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- Central Banks were centre stage last week and in general delivered what was expected. The European Central Bank (ECB) and the Federal Reserve increased policy rates by 0.25%. The surprise came from Japan where the Bank of Japan increased the yield level it will tolerate on 10-year government bonds, a modest tightening in monetary policy. The statements going with the policy announcements did give some ‘food for thought’. President Lagarde from the ECB indicated that the bank does not have ‘any more ground to cover’ suggesting that interest rates are about where the ECB wants them. Echoing the President of the Dutch Central Bank Klaas Knot’s comments last week that an increase in September is only a possibility. Fed Chair Powell was a little more aggressive stressing that an interest rate increase will be a “live” topic at the next meeting.
- The main point from all the statements is that if we have not reached the peak in interest rates in the euro area and the US, we are just 0.25% away from it. The big change is that the ECB is now sounding softer than the Federal Reserve. It wants to pause and is just waiting for the data to justify that. This is good news for the short end of the euro area fixed income market as it removes a major risk around it. It is not good news for the Euro but that will enhance the value of our overseas investments.
- Market movements during the week were more focused on Asian developments. Equities were up 1% in local currency terms during the week and were led by the Pacific Basin as the Chinese government announced some policy goals (see comment below). Bonds had a dull week, down slightly in the euro area as the change in policy from the Bank of Japan puts a question mark over Japanese buying of international bonds (including the euro area).
- The second quarter GDP statistics from the US were surprisingly strong and better than expected. The economy grew at an annualised rate of 2.4% from the first quarter against forecasts of 1.8%. The big surprise came in non-residential investment, in particular motor and aeroplane production. Consumption did weaken in the quarter but was better than expected. We are unlikely to see non-residential investment continue to grow at this rate, so economic growth is likely to subside below 2% in the second half of the year. Not slow enough to impact on the Federal Reserve’s thinking.
- The major business sentiment surveys (PMIs) were released last week in the euro area and both the Manufacturing and Services surveys declined month-on-month. The Service survey is still above 50, indicating expansion but the Manufacturing survey sank further into recessionary territory. The forward-looking components (the New Order sub-indices) also fell, indicating further weakness in the future. The only solace one can take is that actual data in recent times has been better than the sentiment surveys were indicating.
- China’s governing politburo met last week and announced three ways they are looking to bolster the economy in order to achieve 5% growth rate. First on the agenda is to provide a plan to resolve the local government debt problem. Secondly, ease market regulations in the property sector and boost infrastructure spending and thirdly, continue to ease monetary policy. These are intentions, but we do not know what specific policy changes are going to be implemented. It will probably bring some economic stability in the short-term but we will need to see the details to gauge the scale of the impact.
Chart of the week: Almost normal
As you can see in the chart above, consumer confidence in the US took a large hit when the Covid-19 pandemic arrived. Confidence recovered with the re-opening but faded soon after.. Recent trends are more encouraging. Despite the talk and fears of recession in the US, consumer confidence has been slowly rebuilding over the last year. The recent readings showed big jumps moving consumer confidence closer to where it was after the reopening. A healthy jobs market was a plus and that is now being augmented by rising house prices. We are not back to pre-pandemic levels, but the data suggests continued resilience in the US economy.
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