Economic Highlights

There was limited data released in the UK last week, and what was released failed to add much to the sum of human knowledge. The final readings for August’s PMI surveys confirmed the slowdown in growth as a result of the Delta variant, but readings of 55 for Services and 60.3 for Manufacturing suggest that underlying demand is robust. Mortgage lending data for July showed the inevitable reduction following the end of the Stamp Duty holiday, and was not of concern. Perhaps more surprising was that Consumer Credit outstanding fell in July despite “Freedom Day”, suggesting some continued caution as well as a move away from spending on big ticket items in favour of beer and ice cream.

Non-Farm Payrolls for August came in much weaker than expected. 235k jobs were created, against a consensus expectation of 750k, the lowest reading for seven months, although there were modest upward revisions to June and July’s numbers (+134k). Given that much of the weakness was concentrated in the high-touch retail and service sectors, it appears highly probable that the rapid spread of the Delta variant was largely to blame. And as the consensus opinion remains that vaccines will ultimately blunt Delta’s progress, investors were generally unperturbed by the weak print. The only other slight surprise was that Average Hourly Earnings rose by 0.6% m/m vs an expected 0.3%, and by 4.3% y/y vs an expected 3.9%, further evidence of the underlying squeeze in certain areas of the labour market. From a policy perspective and bearing in mind Fed chair Powell’s comments at Jackson Hole, the data would tend to push back the potential date for a tapering of asset purchases, or at least the announcement thereof.

The “Flash” reading of headline CPI for August created a bit of a stir, coming in at +3%, ahead of expectations of 2.7% and up from 2.2% in July. This immediately drew comment from the traditionally more hawkish Bundesbank, and creates a bit of tension ahead of this week’s ECB meeting. Meanwhile the doves will point to a weak Retail Sales print for July, where the outcome was +3.1% vs an expected +4.5%, and down from June’s +5.4%.

The Caixin PMI readings for August were unequivocally weak, driven lower by further COVID outbreaks and, possibly, increased regulatory intervention by the CCP. Manufacturing fell to 49.2 (vs 50.3; f/c 50.1), while Services dropped more precipitously from 54.9 to 46.7 (f/c 52). On the face of it those numbers might suggest that China is in recession! However, we know that the CCP will not tolerate a weak economy for reasons of social cohesion, and therefore expectations are already building for some form of stimulative policy response.