Tactical Turning Points
7 min read
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The headline measure of inflation dipped from 6.8% year-on-year in July to 6.7% in August, moving against consensus expectations of a rise to 7.0%. Given the sharp increase in petrol prices over the course of the month it was unsurprising that the headline measure was boosted by transport prices, which includes motor fuels (fuels and lubricant prices were up 3.8% on the month). But this was offset by further declines in food price inflation and a fall in restaurant and hotel prices. When excluding food and energy prices, the core measure was also significantly lower than expectations, at 6.2% in August (July: 6.9%, consensus: 6.8%). Possibly of most relief to the Bank of England though was the flat monthly price in the stickier services sector. This resulted in the annual rate declining by 0.6% to 6.8% - the first more convincing sign of improvement this year. Petrol prices aside, this is a very encouraging report and one that means that headline inflation is now tracking 0.4% below the Bank of England's projections set out the August. These data were sufficient to encourage the Bank to keep the base rate on hold at 5.25% at last week’s meeting.
The latest PMI data was generally a bit downbeat. The US Composite reading was dragged down to 50.1 (f/c 50.4) by weaker Services (50.2 vs f/c 50.7), although Manufacturing did surprise to the upside at 48.9 (f/c 48.2). Once again, it looks as though those two elements of the economy are not in synch, which might continue to send confusing signals. Indeed, those mixed signals were also evident in both housing and employment data. Housing Starts fell 11% from July to August when they were expected to be roughly unchanged. Meanwhile, the weekly Initial Jobless Claims number came in at a lowly 201k vs 220k the previous week, which is where expectations were pitched. The labour market remains firm.
The PMI outcome in Europe was the opposite to the US, with Services ahead of forecasts and Manufacturing lower, although both remain below the vital 50 mark which is the dividing line between growth and stagnation, at 48.4 and 43.4 respectively. Even within Europe, France came in below expectations while Germany came in better. But it’s clear that Europe is not blowing any lights out at the moment. The latest IFO business sentiment survey in Germany showed little change in September from August, coming in at 85.7, which is still very close to the post-pandemic lows.
No economic data from China last week, but still plenty to ponder. Stimulus measures remain piecemeal by nature rather than “big bazooka”. That means a still slow recovery. The situation is exacerbated by the ongoing restructuring of the highly indebted real estate sector. The latest news there is that real estate giant Evergrande was unable to monetise certain assets or issue new debt as part of its restructuring plan, sending the shares down 20% on the news (although they already trade at but a small fraction of their pre-Covid levels, because the outstanding debts overwhelm whatever stub of equity value might be left).
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