Investors and economists spent the summer waiting for Fed chair Jerome Powell’s Jackson Hole speech in late August and the first part of September commenting on it. The next meeting of US Federal Reserve policymakers is not until 21-22 September, so now is the time refocus on the ECB ahead of the upcoming Governing Council meeting and the Sintra Forum in late September.
As at 7 September, global equities were up by 0.6% from the end of August (MSCI AC World index in US dollars), with emerging markets outperforming (+1.3% for the MSCI Emerging). In developed markets, after setting a record high on 2 September, the S&P 500 hesitated, leaving it more or less flat. Eurozone equities were up by 0.7% from the end of August.
Tokyo’s Nikkei 225 gained 2.0% on 27 August after Prime Minister Yoshihide Suga, in a surprise move, signalled he was stepping down amid low approval ratings. Investors see the decision as paving the way for additional support measures for the economy to be put in place while Suga’s LDP has a majority in Parliament. As of 8 September, the Nikkei 225 was up by 7.4% from the end of August.
What to make of the latest economic indicators?
Recent data has not changed the cyclical outlook, but two forces are likely to weigh on economies longer than initially hoped:
1) supply-chain bottlenecks, which are limiting industrial production
2) the pandemic, which continues to weigh on the services sector, either because governments are imposing new restrictions or because consumers are reluctant to return fully to normal life.
Business surveys are reflecting the effects of the Delta variant that swept the world this summer. Global growth is running at a somewhat slower pace. Consumer confidence fell in both July and August. The JPMorgan Global Composite PMI dropped from 55.8 in July to 52.6 in August, its lowest reading since January. These surveys suggest that growth probably peaked in May.
The drop in the global services PMI was significant (from 56.3 to 52.9). The indices for Japan and China, where more stringent measures have been implemented to contain the spread of the virus, were below 50, signalling a contraction in activity.
The main eurozone countries are nonetheless doing well: PMIs fell only marginally in France and Spain and the composite index managed to rise in Italy to its highest since June 2006.
German industry is also suffering from supply problems, but the services sector has remained dynamic. The ZEW survey of investor views on the German economy deteriorated in September as shortages of semiconductors and building materials weighed on the outlook. However, the current conditions index improved. Hard data released this week showed a rise in manufacturing output and orders in July even as car production has remained well below its pre-pandemic level.
Eurozone Q2 GDP growth has been revised up from 2.0% to 2.2% with a strong rebound in consumption and business investment and a slightly negative contribution from inventories. The latest economic outlook by INSEE indicates that the recovery of the French economy continued this summer despite the fourth wave of Covid.
What about employment in the US?
The US economy created a disappointing 235 000 jobs in August versus a consensus estimate of 733 000. This slowdown followed two months where one million new jobs were added. The shortfall was concentrated in the leisure and hospitality industries, where employment had been rising by 350 000 per month over the past six months.
This underperformance was primarily due to the sharp increase in Delta infections. Job creation in other sectors, which had been less affected by the pandemic, continued at a pace comparable to that seen in previous months. These sectors account for about two-thirds of total jobs.
The August employment report is not as unfavourable as it looks at first glance, however. The household survey showed a significant rise in employment, pushing down the unemployment rate from 5.4% to 5.2%. Furthermore, the ‘underemployment’ rate, which takes into account persons marginally attached to work and those working part-time for economic reasons, fell significantly from 9.2% to 8.8%.
The number of ‘permanent’ unemployed has also started to drop (see Exhibit 1), showing that job creation is not coming just from temporarily laid off workers returning to work as companies reopen. Finally, hourly wages have risen more sharply than expected (+4.3% YoY vs. 3.9% forecast) and there is more anecdotal evidence that companies are considering raising wages.
US government bonds rose after the release of the report, suggesting that investors are putting more weight on pay pressures, which could be inflationary, rather than taking the view that activity is deteriorating.
Let’s talk about Europe
“The first P in PEPP stands for pandemic, not for permanent, and for a good reason.” This comment by the President of the Bundesbank reflects an opinion that may be spreading on the ECB’s Governing Council.
Other recent comments have indeed suggested that a reduction in purchases under the pandemic emergency purchase programme could be announced soon. The ECB will want to present this as a technical adjustment allowed by more favourable financing conditions than in June.
August asset purchases totalled EUR 65 billion after 87.5 billion in July (see Exhibit 2). As announced in March and confirmed in June, the ECB had bought more assets in recent months (EUR 79 billion on average in each month since April) and may now decide to slow this pace.
Cumulative purchase since the programme was launched in March 2020 stood at EUR 1 337 billion at the end of August, out of an envelope of EUR 1 850 billion. In the coming months, with inflation at 3.0% year-on-year and uncertainty over the effects of the new wave of Covid on European growth, ECB messaging will be decisive. Expect it to tread lightly.