US initial jobless claims dropped -14k to 385k in the week ending July 31, slightly above expectation of 382k. Four-week moving average of initial claims dropped -250 to 394k.
Continuing claims dropped -366k to 2930k in the week ending July 24. That’s the lowest level since March 14, 2020. Four-week moving average dropped -109k to 3188k, lowest since March 21, 2020.
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BoE left Bank rate unchanged at 0.10% by unanimous vote. Asset purchase target was held at GBP 895B, by 701 vote. Michael Saunders was the only MPC member who voted for tapering to GBP 850B. BoE noted that the Committee will focus on “medium-term prospects for inflation”, but “will not put undue weight on capacity pressures that are frictional in nature and likely to be temporary.” Though, there remain “two-sided risk” around central path for medium term inflation and risk management considerations “continue to have some force”.
BoE also said that GDP is expected to grow by around 3% in Q3, with just a “small negative impact from recent developments in the pandemic”. GDP is projected to “recover further over the remainder of the year”, and reaches its prepandemic level in 2021 Q4. CPI inflation is projected to “temporarily” rise to 4% in Q4, but that falls back to close to the 2% target.
In the Monthly Economic Bulletin, ECB said Eurozone economy is “on track for strong growth” in Q3. Manufacturing is expected to “perform strongly” despite supply bottlenecks. Reopening is supporting a “vigorous bounce-back” in services sector. However, Delta variant “could dampen this recovery in services, especially in tourism and hospitality.”
Economic activity is expected to return to pre-crisis level in Q1 next year. But there is “still a long way to go” before the damage is offset. Thus, “significant policy support remains essential”. It added, “an ambitious and coordinated fiscal policy should continue to complement monetary policy in underpinning confidence and supporting spending”.
UK PMI Construction dropped to 58.7 in July, down sharply from June’s 24-year high of 66.3. House building remained best-performing category. Supply shortages led to another rapid rise in input prices.
Tim Moore, Economics Director at IHS Markit:
“July data marked the first real slowdown in the construction recovery since the lockdown at the start of this year. It was unsurprising that UK construction companies were unable to maintain output growth at the 24-year high seen in June, especially with widespread supply shortages and constrained capacity to take on additional orders…
“Long lead times for materials and shrinking sub-contractor availability were cited as factors holding back work on site… Another rapid increase in purchasing costs was linked to global supply and demand imbalances, but many firms also noted that local issues had amplified inflationary pressures. These included a severe lack of haulage availability, continued reports of Brexit trade frictions, and greater shortages of contractors due to exceptionally strong demand.”
No policy change is expected from BoE today. But recent development suggests that policymakers would remain upbeat about the economic outlook. Upgrades in the near-term GDP growth and inflation forecasts are likely. The development to keep Bank Rate unchanged at 0.10% should be unanimous. Yet, the vote on maintaining asset purchase target at GBP 895B would be divided. Michael Saunders and Dave Ramsden could vote for an early end to the program. At the May and June meetings, the now-departed Chief Economist, Andy Haldane, was the only member dissenting to leave the size of QE purchases unchanged.
Suggested readings on BoE:
GBP/CHF continues to trade with an undertone for the near term, as recoveries were limited by 55 day EMA. At this point the choppy correction from 1.3070 is still in favor to continue. Break of 1.2498 support would target 1.2259 key resistance turned support next.
Australia exports of goods and services rose AUD 1489m (4% mom) to AUD 43.34B in June. Imports of goods and services rose AUD 261 m (1% mom) to AUD 32.84B. Trade surplus widened to AUD 10.50B, from AUD 9.27B, slightly above expectation of AUD 10.20B.
San Francisco Fed President Mary Daly said in a PBS interview, she didn’t expect the Delta variant to “derail recovery” in the US. nevertheless, “it’s already very seriously interrupting the recoveries in the global economy,” which is a “headwind on US growth.
She’s looking for “continued progress in the labor market, continued putting COVID behind us, rising vaccination rates, the things that are so fundamental to us saying that the economy has achieved that metric of substantial further progress.”
Right now, her modal outlook is that “we will achieve that metric later this year or early next”. And, “we will do something on the asset front, asset purchase tapering, by the end of this year or early next.”
Dallas Fed President Robert Kaplan told Reuters that, “as long as we continue to make progress in July numbers and in August jobs numbers, I think we’d be better off to start adjusting these purchases soon,” referring to the QE program.
He added that tapering over a time frame of “plus or minus” about eight months would help give the Fed ” as much flexibility as possible to be patient and be flexible on the Fed funds rate.”
He emphasized it’s “important to divorce discussion of the Fed funds rate from discussion of our purchases.” His comments on purchases are not intended to suggest I want to take more aggressive action on the Fed funds rate.”
Gold failed to break through 1833.91 resistance again today. It reversed earlier gains in response to much stronger than expected ISM services data. The development suggests that consolidation pattern from 1833.91 is extending with another falling leg. Still for now, further rise is expected as long as 1789.42 support holds.
On the upside, firm break of 1833.91 will finally confirm resumption of rise from 1750.49, for 61.8% retracement of 1916.30 to 1750.39 at 1852.96.
Fed Vice Chair Richard Clarida said in a speech that “we are clearly a ways away from considering raising interest rates and this is certainly not something on the radar screen right now”.
If outlook of inflation and unemployment turn out to be the actual outcomes, the necessary conditions for raising federal funds rate “will have been met by year-end 2022.” If inflation remain well anchored at 2%, commencing policy normalization in 2023 would then be “entirely consistent with our new flexible average inflation targeting framework.”
As for asset purchases, he said FOMC members expected the economy to continue to move toward the standard of “substantial further progress.”
FOMC will asses the progress in coming meetings. He reiterated the pledge that, “we will provide advance notice before making any changes to our purchases.”
US ISM Services PMI rose to 64.1 in July, up from 60.1, above expectation of 60.4. That eclipses previous record in May and indicates the 14th straight month of growth.
Looking at some details, business activity/production rose 6.6 to 67.0. new orders rose 1.6 to 63.7. Employment rose 4.5 to 49.3. Prices rose 2.8 to 82.3.
ISM said: “The past relationship between the Services PMI® and the overall economy indicates that the Services PMI® for July (64.1 percent) corresponds to a 5.2-percent increase in real gross domestic product (GDP) on an annualized basis.”
US ADP employment grew just 330k in July, well below expectation of 680k. By company size, small businesses added 91k jobs, medium businesses 132k, large businesses 106k. By sector, goods-producing job grew 12k while service-providing jobs rose 318k.
“The labor market recovery continues to exhibit uneven progress, but progress nonetheless. July payroll data reports a marked slowdown from the second quarter pace in jobs growth,” said Nela Richardson, chief economist, ADP.
“For the fifth straight month the leisure and hospitality sector is the fastest growing industry, though gains have softened. The slowdown in the recovery has also impacted companies of all sizes. Bottlenecks in hiring continue to hold back stronger gains, particularly in light of new COVID-19 concerns tied to viral variants. These barriers should ebb in coming months, with stronger monthly gains ahead as a result.”
ECB Governing Council member Martins Kazaks said, “given the uncertainty, given how much time is left, there is no need to decide on” what to do with the PEPP purchases after next March. He added, “we will discuss it, but at the moment it would still be premature.”
“It’s quite unlikely that we will come out in late March 2022 and say this is it, we’ve done our job and we terminate it,” Kazaks added. “We would like to warn the markets in advance — but only as much as it’s reasonably possible.”
Kazaks defended ECB’s new forward guidance, and said, it’s “a balanced view on how we may react when we see inflation approaching 2%.” “Is this tying our hands too much or too far into the future? I don’t think so,” He said. “If we find that this is not appropriate for the given economic situation then we can adjust our forward guidance.”
Eurozone retail sales rose 1.5% mom in June, below expectation of 1.9% mom. The volume of retail trade increased by 3.8% for automotive fuels and by 3.4% for non-food products, while it decreased by 1.5% for food, drinks and tobacco.
EU retail sales rose 1.2% mom. Among Member States for which data are available, the highest monthly increases in total retail trade were registered in Ireland (+9.4%), Germany and Latvia (both +4.2%) and Lithuania (+2.0). The largest decreases were observed in Malta (-3.0%), Austria (-2.7%) and Croatia (-2.6%).
UK PMI Services was finalized at 59.6 in July, down from June’s 62.4. PMI Composite dropped to 59.2, down from 62.2. Markit said there was weakest rise in business activity since March, but strongest input cost inflation in 25 years of data collection. Staff shortages constrained business capacity and recruitment.
Tim Moore, Economics Director at IHS Markit: “UK economy has slowed… More businesses are experiencing growth constraints from supply shortages of labour and materials, while on the demand side we’ve already seen the peak phase of pent up consumer spending… Any re-acceleration of growth in August looks unlikely.. as new orders increased at a much-reduced pace at the start of the third quarter… business expectations softened again.
Eurozone PMI Services was finalized at 59.8 in July, up from 58.3, highest since June 2006. PMI Composite was finalized at 60.2, up from 59.5, a new record high.
Chris Williamson, Chief Business Economist at IHS Markit said: “Europe’s service sector is springing back into life. Easing virus restrictions and further vaccination progress are boosting demand for a wide variety of activities….Alongside the sustained elevated growth recorded in the manufacturing sector, the impressive strength of the service sector’s expansion in July means the eurozone should see GDP growth accelerate in the third quarter.
“Worries about the Delta variant have become more widespread, however, subduing activity in some instances and raising concerns about the possibility of virus restrictions being tightened again…. Furthermore, up to now companies have generally seen little resistance from customers to higher prices, but this could change after the current rebound from lockdown restrictions has passed.”
Germany PMI Services was finalized at 61.8, up from June’s 57.5, surpassing previous record high set some 15 years ago. PMI Composite rose to record high of 62.4, up from 60.1. Markit said there was record expansion in activity as COVID-19 restrictions eased. Rate of job creation hit new record. Inflationary pressures remained elevated.
Andrew Harker, Economics Director at IHS Markit said: “The recent surge in activity in the German service sector continued in July, with growth hitting the highest in more than 24 years of data collection as companies feel the benefit of the reopening of the economy following the lifting of COVID-19 restrictions. The ramping up of activity is also proving to be good news for workers, with companies taking on extra staff at an unprecedented rate.
“Inflationary pressures remain elevated, however, and companies will take little solace from the fact that costs rose at a slightly weaker pace than in June. With the sector running hot and severe pressure on capacity signalled, rising costs look set to remain a feature in the near-term at least.”
France PMI Services was finalized at 56.8 in July, down from June’s 57.8. PMI Composite was finalized at 56.6, down from July’s 57.4. Markit said robust demand supported strong activity growth. Backlogs rose at joint-fastest pace since April 2011. Output price inflation hit decade high.
Joe Hayes, Senior Economist at IHS Markit said: “Although the headline PMI dipped slightly, the data is consistent with activity growing at a strong pace, much like we saw in the previous two months since pandemic-related restrictions have been peeled back. Pent-up demand is considerable, and firms are struggling to meet it, as evidenced by one of the strongest increases in backlogs of work for a decade. This is a good thing in the short-term as it means the economic recovery will have legs to continue through the third quarter and hopefully beyond.
“That said, current conditions have handed businesses an incredible amount of pricing power. While inflationary pressures are not quite as alarming as they are in the manufacturing sector, there’s clear spillover effects from the severe supply chain disruptions, as firms cited this as a reason behind July’s 34-month high in input costs. In response, firms upped their fees to the greatest extent in a decade. If the price rises we’re seeing remain sticky, inflation will no longer be transitory.”
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Fed Waller: Could pull back on accommodation sooner than others think
Fed Governor Christopher Waller said yesterday that his outlook is very much that the economy is “going to recovery”. And, “we will be able to pull back on accommodative monetary policy potentially sooner than others think.”
He repeated his “high hopes” for July and August job numbers, and expected the labor market to recover 85% of pandemic job loss by September. Fed could start to taper asset purchases in October if these two reports show 800k to 1m job growth each.
“My base case is that the inflation we’re seeing is somewhat transitory, that there will be some relief in the fourth quarter of this year on price pressures,” Waller added.