecutive month.
But most striking in today’s release was the 1.6pt increase in the flash services PMI to 53.4, matching the level last seen in October 2017, which itself was the highest since the summer of 2015. As such, the composite PMI rose 1.1pts in August to 51.7, the strongest reading since December and a full point above the average so far in 2019. And there were improvements across the board, with e.g. the new orders index rising 0.6pt to 51.2, the employment PMI up 0.5pt to 51.3 and the output price component up 0.8pt to 51.3. So, in the first two months of Q3, the composite PMI was on average ½pt higher than the average in the first two quarters of the year at 51.2, suggesting that – probably supported by demand brought forward ahead of October’s consumption tax hike – GDP is on track for another quarter of positive growth in Q3.
But while the first estimate of Q2 GDP confirmed that Japan’s economy expanded by ½%Q/Q, today’s monthly all industry activity figures for June suggested that economic momentum weakened considerably towards the end of the quarter. In particular, total output declined 0.8%M/M in June, the steepest monthly drop since September, to leave output 0.3% lower than a year earlier. We already knew that industrial production fell 3.3%M/M – the most in seventeen months – and that activity in the tertiary sector (which accounts for more than 70% of total output) was down 0.1%M/M. But today’s release reported that construction also slipped back, with output in the sector falling for the first month in three and by 1.0%M/M in June.
Within the detail, the weakness in construction reflected a more than 2%M/M drop in private sector construction activity. In contrast, public sector construction rose for the third consecutive month and by 2½%M/M, with building work rising to its highest level for sixteen months to leave it up 7½%Q/Q in Q2, the strongest quarterly growth since Q312. Although some projects associated with last year’s natural disasters are now complete, we would expect public sector construction to further support growth over coming quarters. However, after a rebound in the second quarter, manufacturing will likely struggle again against the challenging external backdrop. And services will no doubt face payback after the consumption tax hike in October.
There are several noteworthy releases from the euro area today, including the flash PMIs and Commission’s consumer confidence indicator for August. The flash German and French PMIs released already this morning were on the whole a touch firmer. But the improvement in Germany’s manufacturing PMI was very modest, up just 0.4pt to a still very weak 43.6, with no improvement in the (highly contractionary) index for new orders. And Germany’s services PMI slipped back 0.1pt to 54.4, the lowest since January. So, while Germany’s composite PMI rose 0.5pt to 51.4, this was insufficient to allay fears that Germany’s economy might be technically in recession in Q3.
In France, however, this morning’s release more comfortably exceeded expectations, with the headline manufacturing PMI rising 1.4pts to 51.0, with the output and new orders components also rising back above the key 50 level. Moreover, the services PMI increased 0.7pt to 53.3, a nine-month high. As such, the French composite PMI rose 0.8pt to 52.7, matching the seven-month high hit in June and signalling a relatively solid pace of expansion in the middle of Q3.
Also of interest today, of course, will be the ECB’s account from its July Governing Council meeting, at which President Draghi gave a clear steer that a multi-faceted easing package will be forthcoming in September. The document will be closely watched for any further insight into the specific policy measures likely to be preferred by Governing Council members.
All eyes in the UK will be on French President Macron, who might be expected to give a franker opinion about Boris Johnson’s Brexit policy than was offered yesterday by the ever-polite Angela Merkel. Certainly, he didn’t pull his punches yesterday, talking (not inappropriately) of a “British democratic crisis” and how the blame would be entirely with the Johnson government if the UK left the EU without a deal at end-October. Against the backdrop of heightened Brexit uncertainty, meanwhile, today will bring the CBI’s distributive trades survey for August, which is likely to show that retailers remain broadly downbeat about conditions, with the survey’s headline balance expected to report the fourth consecutive negative reading, which would be the worst performance since 2011.
Finally, today’s US dataflow will include flash PMIs for August, the Conference Board’s leading index for July and the weekly jobless claims numbers. Please see Mike Moran’s FOMC Review for commentary on yesterday’s minutes from the Fed’s end-July meeting.