Wawasan Ekonomi

Key Events Last Week
UK Consumer Price Index (CPI) beat the forecast at 2.6% y/y
Euro Zone Gross Domestic Product (GDP) contracted 0.2% q/q
German ZEW (Zentrum für Europäische Wirtschaftsforschung) Economic Sentiment at -21.12, while Q2 GDP expanded 0.3% m/m only
US Retail Sales grew 0.8% m/m
Philly Manufacturing Index at -7.1, from previous -12.9



Key Events to Focus On This Week
Euro Zone Flash Manufacturing Purchasing Managers’ Index (PMI)
US Flash Manufacturing PMI
China Flash Manufacturing PMI
Spain 10-year Bond Auction



Global Macro Brief

Global Purchasing Managers’ Indices (PMIs) have limited impact on broad asset direction

Euro Zone, China and the United States are going to release the flash manufacturing PMI this week, which are usually the key benchmarks to affect the sentiment. However, it may not happen this time, especially for the Euro Zone and China. Because the focus on the Euro Zone is how much goodwill the European Central Bank (ECB) and the policymakers are going to show instead of the growth speed. How the market reacted to the Q2 GDP last week sets a good example. For China, the comment by Prime Minister Wen Jia Bao on lowering inflation to offer more room for the People’s Bank of China (PBOC) to act further seems to put the real economic growth away from investors’ concern.

Thus, I do not think the global PMIs will set a firm tone for Wall Street because there will be something more important than the current economy, which is the decision by the German constitutional court on September 12. Because before that, all the indicators from different policymakers or the ECB were less meaningful; expectation is high so far, but without the European Stability Mechanism (ESM), they do not have much options left.

German Chancellor Angela Merkel backed the ECB’s verbal commitment to purchase sovereign bonds to help reduce the borrowing costs in the sovereign countries. ECB President Mario Draghi fired at the market earlier this month that the central bank was ready to do whatever to help lower the borrowing costs in those indebted countries.

Even that, there will be uncertainties that create further volatilities, but most likely it will happen in September onwards. German constitutional court could give a ‘yes’ or ‘no’ answer. However there might be also something like “if this and that, then it can be yes”, etc.

No matter what the outcome of the judgment is, the ECB is going to be put on the centre of the stage because it is the time for them to realise their commitment. The market is also going to react and criticise whether the firepower is enough, as usual.

Recently the Germany/Spain 10-year bond yield spread narrowed to less than 500 bps, from July’s high at 627 bps, but it is still higher than the average figure in 2012 at 430 bps.Source: Bloomberg, FXPRIMUSClick the image to enlarge

HSBC China flash PMI unlikely to show growth in manufacturing activity

The Markit is also going to release the HSBC flash manufacturing PMI later on this week, and I expect the figure will hardly have the opportunity to show growing manufacturing activities because the weak global demand was causing the recent new order and the new export order remain subdued; with the recent continuous soft economic releases, I expect the manufacturing activities to remain low.

The recent global slowdown has brought the commodity prices lower, which also hurt the Morgan Stanley Capital International (MSCI) China Material Index. The index has been lowering 30% from the year peak that suggests many headwinds ahead for the Chinese economy.Source: Bloomberg, FXPRIMUSClick the image to enlarge

Recent US data suggests decision to remain unchanged in the coming Federal Open Market Committee (FOMC) meeting

The recent US employment data, retail sales and manufacturing data showed a moderate improvement, especially the July’s jobs report. Thus the hope for further stimulus from the Fed to be announced in the coming FOMC meeting has dampened, which is also in line with my point of view since the middle of the year.

The US retail sales rose 0.8% in July for the first time in four months as demand climbed for goods ranging from cars to electronics, a sign that decent demand from the consumers may imply the jobs market improvement, and also could drive the Q3 growth higher from the consumer spending part.

The US industrial production has increased by 0.6% m/m, up from 0.1% m/m in the previous month. Among all the components, the manufacturing sector increased by 0.5% m/m, which has been moving sideways. However an increase of 0.5 per cent this round signals a bit of an upward trend for the manufacturing activity. Utilities and mining sector in July has grown by 1.3% m/m and 1.2% m/m.Source: ReutersClick the image to enlarge

The Philly Fed Index shows the factory activity in the US mid-Atlantic region contracted in August for the fourth consecutive month, although it improves to -7.1, from previous -12.9.Click the image to enlarge

The activity in the survey is still stable although I did not see an upbeat number.