Week Ahead: All eyes on Jackson Hole

Week Ahead

The Jackson Hole Symposium is the big one this week. 

This annual gathering of top US and international finance policymakers, movers, and shakers has long been used to break major policy shifts. Markets are anticipating Fed Chair Jerome Powell will be using this year’s meeting to announce QE and stimulus policy changes. 

Powell could use the Symposium to announce a pullback from its current bond-buying programme. The Fed hinted as much in its July meetings, and there’s been plenty of rumblings that tapering is on the way, but as yet traders and investors are yet to receive an official green light.  

At present, the Fed is currently buying $120bn in fixed-income assets every month. $80bn comes from Treasury securities and the remaining $40bn is sourced from mortgage-backed securities. All of this was part of a package of ideas to help support the COVID-ravaged US economy. 

Bond traders and currency markets in particular are watching Thursday’s get together with interest. Clarity on the economy’s course, and navigational ideas to make it through a Delta-dominated landscape, will do much to allay their fears. It’s up to Powell now. 

Since the start of the year, the economy has been accelerating rapidly – even if last quarter’s GDP growth failed to meet expectations. But rapid rises can bring other challenges. In this case, they’re inflation shaped. CPI and PPI keep growing at record rates too, and while Powell has been content to let the economy run hot, he’d best put on some oven gloves, lest his fingers get burned. 

Speaking of inflation, further data on its impact is on its way with Friday’s release of Personal Consumption Expenditure index numbers, the Fed’s preferred gauge of inflation. 

PCE growth clocked in at 0.4% in July, below the expected 0.6%, but an increase of 3.5% on an annualized basis. Seeing as it has been rapidly rising across the past couple of months, no doubt Powell and co. will be keeping a very close eye on Friday’s print. 

Further economic health indicators are on their way in the shape of a Monday morning PMI blitz. We’ll get releases judging American business output then, as well as IHS Markit insights into British and European activity too.  

US flash PMI readings for manufacturing and service productivity are released on Monday. There will be a lot to unpack when these are published, particularly as July’s numbers reported solid-but-slowing growth in American business activity. 

Both services and manufacturing sectors continue to feel the twin fangs of inflation and COVID-19. Factory output caused the manufacturing index to drop from June’s 63.7 reading to 59.7 in July (a four-month low), while the services sector also pulled back from 64.6 to 59.8.  

Higher input costs, staff shortages, and rising raw material costs are limiting growth. Let’s be clear: a reading over 50 indicates growth, but it does appear there’s a slowdown occurring in American productivity. 

Much the same can be said of the UK, according to its own PMI figures. August’s index readings are published on Monday morning, but we’ve seen supply chain bottlenecks and low worker numbers hold back output.  

July’s IHS Markit UK services PMI score was 59.6, a quite significant drop from June’s 62.4. Manufacturing showed a similar drop to 59.2 from 62.2.  

“More businesses are experiencing growth constraints from supply shortages of labour and materials, while on the demand side we’ve already seen the peak phase of pent-up consumer spending,” said IHS Markit’s economics director, Tim Moore. 

Conversely, EU productivity showed a July surge. IHS Markit’s final composite Purchasing Managers’ Index reached 60.2 in July – the highest level since June 2006 – indicating a strong showing from both services and manufacturing. 

However, to sustain this, the EU will have to be careful to avoid the logistical and labour market snags that have hit the UK and US. It’s unlikely to do so, so we could be looking at a lower reading in August. 

Major economic data 

Date  Time (GMT+1)   Asset  Event 
Mon 23-Aug  8.15am  EUR  French Flash Manufacturing PMI 
  8.15am  EUR  French Flash Services PMI 
  8.30am  EUR  German Flash Manufacturing PMI 
  8.30am  EUR  German Flash Services PMI 
  9.00am  EUR  Flash Manufacturing PMI 
  9.00am  EUR  Flash Services PMI 
  9.30am  GBP  Flash Manufacturing PMI 
  9.30am  GBP  Flash Services PMI 
  2.45pm  USD  Flash Manufacturing PMI 
  2.45pm  USD  Flash Services PMI 
       
Wed 24-Aug  3.30pm  OIL  US Crude Oil Inventories 
       
Thu 25-Aug  ALL DAY  USD  Jackson Hole Symposium 
  1.30pm  USD  Preliminary GDP q/q 
  1.30pm  USD  Unemployment Claims 
       
Fri 26-Aug  ALL DAY  USD  Jackson Hole Symposium 
  1.30pm  USD  Core PCE Price Index m/m 

 

Stocks firm as travel gets a boost

Morning Note

The reopening in the US and UK continues apace. More states are opening up bars, restaurants and other hospitality venues at full capacity, whilst Britons are set to resume international travel this month and get back in the pub too.  Europe is catching up fast on vaccinating its population and will be at a similar level by the summer. The vaccines are working. Stimulus is also supporting spending as US personal incomes soared by 21% last month. Dare we consider a return to genuine normality soon? Perhaps, but the picture is very uneven across the globe, as India shows all too clearly.

 

European stocks opened broadly higher on Tuesday before easing back to the flatline, with the UK market leading the way in a holiday-shortened trading week. The FTSE 100 rose 0.7% in early trade, testing the 7040 high from last month again before paring gains.  Infineon scrubbed 20pts off the DAX as the German index dropped by around 0.4%. US markets were higher on Monday, with the S&P 500 up 0.3% to 4,192 and the Dow Jones rising 0.7% to 34,113. The Nasdaq lagged, falling 0.5% as big tech names declined a touch following a period of strong gains running into earnings season. Tesla fell 3.5% and Amazon dropped over 2%.  

 

Profits at Saudi Aramco soared 30% versus last year as higher oil prices lifted earnings. Net income rose to $21.7bn. Crude prices have rebounded strongly in the last 12 months –it’s just over a year since WTI futures dropped into negative territory ahead of expiration. Crude prices have a bullish bias at the start of May with WTI futures (Jun) hovering around the $643.50 area and Brent just a little under $68. Whilst there concerns about the situation in India and implications for demand growth, this is being outweighed by hopes for demand recovering strongly. 

 

On that front, IAG shares rose over 3% to the top of the FTSE 100 as the US and Europe move to reopen travel this summer and Britons look set to be able to resume foreign travel from May 17th. As US states declare further moves to open things up, the EU is looking to enable people from outside the bloc who have had both their vaccinations to travel freely to Europe this summer. Talks on the plans begin today. Whilst progress is slow, there is hope that by the summer holidays travel will be substantially more possible. Airline stocks were broadly higher. TUI and EasyJet topped the FTSE 250, which rose to within a whisker of its intra-day all-time high this morning. 

 

Australia’s central bank left rates on hold but upgraded its outlook for the economy. Later this week the Bank of England is expected to do similar. The quarterly Monetary Policy Report should show better growth and higher inflation ahead as vaccines are working and enabling the economy to reopen as planned. The big question is over a taper of bond purchases. The thorny issue for policymakers is whether to use this meeting to announce how and when it will taper bond purchases. The yield on 10-year gilts is back to 0.84%, close to the March peak at 0.87% and could top this should the BoE signal it is ready to exit emergency mode. Policymakers may prefer to wait until June. Ultimately, the question about tightening is really one of timing, but the BoE cannot be blind to the economic data and this meeting could be the time to fire the starting pistol. The fact the furlough scheme is slated to run until September, the BoE has time on its hands and could wait until August. As far as sterling goes, also keep your eyes on the Scottish elections on Thursday, where a majority for pro-independence parties in Holyrood could up the ante in terms of a second referendum. GBPUSD tested 1.380 support yesterday before a rally ran out of steam at 1.3930 as it continues to hold the range of the last 2-3 weeks.

 

Gold touched the 100-day SMA and pulled back from the $1,800 area. MACD bearish crossover avoided for now but potential double-top at $1,800 could call for a deeper pullback. 

Chart showing gold performance on May 4th 2021.

Week Ahead: Acronyms a-go-go – CPI, PMI & GDP releases

Week Ahead

A lot of economic data is released in key economies this week. Starting with the UK, CPI and retail sales figures are released, with furlough and lockdown still looming large over the economy. US GDP numbers for the first quarter are finalised but the focus will be on business sentiment showing up in a fresh batch of PMI releases from the US, UK and Eurozone amid vaccine progress that is diverging in the major economies.  

UK CPI 

Investors and FX traders will be watching UK inflation figures this week following the Bank of England decision. 

Inflation is in focus in the UK right now, as the effects of rising bond yields, further government economic support via Chancellor Sunak’s “spend now, tax later” budget, and the Bank of England’s response continue to colour the economic picture. 

ONS data shows the latest full-year CPI at 0.9%. Across 2021, the CPI is expected to rise to 1.5% across the year. Some estimates suggest it may even rise to 1.8% by April. 

 CPI inflation for the UK came in at -0.2% monthonmonth in January, down on December’s 0.3%, but the figure was above the -0.4% the market was expecting. 

CPI inflation rose 0.7% year-on-year in January, which is above December’s figure of 0.6% and above the consensus expectation for a reading of 0.6%. January’s upward trend was driven by rising prices of food, transport, and household goods. 

UK Retail Sales 

UK retail sales data is released this week. The latest industry data suggests February was a solid month for the UK’s retail sector, according analysis from KPMG. 

Total sales were up 1% in February on a like-for-like basis against last year’s stats. Importantly, this was a sharp reversal of January’s retail sales, where sales contracted 1.3% against 2020’s figures. 

Driving February’s growth was March’s reopening of schools across England. Spending on non-food items, like school uniforms and stationery, was up as shopper’s fell into the back-to-school trend.

Non-essential stores still remain shuttered in England and will remain so until April 12th. Online sales are benefitting greatly from lockdown, mainly because consumers have no other choice but to use digital outlets to get their non-essential items. Non-food spending accounts for 61% of February sales – up nearly double compared with 31% in February 2020. 

However, overall consumer spending is down, Barclaycard reports, slipping 13.8% y-o-y in February. Lockdown restrictions on hospitality and leisure continue to weigh heavy. No doubt they’ll surge once full lockdown restrictions are removed in June, but until then the sector is going to greatly underperform. 

US, UK, EU PMI 

PMI data is released in major economies this week as the UK, US, and EU share index findings. 

Starting with the UK, observers will be hoping the momentum started in February will continue into March. The IHS Markit/CIPS Composite PMI gave a reading of 49.6 for February, up from an eight-month low of 41.2 in January.  

Some industries are performing above expectation. According to IHS Markit, UK construction was perkier than forecast in February, with the construction PMI at 53.3 from 49.2, as projects halted by Covid-19 were given the green light to continue or begin. Manufacturing continued an upward swing too, rising to 55.1 last month. 

However, services remain disappointing, with the revised February figure chalked up as 49.5 – still below the 50 growth threshold. This is perhaps to be expected. Leisure and hospitality are still heavily restricted, so don’t expect any upward trends in March. 

EU leaders were breathing a little easier after  February’s numbers.  For instance, manufacturing was up to 57.9 in February from 54.8 in January – a 3-year high – led by strong performance from The Netherlands and Germany. 

However, since then the outlook for Europe has deteriorated as Covid cases in France and Germany have spiraled and Italy has entered a fresh lockdown. Survey data may not reflect the recent developments fully. 

Hopping across the Atlantic, the US enjoyed a smash-hit manufacturing PMI in February, blowing the EU’s impressive numbers out the water. The US manufacturing PMI came in at 60.8 – the highest level seen for 3 years. However, that impressive figure may be cooled by issues in the supply chain.  

According to manufacturers surveyed by the Institute for Supply Management (ISM), commodities and component prices are rising. The steel price is up, for instance, which massively affects pricing for the US manufacturing sector. 

US GDP 

The final reading for US Q4 2020 GDP comes this week but all eyes are really on the updated forecasts we are getting for 2021. Last week the Federal Reserve raised its outlook for growth to 6.5% this year, up from 4.2% expected at the time of the December meeting.  

The OECD and several investment banks have also upped their guidance for US growth this year. Therefore, high frequency data like the weekly unemployment claims and personal income and spending figures will be the ones to watch, particularly as the arrival of $1,400 stimulus cheques begins to be felt. 

Markets, however, like to look forward, not backward. Q1 2021’s GDP figures will be very interesting for the market. On that front, the outlook is optimistic. 

Back in December, Goldman upgraded its Q1 2021 GDP figure to 5%, following the passing of $900bn in stimulus. Joe Biden’s further $1.9bn stimulus package has been passed, which may influence the quarter’s GDP movement. 

More recently, the Philadelphia Fed has put Q1 2021 GDP growth at 3.2%, citing a brighter outlook for labour markets, although it has also bumped its inflation expectations up to 2.5% for this quarter’s CPI release. The Atlanta Fed is even more upbeat than its cousin to the north. Its initial Nowcast puts the quarter’s GDP growth at 5.2% – in line with Goldman’s December estimate.  

The point about unemployment raised by Philadelphia is pertinent here. The last Nonfarm payrolls indicated the jobs market was beginning to come off life support, surging 379,000. More people at work suggests more productivity, suggests healthy Q1 GDP growth. 

Essentially, we’re looking at a healthier US economy in 2021 so far. Morgan Stanley has even gone so far as to suggest pre-pandemic GDP growth will kick in as early as the end of March. That might be a bit too ambitious, but it’s an indicator of increased confidence regarding the United States. 

Major economic data 

 

Date  Time (GMT)  Currency  Event 
Wed 24 Mar  7.00am  GBP  UK CPI y/y 
  8.15am  EUR  French Flash Manufacturing PMI 
  8.15am  EUR  French Flash Services PMI 
  8.30am  EUR  German Flash Manufacturing PMI 
  8.30am  EUR  German Flash Services PMI 
  9.00am  EUR  Flash Manufacturing PMI 
  9.00am  EUR  Flash Services PMI 
  9.30am  GBP  Flash Manufacturing PMI 
  9.30am  GBP  Flash Services PMI 
  1.45pm  USD  Flash Manufacturing PMI 
  1.45pm  USD  Flash Services PMI 
  2.30pm  USD  US Crude Oil Inventories 
       
Thu 25 Mar  8.30am  CHF  SNB Monetary Policy Statement 
  12.30pm  USD  Final GDP q/q 
  2.30pm  USD  US Natural Gas Inventories 
       
Fri 26 May  7.00am  GBP  Retail Sales m/m 
  9.00am  EUR  German ifo Business Climate 

 

Key earnings data 

 

Date  Company  Event 
Mon 22 Mar  Saudi Aramco  Q4 2020 Earnings 
        
Tue 23 Mar  Adobe  Q1 2021 Earnings 
   Markit  Q1 2021 Earnings 
        
Wed 24 Mar  Tencent Holdings  Q4 2020 Earnings 
   Geely Motors  Q4 2020 Earnings 
        
Thu 25 Mar  CNOOC  Q4 2020 Earnings 

Broad rally for equities as UK goes for lockdown-lite, Tesla fails to spark, precious metals under pressure

Morning Note

European markets rose 1% in early trade on Wednesday, extending mild gains from the previous sessions following the steep selling on Monday. Yesterday, the S&P 500 rose 1%, and the Nasdaq climbed 1.7%, whilst markets across Europe were a little more mixed with London and Frankfurt higher but Paris lower.

Today sees solid bid across sectors and bourses with a slate of manufacturing and services PMIs in focus. The FTSE 100 recovered the 5,900 level, with even IAG and easyJet getting in on the action, rising 6% each. Safe-haven play Fresnillo was off by a similar margin as silver and gold prices come under a good deal of pressure again today.

There is no clear evidence for the airlines to rally except that perhaps there was an overreaction earlier in the week.

PMIs underline the fragility of the recovery

I will issue the usual caveat about extrapolating too much from these diffusion indices, but they do highlight an interesting trend. The manufacturing sector can sustain a recovery as firms can work out how to function in the new environment, but it’s harder for many service sector businesses to operate at all, which drags on the number.

Service sector companies are also much more exposed to the caprice of lockdowns. Both German and French services PMIs came in under 50, indicating contraction (survey respondents think things are worse than the month before), while both countries’ manufacturing PMIs pointed to expansion.

The UK is heading for a second lockdown-lite

This will dent the recovery and hit some sectors especially hard, but perhaps more importantly this is spurring the chancellor into action. With the furlough scheme slated to end in October, there is a risk of a jobs calamity even without further lockdown restrictions, which are a possibility.

Rishi Sunak is reported to be working on new plans to support jobs, which may ease worries among investors that the UK economy could fall off a cliff for a second time just as the Brexit process reaches its finale.

Individual stocks are putting some very big moves daily which only indicates the kind of dislocation in market pricing, uncertainty about the path of the pandemic and the fact that no one really knows where a lot of these securities ought to be trading.

Whether it’s value or growth, tech or travel, the unevenness of both the recovery and government policy means it’s hard to know what a fair value is. Trying to extrapolate a narrative to fit all of this is often a fool’s errand.

Tesla stock tumbles after Battery Day reveals fall flat

A case in point: Tesla shares fell over 5% and extended their decline by a further 7% in after-hours trading, despite Elon Musk outlining the company’s plans to halve the cost of battery manufacturing and market an electric car at $25,000. The new battery tech would deliver 16% more range and x6 more power, but the company said production in volume is three years away.

There is some debate about whether Tesla’s Battery Day announcements amount to incremental or revolutionary changes to battery technology, but two things are clear: Tesla has not suddenly acquired warp speed capability, but clearly the company has a roadmap to cheaper, longer life battery technology that it will make itself and will allow it to lead the EV field for a while longer.

Panasonic and other suppliers were hit with Tesla planning to make its own battery. Nevertheless, given all the anticipation around a potential game-changer in battery technology, investors were a little underwhelmed by the news. Tesla’s Frankfurt-listed shares declined 7% at the open, before paring losses a touch.

Nike climbs as online sales surge, Ant Group takes another IPO step

Nike shares shot higher after-market following an 82% rise in online sales, with the company expecting to benefit from a permanent shift to direct online sales. EPS of $0.95 beat the $0.47 expected, on revenues of $10.6bn vs the $9bn expected. Nike continues to benefit from its strong brand presence that is akin to Apple in the smartphone space, as well as large investments in its web and mobile platforms. Shares in Adidas and Puma rose about 4% on the read-across.

Ant Group took a step closer to its mega-IPO after it submitted documents for registrations of the Shanghai side of the listing. The company plans to list both on Shanghai’s STAR Market and in Hong Kong, with valuation estimates in the region of $250bn-$300bn.

Cable softens, BoE Baily fails to quell negative rate fears

In FX, GBPUSD traded under 1.27 in early European trade after the downside breach of the 200-day EMA presented bears with an obvious momentum play. Yesterday’s move under the 1.2760 level has opened up the path to further losses and today the pair is trading through the 100-day line and testing the 38.,2% retracement at 1.2690.

Whilst Andrew Bailey attempted some push back on negative rates, saying they are not imminent, the takeaway from his comments was that this unorthodox and dangerous tool is very much being actively considered by the bank’s Monetary Policy Committee.

Chart: GBPUSD downside exposed

The USD continues to find bid, which is weighing on gold. DXY extended its push out of the channel, forcing gold to trade under $1,900 and test the 50% retracement around $1875, corresponding with the horizontal support of the descending triangle formed by the August lows. Silver has a bearish bias after breaching the August low.

Chart: Dollar continues breakout

 

Chart: Gold tests 50% retracement

Chart: Silver breaks August lows

Foreign flops at Purplebricks and Domino’s hit shares

Equities

International expansion is not as easy as it looks – just ask the boards of Purplebricks and Domino’s.

Michael Bruce, found and chief executive of Purplebricks, is stepping down after a torrid year for the company. COO Vic Darvey is stepping into the breach. That means we’ve seen the poor performance recently claim 3 CEOs – in February the firm said UK boss Lee Wainwright and US boss Eric Eckardt would be departing. Shares are down almost 75% since the summer of 2017 and fell another 8% on the news this morning. 

The UK housing market has softened, prices are falling in Australia and cracking the US is proving very difficult. It’s tried to expand a little bit too quickly, but clearly the market conditions in the UK and Australia have been less than favourable. In fact, it’s got so bad in Australia that the company is pulling out. In the US it looks like it will materially scale back the business. Canada is better, but small. The focus will now be on Canada, where growth is good, and shoring up the core domestic market in the UK. 

In today’s trading update the group confirmed that full year revenues would be in the £130-£140m guided in February, which of course was down from the £165m-£175m previously indicated. Purplebricks tried to run before they could walk and are paying the price for being just a little bit too ambitious.  

Domino’s international sales slacken

Domino’s PIzza Group meanwhile is seeing good UK growth offset by considerable weakness in its international business, whilst there are ongoing worries about the state of the company’s relations with franchisees. Shares fell 6% on a disappointing trading update that shows things are not getting any better in foreign markets after a tough period of trying to get the ducks in a line in 2018.

UK and Ireland system sales rose 4.8% in the quarter. UK system sales rose 4.7%, with like-for-like growth, excluding stores in split territories, of 3.1%. International sales were up a modest 1.1% and with the cost of growing in these markets, this side of the business will not be profitable this year. Last year the company posted a £4.1m EBIT loss in its international business. Costly growth for a part of the business that is only about 10% of revenues. 

Meanwhile, franchisee strife looks set to weigh on growth prospects as it will impact the store rollouts in the UK and Ireland. 

We also see more challenges from competitors than before, particularly from Uber Eats, Deliveroo etc. Nevertheless, Dominos seems to be holding onto market share and the app is proving very sticky with customers.

There is undeniably a problem in delivering ongoing growth in the UK, whilst in international markets although there is certainly scope for expansion, management is currently finding it hard going, making investors more cautious about the near-term prospects. In the meantime, competitors are getting stronger.

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