Economic Highlights

There was a dearth of economic data released in the UK last week, although the final reading of the June S&P Global/CIPS PMI survey did reveal a decent upwards revision to the Services component, which was raised from 53.4 to 54.3. Unfortunately, this was offset by a downward revision to the Construction Index, which fell from 55.0 to 52.6. This reflects the different speeds at which various parts of the economy are running. Housing is experiencing a deceleration thanks to rising interest and mortgage rates, while the service economy continues to enjoy the first proper low-Covid summer since 2019. It seems inevitable that we will get similar conflicting data about the state of the economy in future.

The monthly employment data showed a gain of 372k for Non-Farm Payrolls, well ahead of the expected 265k. It was Service industries that dominated the increase, notably professional and business services, leisure and hospitality and healthcare. The unemployment rate was unchanged at 3.6% and hourly earnings were +0.3% month-on-month, both as forecast. The latter suggests some reduction in wage pressures against a year-on-year rate of 5.1%. One disappointment was a drop in the Participation Rate from 62.3% to 62.2%. Both the government and the Federal Reserve would like to see more workers tempted back into the labour market to alleviate shortages. There was nothing in this data to deflect the Fed from continuing to tighten policy, and the market still expects a rise of 0.75% in the Fed Funds rate at the end of this month.

As in the UK, it was a quiet data week in Europe. Perhaps the most notable development was the continued rise in the wholesale price of natural gas in Germany, where it climbed from €115 per megawatt hour to €150. That’s up from €41 at the beginning of the year. The latest move was inspired by fears that Russia’s President Vladimir Putin might take the opportunity of a period of maintenance on the critical Nord Stream 1 gas pipeline to squeeze supplies to Europe. Not only are higher energy prices going to be affecting corporate margins as well as constraining overall consumer demand, but there remains a real risk of energy rationing on the Continent, with the prospect of certain parts of industry having to shut down temporarily. The situation could get even worse during the next winter, as natural gas inventories remain below preferred levels for this time of year. Price inflation combined with risk of demand destruction will only make the European Central Bank’s monetary policy decision-making even harder.

China continues to carve its own idiosyncratic path in the global economy. Last week’s inflation data saw consumer prices rising just 2.5%, which gives the authorities more leeway to provide either monetary or fiscal stimulus as required. The latest Services PMI reading leapt from 41.4 to 54.5 (vs 49.6 expected) as major cities reduced Covid-related restrictions on their citizens, but is testament to the potential volatility caused by the zero-Covid policy. This week, for example, there are increasing fears of renewed lockdowns as the first cases of the much more infectious BA5 Omicron sub-variant have been detected. Meanwhile the government unveiled a $220bn infrastructure-driven stimulus plan. This looks exciting, but relies on debt funding by local authorities being pulled forward from 2023. How much more infrastructure does China need, and will the capital be well allocated?