Financial stress in China and weak US and euro PMIs set the scene for global markets this week. It started out with continued focus on China where the housing crisis and financial risks from shadow banking has resurfaced. Chinese financial stress eased somewhat during the week, though, as there was no new bad news to fuel a further sell-off. It does not mean the problems are no longer there, however. We see increasing downside risks to Chinese growth and have revised down the annual growth estimate to 4.8% from 5.2%, see Resarch China: downside risks on the rise – scenarios for Chinese growth, 21 August. We expect Chinese policy makers to step up stimulus to stave off a crisis but there is a risk they continue to be two steps behind and growth slows even more.
PMIs out of the US and the euro area added to the picture of a slowing global economy. In the US Composite PMI dropped to 50.4 in August from 52.0 in July with declines in both manufacturing and services. The European PMI figures also came out much weaker than expected with services showing renewed signs of slowing. The German Services PMI numbers stood out with a massive 5 index points decline, which has only happened three times before with the latest being in March 2020 during the Covid-19 lockdown. The service sector has been the engine that kept activity running at a decent level while the manufacturing sector has been in recession for a while. However, it now seems the service sector is finally losing some steam as well. It will be interesting to see if this finally translates into more weakness in labour markets, which have stayed surprisingly resilient over the past year despite weaker growth.
The BRICS countries this week expanded the cooperation with six new members being Argentina, Ethiopia, Egypt, Saudi Arabia, United Arab Emirates and Iran. BRICS’ stated goal is to be a champion for the Global South working for a multipolar world and with the increase in members they now represent 37% of global GDP (PPP terms) and 46% of global population. We could very well see a further expansion of the group in the years to come.
Bond yields started the week higher but the soft PMI data led markets to rethink the need for further central banks hikes and yields turned lower again. That was until markets started to fret about Jackson Hole and coming speeches by Governors of both the Fed and ECB, Jerome Powell and Christine Lagarde. Then yields came back up. Equities rallied on the softer central bank outlook despite the economic weakness but fell back again when jitters rose going into Jackson Hole.
Looking ahead, it’s time for US labour market data again, with main focus naturally on the August non-farm payrolls, where the gradual cooling in employment growth has likely continued. We’re looking for +160k. The Fed pays close attention to the development in average hourly earnings and another print at 0.4% m/m or above would likely be a hawkish signal for the markets. JOLTS data for July is also up for release on Tuesday where job openings have been a good leading indicator for wage growth as well. US ISM Manufacturing and July PCE data is also due for release. In China, PMI for August will be in focus while Flash CPI inflation in the euro area will be a key input for the coming ECB meeting in September.
