This week brought more evidence that the global macro momentum is turning lower. Chinese PMIs for August were weaker than expected with notably the non-manufacturing component missing the estimate. The private Caixin PMI survey even pointed to a contraction in both the manufacturing and services sectors. While also a result of lockdowns due to earlier virus outbreaks, it is another clear sign that the Chinese economy is slowing rapidly and the global manufacturing peak is behind us. While manufacturing PMIs remained high in the US and in Europe during August, South East Asian PMIs are now below the 50 threshold, partly due to restrictions amid big outbreaks (see also COVID-19 Update – No need for booster shot in the EU yet, according to EMA, 2 September).
Despite the weakening macro momentum, the mood in markets stayed constructive. Industrial- and commodity sensitive currencies gained and EUR/USD has moved above 1.1850 for the first time since early August. However, investors’ risk appetite might be increasingly tested in the coming weeks as the number of negative macro surprises accumulates. One important factor for the complacency was Fed Chair Powell’s dovish speech at the Jackson Hole Symposium, where he avoided delivering any details on the Fed’s tapering plans, besides that the conditions will likely be met later this year. As markets widely expect the Fed to announce a tapering plan this year, the main question is the exact beginning of tapering and not least how fast the Fed is going to taper. We stick to our view that the Fed will announce more details at the upcoming meeting in September and that the Fed will conclude tapering mid-2022. Markets will keep a close eye on any tapering hints from NY Fed President John Williams, when he speaks on Wednesday.
In Europe, market focus centred on Germany’s upcoming election and further inflation upside surprises. The German election is shaping up to be a close call, with SPD’s Scholz increasingly becoming the chancellor favourite, after seemingly winning the first TV debate among the candidates. However, his party may still be the biggest hurdle to succeed. Euro area inflation surged to a decade high of 3.0% in August. The price increases were driven by a multitude of factors, including the rebound in travel and tourism after lockdowns, higher energy costs, the reversal of last year’s German VAT cut, increasing bottlenecks in supply chains and base effects from differing summer sales periods in France and Italy. With inflation expected to print above the ECB’s new 2% symmetric inflation target for the remainder of this year, hawks in the ECB’s Governing Council are getting more vocal about pro-inflationary risks and the need to slow bond purchases.
PEPP re-calibration and the inflation outlook will likely also be the big focus themes for Thursday’s ECB meeting, where we expect an announcement to reduce the Q4 PEPP purchase pace to the January/February level of EUR60bn/month (see also ECB Preview: Recalibrating, not tapering – but hawks will squawk, 2 September 2021). Next week we also keep an eye on Chinese PPI inflation that should start to decline with the abating momentum in commodities prices and ease global inflationary concerns somewhat. As new infections in Australia continue to rise despite the lockdowns, there is a risk that the Reserve Bank of Australia (RBA) might delay its QE tapering (AUD 5bn to 4bn/month) that was announced back in early July and scheduled to start in September.
